31 ELR 10646 | Environmental Law Reporter | copyright © 2001 | All rights reserved

Reconciling Environmental Protection and Investor Rights Under Chapter 11 of NAFTA

The author is Professor of Law and Director, International Trade Law Program, the University of Arizona, James E. Rogers College of Law, and Associate Director, National Law Center for Inter-American Free Trade. He received an A.B. degree from Harvard College in 1964 and J.D. and J.S.M. degrees from Stanford Law School in 1967 and 1970. The author is currently serving on a North American Free Trade Agreement tribunal under the International Centre for Settlement of Investment Disputes Additional Facilities rules, in a case which raises no environmental issues whatsoever. The assistance of Erica Rocush and Elizabeth Townsend, both third-year students at the College of Law, is gratefully acknowledged. Copyright(c) 2001, David A. Gantz.

[31 ELR 10646]

I. Introduction¹

Many concerns have been expressed recently regarding the likely conflicts between the extensive protections given to investors and investments under Chapter 11 of the North American Free Trade Agreement (NAFTA)² and the legitimate needs of the NAFTA governments to exercise their normal regulatory functions, including but not limited to the area of environmental regulation.³ As an article in the New York Times recently put it, "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."⁴ Similar concerns were instrumental in causing the failure in 1998 of the negotiations among members of the Organization for Economic Cooperation and Development (OECD) of the Multilateral Agreement on Investment (MAI).⁵ Many of the same issues arise under provisions of the more than 40 bilateral investment treaties (BITs) the United States has negotiated since 1980 with developing countries around the world,⁶ and in the early efforts to negotiate a Free Trade Agreement of the Americas (FTAA).⁷ Recently, opposition has developed among some labor and "civil society" groups to the negotiation of an otherwise uncontroversial free trade agreement with Singapore because of the likelihood that the agreement will include NAFTA-like protection of foreign investors.

While business interests want to preserve the extensive NAFTA protections, particularly the "fair and equitable treatment" standard, environmental groups seek an exception for environmental and health policies.⁸ Even within the U.S. government, there appears to be some disagreement between the regulatory agencies (U.S. Environmental Protection Agency (EPA), the U.S. Department of Justice, the U.S. Department of the Interior), which fear that the U.S. regulatory process may be compromised by overly broad language such as that guaranteeing "fair and equitable treatment," and the foreign relations agencies (U.S. Department of State, U.S. Trade Representative's Office), which remain committed to protection of American investors abroad and fear that a weakening of the BIT/NAFTA language in future agreements would have adverse implications for U.S. investor-host state disputes found in existing agreements.⁹

All of these investment agreements share several key elements, including commitments by the host governments to afford foreign investors national treatment and fair and equitable treatment, and to provide fair compensation in the event of nationalization or expropriation, or actions tantamount to nationalization or expropriation. Under NAFTA and the BITs,¹⁰ a foreign investor who believes that his rights under the agreement have been breached has a right to take the host government to international arbitration under the auspices of the World Bank's International Centre for Settlement of Investment Disputes (ICSID)¹¹ Additional [31 ELR 10647] Facility or the arbitral rules of the United Nations Commission on International Trade Law (UNCITRAL).¹²

If a violation of the provisions of the applicable agreement is found, the government may be required to pay compensation, a situation that could have a chilling effect on governments' obligations to regulate in order to achieve protection of the environment, human health, or other objectives. What happens, ask critics, when there is a conflict between an asserted investor right under one or more of these provisions and a new governmental regulation enacted in exercise of sovereign governmental powers to promote the public welfare? Should, for example, investors in the United States from Canada or Mexico have a greater right to protection of their investment than is afforded by the Fifth Amendment to the U.S. Constitution?¹³

The process itself also raises the question of whether it is appropriate for ad hoc arbitral tribunals, operating through proceedings that are largely closed to the public, to make decisions which, while nominally deciding only the foreign investment dispute before it, may have much broader implications for government regulatory activities. NAFTA itself makes no provision for amicus curiae submissions, and there is no requirement that either the government or the private party make submissions, interim orders, or even final decisions public, although in practice most of the interim and final decisions to date have been published.

These are no longer merely theoretical questions, at least under NAFTA. Half a dozen investor-host state disputes arising under NAFTA and conducted under ICSID or UNCITRAL rules have produced substantive arbitral awards,¹⁴ and a number of others are pending.¹⁵ Three awards, one against Mexico, two against Canada, have determined that the respondent government may be required to pay compensation to the injured investor.¹⁶ Interestingly, roughly one-half of the cases submitted to arbitration to date involve matters that relate at least peripherally to environmental regulation, such as the siting of waste disposal facilities and the like,¹⁷ although there is no obvious explanation for this proliferation of environmental cases. The BIT history is a series of investment agreements between the United States and 40 developing countries; Canada, under NAFTA, is the only developed nation to be covered by BIT-like provisions in an agreement with the United States. Yet, about two-thirds of the NAFTA Chapter 11 cases filed to date involve disputes between Canada and the United States and their investors, rather than with Mexico. Canada and the United States are, of course, two nations where the level of environmental protection and concern is relatively high, and this may help explain why environmental issues have been significant in so many disputes. Inevitably, to the extent that NAFTA and similar language in other agreements is creating problems with regard to the investment protection-environmental regulation dichotomy, the emerging jurisprudence will necessarily, satisfactorily or otherwise, deal with those problems.

Of the investor protection agreements concluded by the United States to date, only NAFTA makes any attempt to balance investor interests with environmental concerns. Unfortunately, the language used in NAFTA is unclear regarding the circumstances, if any, under which environmental concerns should prevail over investor rights in the event [31 ELR 10648] of a conflict. Despite some environmentally protective provisions, no tribunal created under NAFTA Chapter 11 to date has relied extensively on the environmental provisions. Thus, the extent to which these provisions will significantly affect investor-host government disputes remains to be seen and depends on the manner, if any, in which individual arbitral tribunals weigh both the investor protection and environmental protection provisions of NAFTA.

As my analysis suggests, with the obvious benefit of hindsight, the BIT and NAFTA language on investor protection is less than clear in setting out criteria to guide arbitrators in determining when regulatory actions that adversely impact foreign investment are to be deemed violations of NAFTA (or BIT) obligations which require compensation. The idea that "we [the negotiators] knew what we meant" is a risky approach where decisions are made by ad hoc arbitrators seeking to interpret legal provisions as they are written. Moreover, to date it has proven impossible for the NAFTA governments to issue any interpretations of the Chapter 11 language which would be binding on arbitral tribunals.¹⁸ The tribunals must thus rely on NAFTA language, principles of treaty interpretation, and international law, as well as their own judgment.

Also, more generally, little thought was apparently given by the negotiators as to whether investment protection agreements among developed countries, most with generally well-functioning independent judiciaries (not only the United States and Canada, but most of the members of the OECD) should include the same broad expropriations/taking/fair and equitable treatment language as agreements with the developing world, or whether they should be treated differently in any significant way. Are those agreements necessary only where the local legal systems are viewed with skepticism in terms of their competence and independence, or should they be available as well in disputes involving only developed countries? Or, as others could reasonably argue, why shouldn't foreign investors in the developed nations also enjoy protection from federal or local governments when those governments take arbitrary steps that greatly reduce or destroy the value of an investment, or other actions that discriminate against foreigners or otherwise deny them due process and fair treatment? Certainly the publicly available facts in some of the NAFTA cases—Ethyl Corp. v. Canada, Loewen Group, Inc. v. United States, S.D. Myers, Inc. v. Canada, and Pope & Talbot v. Canada—suggest that developing countries do not have a monopoly on discriminatory behavior that may violate traditional concepts of fairness and due process. The fact that officials in some of the NAFTA member governments and members of the public are disappointed or even outraged that a foreign investor and arbitral tribunal would implicitly or explicitly question the legal rationale or even the good faith of certain governmental action, whether relating to the environment or other regulatory issues, is hardly relevant to the merits of the issue; no government anywhere likes to be criticized, let alone sued.

Notwithstanding these valid questions and concerns, it is my view, based on the cases decided to date, and given the constraints imposed by the broad language of Chapter 11, that the ad hoc arbitral tribunals appointed under ICSID or UNCITRAL to date have carried out their responsibilities reasonably and in some cases quite well. Most have taken a credible, objective approach to interpreting vague and expansive legal provisions, seeking where necessary to draw the lines between government regulatory actions which require compensation and those which do not. While they have not spent much time interpreting NAFTA's environmental language, their determinations do not threaten national government environmental regulation that is otherwise consistent with NAFTA and international law. This is not at all surprising given the fact that some of the best known and mostly highly respected lawyers in North America (or elsewhere) have served or are serving on NAFTA tribunals, including, inter alia, former Attorney General Benjamin R. Civiletti (Metalclad Corp. v. Mexico; Azinian v. Mexico); former Secretary of State Warren Christopher (Methanex Corp. v. United States); Professor Eli Lauterpacht (Metalclad); Lic. Jose Luis Siqueiros (Metalclad); Lic. Claus Von Wobeser (Azinian); former federal appellate judge Abner J. Mikva (Loewens); Edward C. Chiasson, Q.C. (S.D. Myers); and the late Keith Highet (Waste Management, Inc. v. Mexico). While the number of cases decided to date is small and the results in pending and future cases may well be different, the competency, objectivity, and serious nature of most of the arbitrators appointed to date, although predictable given the high stakes involved, is nevertheless reassuring. Even if all are essentially international investment experts, they are presumably quite capable of assessing environmental issues as well to the extent it is legally permissible for them to do so.

Why, one may well ask, are the tribunal decisions important? After all, NAFTA specifically states that "an award made by a Tribunal shall have no binding force except between the disputing parties and in respect of the particular case."¹⁹ In other words, tribunal decisions are not binding precedent. However, there are several good reasons to focus on the awards. First, Chapter 11 makes the governing law "this Agreement and applicable rules of international law."²⁰ "International law" includes arbitral decisions,²¹ and decisions interpreting the sometimes vague or unclear provisions of "the Agreement" are clearly the most probative. Secondly, and perhaps equally important, many of the arbitrators appointed to Chapter 11 tribunals are likely to be common-law lawyers from Canada and the United States or chairpersons from other common-law jurisdictions, and common-law lawyers will want to be aware of and understand earlier Chapter 11 decisions even if they decide not to follow them. Also, it is the decisions, more than the NAFTA provisions themselves, that will shape the public debate and any governmental action to "correct" erroneous interpretations by the arbitrators.

In analyzing the problem, and the specific cases, I suggest the appropriateness of the following standard in investor-environmental regulatory conflicts.

1. Reasonable, nondiscriminatory governmental regulatory actions, including but not limited to [31 ELR 10649] those relating to protection of human health and the environment, should generally not be compensable even where the result is to reduce significantly the value of or profits derived from the investment; but

2. Unfair or inequitable government actions and/or actions which discriminate against and cause harm to foreign investors, or actions which effectively constitute takings, all under principles of customary international law and/or the explicit language of NAFTA when the latter departs from customary international law, should be compensable, notwithstanding the fact that the affected government seeks to justify the action on grounds that it is necessary to protect the environment or public health.

In the latter instances, it is the responsibility of the NAFTA tribunal, like any court, to fully investigate the circumstances of the government regulation, to determine the nature of the action as well as its rationale. The formulation above is neither original nor profound, in the sense that most of the NAFTA-related decisions to date reflect this approach in substance, even if it is not articulated in so many words.²²

This Article, in part II, briefly reviews the key provisions of NAFTA Chapter 11 and their derivation from U.S. bilateral investment treaties and other international law heritage. In part III, I describe and analyze the relevant cases and discuss the orders and decisions to date in which tribunals have attempted to interpret the NAFTA language and to deal with potential conflicts between investor protection and environmental (or similar) regulation. In part IV, I speculate on future cases and interim developments and discuss the appropriatenessas well as the risks of a mandatory governmental "interpretation" of Chapter 11 to narrow its scope.

II. NAFTA's Investor Protections

A. Overview

Chapter 11 essentially serves two purposes: it provides a set of standards for treatment of foreign investors and investment and a binding arbitral mechanism for resolving disputes between foreign investors and host governments. The probable intention, and without doubt the result, is to define such terms as "measures," "investment," and "enterprise" broadly, in language drawn from the many BITs the United States has concluded with developing nations,²³ but to do so in a manner consistent with and limited by customary international law where the latter can be discerned. Thus, the tribunals convened under NAFTA are directed "to decide the issues in dispute in accordance with this Agreement and applicable rules of international law."²⁴ More generally, NAFTA requires that "the Parties shall interpret and apply the provisions of this Agreement in light of its objectives … and in accordance with applicable rules of international law."²⁵

This presumably also means interpretation should be in accordance with the Vienna Convention on the Law of Treaties, which requires that international agreements "be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its objective and purpose."²⁶ The context includes consideration of any subsequent agreement or practices among the Parties regarding the initial treaty's interpretation, and "any relevant rules of international law."²⁷ There is no reference in Chapter 11 or elsewhere that suggests that the national laws of the Parties—including but not limited to any environmental laws that might otherwise be relevant—are to be considered by Chapter 11 arbitral tribunals.

Another potentially vitally important guide to interpretation of NAFTA provisions is the right of the NAFTA Parties through the NAFTA Free Trade Commission (the NAFTA member trade secretaries) to tell the tribunals how to interpret provisions of Chapter 11: "An interpretation by the Commission of a provision of this Agreement shall be binding on a Tribunal established under this Section."²⁸ While this may appear to be a relatively simple solution to any situation where a NAFTA tribunal or tribunals interpret investor rights in a manner that is considered overly broad or insensitive to environmental regulatory concerns, it has not proven so in practice.

First, the three NAFTA governments must be in agreement that they should, through the Free Trade Commission, issue a binding interpretation or interpretations, either in a specific case or cases, or generally. Second, even if they agree that this is a good idea in principle, they must negotiate language acceptable to all of them. This is not only inherently a difficult negotiation, but it has implications that go well beyond NAFTA. If, for example, the United States agrees to an official interpretation of provisions of Chapter 11 that narrow the scope of some of its provisions, the risk of reducing the scope of American investor provisions based on the same or similar language in the BITs is very great. Nor would it be in Mexico's interest to espouse changes that would make it appear that Mexico is unwilling to give proper protection to foreign investors. To date, only Canada has consistently favored the Free Trade Commission's interpretation approach to "protect legitimate government regulatory action designed to protect the environment and public health from challenge under Chapter 11."²⁹ However, there are signs that Mexico, having had a change of government on December 1, 2000, and having been ordered [31 ELR 10650] to pay compensation in Metalclad; and the United States, as the respondent in several sensitive cases, are rethinking their opposition.³⁰

Although the U.S. BITs from which the NAFTA provisions are fully reciprocal, to the best of the author's knowledge there has never been an action based on a BIT by a foreign investor in the United States against the U.S. government. It is clear that the U.S. intent was to protect U.S. investors in foreign countries, rather than vice versa.

The [U.S.] Government created the [BIT] program to provide a mechanism for protection of U.S. foreign investment in the Third World from unfair or discriminatory treatment and for promoting treatment standards compatible with U.S. policies and principles of international law.³¹

This objective is reflected in the BIT and NAFTA definitions. Thus, in NAFTA, an actionable "measure" includes "any law, regulation, procedure, requirement or practice."³² An "investment" includes "an enterprise"; "an equity security of an enterprise"; "a debt security of an enterprise"; "an interest in an enterprise that entitles the owner to share in income or profits" (or assets); "real estate or other property, tangible or intangible, acquired in the expectation or used for the purpose of economic benefit or other business purposes"; "interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory"; including contracts or concessions.³³ Similarly, an "enterprise" is "any entity constituted or organized under applicable law … including any corporation, trust, partnership, sole proprietorship, joint venture or other association …."³⁴ Thus, the fact that tribunals have interpreted scope and standing issues broadly is not surprising given the breadth of these definitions, which by their terms cover a wide range of regulatory "measures," even if this was not explicitly intended.

B. Key Chapter 11 Provisions

Although there are provisions relating, inter alia, to most-favored-nation treatment,³⁵ performance requirements, nationality of senior management and financial transfers; the key provisions of § A of Chapter 11 relate to national treatment, free and equitable treatment, and protection against expropriation, along with binding investor-host government arbitration. Thus, the national treatment/nondiscrimination provision—Article 1102—requires that

each Party shall accord to investors [investments] of another Party treatment no less favorable that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.³⁶

The obligation applies to states and provinces as well as the federal governments,³⁷ and to investors—the companies and firms—not just to the investment. There are a variety of exceptions, principally those found in each Party's sections of Annexes I and II, and the obligation applies only to foreign and domestic firms operating "in like circumstances." Again, this principle of nondiscrimination applies by its broad terms to differential treatment in the area of environmental regulation as well as elsewhere. However, it is not in any way a new concept, except in the context of a foreign investment treaty in North America. The United States and Canada have accepted national treatment/nondiscrimination obligations in their trade relations under the General Agreement on Tariffs and Trade since 1947, and Mexico has accepted them since 1985.³⁸ Many of those who decry equal treatment of foreigners in the investment context have also opposed the idea for years in the context of U.S. trade relations.³⁹

The essence of a national treatment obligation is that a host government must treat foreign investors in the same manner as its own national investors. However, in some instances, national treatment is not considered adequate, in that the level of treatment, e.g., with regard to police protection or access to courts, afforded both to foreigners and citizens is seriously deficient. As a result, NAFTA, like most of the BITs, states that "each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."⁴⁰ As the title to Article 1105 suggests, there is a "minimum standard of treatment" of foreign investors. Also, by connecting the "fair and equitable treatment" concepts with "international law," the drafters may well have intended that those asserting a denial of fair and equitable treatment would have to demonstrate that such denial was a violation of customary international law,⁴¹ or a violation of NAFTA language if the latter is considered to be broader than customary international law. (National law might well give its courts and administrative agencies more leeway.)

Under NAFTA, there is no requirement of a denial of justice, such as evidence of gross misconduct on the part of a state or its institutions that goes beyond an erroneous or even unjust court decision.⁴² Given the lack of clarity of customary international law in this area, the scope of the protection afforded by the fair and equitable treatment requirement is uncertain. It has been suggested that "the terms 'fair and equitable treatment' envision conduct which goes far [31 ELR 10651] beyond the minimum standard and afford protection to a greater extent and according to a much more objective standard than any previously employed form of words."⁴³ For example, suppose that the local courts in country X are totally corrupt; if you want to win your case, you simply pay the presiding judge $ 1,000. The cost of bribing the local judge is $ 1,000 whether you are a national of country X or a foreign investor; thus, the foreign investor is not being denied national treatment since the court system does not discriminate against foreigners. However, it is arguable that maintaining a corrupt court system is a denial of fair and equitable treatment under international law rules, at least if the corruption is sufficiently egregious.

Traditionally, national treatment and fair and equitable treatment have not been the most important protections for foreign investors. Rather, in the past, the focus has been on protection against nationalization or expropriation. However, situations in which a foreign police force or army marches into a foreign-owned factory or mine and seizes it⁴⁴ are relatively rare today, even in developing countries. Accordingly, the nationalization and expropriation provisions in NAFTA afford coverage for indirect or "creeping" expropriation.

1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment ("expropriation"), except:

(a) for a public purpose;

(b) on a non-discriminatory basis;

(c) in accordance with due process of law and article 1105(1); and

(d) on payment of compensation in accordance with paragraphs 2 through 6.⁴⁵

While this NAFTA language is slightly more explicit than in some earlier versions, the "tantamount to nationalization" and other clauses similar to NAFTA Article 1110 are found, inter alia, in the U.S.-Argentine Foreign Investment Treaty of 1991⁴⁶ and the U.S. model BIT.⁴⁷ In all substantive respects Article 1110(1) is also virtually identical to the language in the United States-Canada Free Trade Agreement (CFTA).⁴⁸ Arguably, it reflects a relatively settled view of customary international law on expropriation, advocated by the United States and other capital exporting countries.⁴⁹

However, even under relatively well-recognized customary international law principles, it is by no means clear when governmental action interfering with broadly defined property rights crosses over the line from valid regulation to a taking, as the Restatement of the Law of Foreign Relations suggests:

A state is responsible as for an expropriation of property under Subsection (1) when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien's property or its removal from the state's territory …. A state is not responsible for loss of property or for other economic disadvantage resulting from bona fide general taxation, regulation, forfeiture for crime, or other action of the kind that is commonly accepted as within the police power of states, if it is not discriminatory ….⁵⁰

With key terms such as "unreasonably interferes with," "unduly delays" and "bona fide" from the restatement and the "customary international law" or "tantamount to expropriation" from NAFTA Article 1110 essentially determining whether a compensable expropriation occurred or whether a government has simply exercised its right as a sovereign to regulate, NAFTA Chapter 11 tribunals do and likely will continue to analyze and apply Article 1110 on a case-by-case basis.

Another major question affecting environmental as well as other regulatory activity is whether reliance on Article 1110 on expropriation is really necessary to protect foreign investors. If they rely on additional or alternative causes of action under the national law provisions concerning fair and equitable treatment, which also require compensation if violated,⁵¹ the more difficult aspects of interpreting and applying Article 1110 may be avoided. As discussed later, at least one NAFTA tribunal (S.D. Myers) has taken this approach.

One of the few areas where NAFTA is different from the BITs is in the fact that NAFTA includes certain provisions approving environmental regulation, effectively treating that type of government regulatory action differently from all others. NAFTA includes a provision relating to environmental concerns that does not appear in other investment agreements.

Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns.⁵²

[31 ELR 10652]

However, there is a circularity to this section—"otherwise consistent with [Chapter 11]"—which may significantly limit its usefulness.

Other environmentally related provisions in NAFTA are also ambiguous when read in conjunction with Article 1110. For example, the NAFTA Parties "recognize that it is inappropriate to encourage investment by relaxing domestic health, safety or environmental measures."⁵³ And, in the Preamble, the NAFTA Parties resolve to "ensure a predictable commercial framework for business planning and investment … in a manner consistent with environmental protection and conservation …."⁵⁴ Similarly, one of the stated objectives of a separate "side" agreement adopted at the same time as NAFTA⁵⁵ is to "foster the protection and improvement of the environment in the territories of the Parties for the well-being of present and future generations" without "creating trade distortions or new trade barriers."⁵⁶ However, while the NAFTA objectives specifically mention the need to "increase substantially investment opportunities," they are conspicuously silent on protection of the environment.⁵⁷

In general, the impact of environmentally related provisions in Chapter 11 and elsewhere under NAFTA on investor claims is anything but clear. Is the intent of Article 1114 to insulate environmental regulation from treatment as an expropriation under Article 1110? If so, when is it "otherwise consistent with [Chapter 11]" under Article 1114? There is no negotiating history that articulates the relationship between the two articles, or the relationship between Article 1114 and the national treatment/fair and equitable treatment provisions. As the author has indicated earlier, the does not favor allowing mistreatment of foreign investors under the guise of environmental regulation, and the negotiators, who were by and large international trade and foreign investment experts rather than environmentalists,⁵⁸ probably didn't either. The majority of the arbitrators appointed to Chapter 11 cases by the foreign investor Parties and from the ICSID rosters are likely to be investment experts as well; at most the government will be able to insist only that the one of the three arbitrators it appoints to each tribunal has environmental expertise. Thus, the relationship of the environmental provisions to the investment protection provisions will be decided largely by investment experts sitting as arbitrators in the individual cases, unless and until the three governments issue a binding interpretation, as discussed earlier. The results of allowing arbitration tribunals free rein in interpreting the NAFTA language may ultimately be satisfactory, but there is some risk, at least in the individual cases, to this "let's wait and see" attitude.

C. The Arbitral Mechanism

Section B of Chapter 11 contemplates binding arbitration of investor-host state disputes falling within the scope of the provisions of § A, either through the ICSID "Additional Facility" or in ad hoc arbitration through UNCITRAL.⁵⁹ The arbitration process normally functions with three arbitrators, one chosen by each Party and the third either by agreement of the Parties or by the ICSID Secretary General if, as often happens, the disputing Parties cannot agree on a chairperson within 90 days.⁶⁰ The ICSID Additional Facility rules or UNCITRAL rules establish the procedural requirements for arbitration, in each instance as modified by NAFTA.⁶¹ In general, the process under NAFTA is typical: a series of submissions by the Parties, limited discovery of documents, one or more hearings, and the rendering of an opinion or opinions. Multiple opinions or orders are likely when the Parties and/or the tribunal decide that judicial economy will be served if procedural and jurisdictional issues are resolved in an initial phase, with a second phase devoted to the merits if the claimant survives the procedural and jurisdictional challenges.

NAFTA contemplates that an award by the tribunal will be final and enforceable, but also leaves open the possibility of a request by one Party to the courts at the "seat" of the arbitration for revision, setting aside or annulment of the award under the national law of the seat of the arbitration.⁶² This somewhat anomalous situation results from the fact that there is no appeal in most arbitral proceedings. As a consequence, international arbitral procedures, including NAFTA's, may allow limited review by national courts, either in a direct attack upon the award or as a defense to enforcement, primarily to deal with situations in which the tribunal allegedly was improperly constituted, there was corruption [31 ELR 10653] among the arbitrators, basic violations of due process occurred, or where the arbitrators manifestly exceeded their powers.⁶³ Two challenges in Canadian (British Columbia provincial and federal) courts are now pending against the awards in Metalclad and S.D. Myers,⁶⁴ respectively. The extent of the finality and the usefulness of NAFTA tribunal awards as guidance for future tribunals will remain an open question until these legal actions are concluded.

The final award may be monetary damages plus interest or restitution of the property. Costs may also be awarded in accordance with applicable arbitration rules.⁶⁵ However, no punitive damages may be awarded.⁶⁶ Interestingly, although only the expropriation provision (Article 1110) provides specific instructions as to how to calculate damages,⁶⁷ any violation of the other government obligations of part A of Chapter 11—national treatment, most-favored-nation treatment, fair and equitable treatment, performance requirements, etc.—are also subject to binding arbitration under Chapter 11.⁶⁸ The "final award" provision makes no distinction between awards for expropriation under Article 1110 and awards for violation of other § A provisions. All are subject to an award of "monetary damages and any applicable interest."⁶⁹ How damages in nonexpropriation cases are to be calculated will thus be decided by the tribunals.

NAFTA does not require exhaustion of national (court or administrative) remedies before an investor may bring an action under § B. However, the investor must not only consent to arbitration, but must "waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceeding with respect to the measure of the disputing Party that is alleged to be a breach …."⁷⁰ This does not, of course, prevent recourse to a court at the place of arbitration after the award is rendered, as discussed above.

One implication of this arbitral process is that it leaves interpretation of Chapter 11 language to tribunals comprised of ad hoc arbitrators (subject to very limited court review), of whom only one of three members is chosen by the defendant government, given that the ICSID Secretary General is the appointing authority if the Parties cannot agree on the third arbitrator. Unless the Parties agree otherwise, the proceeding is largely closed to the public and does not countenance participation by non-Parties,⁷¹ or even guarantee that the resulting decision will be made public.⁷² While the governments that are not a Party to an arbitration under Chapter 11 have a right to make submissions to a tribunal "on a question of interpretation of this Agreement,"⁷³ there is no obligation upon the tribunal to accept the governments' interpretation unless all three governments agree on it, as noted earlier. Thus, to the extent that Chapter 11 arbitral proceedings are likely to address issues of public policy, such as the conflicts between investor rights and environmental regulation discussed herein, the lack of participation by other interested parties, nongovernmental organizations or the public is a cause of some concern to those who believe that such issues should be resolved by elected officials, legislatures, and/or national courts.

III. Tribunal Decisions Interpreting Chapter 11

In this section, the NAFTA tribunal decisions and orders relevant to potential conflicts between investor rights and environmental conflicts are summarized and then discussed in detail. Several caveats are offered. First, not all orders or interim decisions are publicly available.⁷⁴ Second, the author's view of "relevance" may differ from that of other analysts, particularly with regard to "procedural" orders which appear to confirm or even expand the broad scope of Chapter 11 (for environmental and nonenvironmental matters alike), making this discussion either over-or under-inclusive. Finally, orders and decisions are now emerging with such frequency that by the time this Article is published it is almost certain that additional jurisprudence will be available.

Part A of this part provides very brief summaries of the relevant Chapter 11 cases. Part B discusses the tribunals' approaches to scope and jurisdiction; part C, to national treatment [31 ELR 10654] and fair and equitable treatment; part D, to expropriation; and part E to the environmental provisions of NAFTA. Part F constitutes a summary and assessment of the jurisprudence. About one-half of the more than one dozen Chapter 11 actions to date involve some sort of environmental investment, trade, or regulatory activity. However, at least for those who accept this author's standard discussed earlier, in some instances the environmental regulatory aspects are largely peripheral to the dispute.

A. Synopsis of Matters Discussed

Ethyl Corp. v. Canada

The Ethyl Corporation, an American company, brought an action against Canada seeking $ 250 million as a result of a Canadian ban on sales of a gasoline enhancing product, methylcyclopentadienyl manganese (MMT).⁷⁵ Canadian legislation had not prohibited the sale of MMT within Canada, but the Manganese Based Fuel Additives Act (MMT Act)⁷⁶ barred interprovincial trade, effectively preventing the sale of foreign-made MMT (but not domestically produced MMT, if there had been any) within Canada.⁷⁷ The ban on MMT achieved by the MMT Act was supported by the automobile industry and by the owners of four Canadian producers of ethanol, the latter effectively a substitute for MMT.⁷⁸ The legislative approach was apparently taken after Canadian authorities determined that MMT did not meet the threshold requirements for banning as a toxic substance under the Canadian Environmental Protection Act.⁷⁹

The matter was not only submitted to arbitration under UNCITRAL rules, but became the subject of a separate arbitration among the Canadian provinces and the federal government, without the direct involvement of Ethyl. There, a panel established under Canada's Agreement on Internal Trade (AIT) found that the measure created a prohibited obstacle to internal trade.⁸⁰

In July 1998, after the NAFTA/UNCITRAL tribunal decided certain procedural issues which would have allowed the tribunal to address the merits,⁸¹ and in response to the adverse AIT decision, the government of Canada withdrew its ban on importations and interprovincial trade of MMT and agreed to pay Ethyl compensation in the amount of $ 13 million. In return, Ethyl agreed to withdraw the action.⁸²

Azinian v. Mexico

Azinian, the first case decided by a NAFTA tribunal on the merits, was a dispute over the cancellation of a concession contract by the city of Naucalpan. The concession was granted to a group of American investors (including Mr. Azinian) for the collection of solid waste from the city for the purposes of operating a landfill, recycling and, through the use of biogases, generating electricity.⁸³ When it became evident to the city that the investors were either unwilling or unable to perform, the city cancelled the contract.

Notwithstanding the quasi-environmental nexus, the tribunal's determination, rejecting claimants' assertions as to the existence of a violation of Chapter 11 by the municipal authorities, focused on questions regarding the claimants' credibility and bona fides, and the fact that the claimants' treatment in several Mexican courts was nowhere challenged by the claimants as a violation of international law.⁸⁴ There is no evidence that the fact that the contract was for waste-related purposes had any significant bearing on the tribunal's decision or that environmental considerations played any role in the city's decision to terminate the agreement.

Waste Management, Inc. v. Mexico

In September 1998, Waste Management, Inc., a U.S. company, challenged an alleged failure of the city of Acapulco, Banco Nacional de Obras y Servicos Publicos (a state-owned entity), and the state of Guerro to pay for landfill and street-cleaning services to be provided by Waste Management.⁸⁵ The environmental aspects of the matter were apparently less significant than the investment/contract issues, as in Azinian, except to the extent that "not in my backyard" (NIMBY) citizens' concerns made permitting in the environmental/waste areas more difficult than in some other areas. The initial action was dismissed on procedural grounds, but has been refiled.⁸⁶

Metalclad Corp. v. Mexico

Metalclad arguably presents the classic NIMBY problem; the need for hazardous waste disposal facilities is recognized, but no one wants to live near one, in Mexico as elsewhere. While most waste generated by the border industries must be returned to the United States for proper disposal,⁸⁷ it is apparent that a good portion of the remainder is disposed of illegally.⁸⁸

[31 ELR 10655]

Metalclad Corporation, a California corporation, purchased land for and developed a hazardous waste disposal facility in the Mexican state of San Luis Potosi. The site had been used for such a waste disposal facility in the past, apparently without regard for environmental or public health concerns. Metalclad was granted a federal government permit for the site in January 1993, and began construction shortly thereafter.⁸⁹ However, despite early support, opposition arose first from the state government, then from the municipality of Guadalcazar,⁹⁰ apparently because of the usual antipathy of neighbors. Work on the new facility, which included a cleanup of the residues left by the previous operators, was completed in March 1995, but opposition from local interests intensified.⁹¹ Metalclad and Mexican federal environmental authorities entered into an agreement in which Metalclad agreed, inter alia, to make certain modifications in the site, take specified conservation steps, recognize the participation of a technical scientific committee and a citizen supervision committee, employ local manual labor, and make regular contributions toward the social welfare of the municipality, including limited free medical advice.⁹² Despite the agreement, and in the absence of any evidence of inadequacy of performance by Metalclad, the municipality denied Metalclad's construction permit in a process which was closed to Metalclad.⁹³ Notwithstanding the local disputes, the federal authorities subsequently granted Metalclad a permit authorizing expansion of the landfill's capacity tenfold.⁹⁴ However, in September 1997, the governor of San Luis Potosi issued an "ecological decree" declaring the area of the landfill to be a "natural area for the protection of rare cactus," thus foreclosing all possibilities of Metalclad's operating the hazardous waste disposal facility.⁹⁵ In August 2000, a NAFTA tribunal awarded Metalclad compensation of $ 16.685 million for the loss of its investment in Mexico (more than $ 90 million in damages was sought) based on violations of NAFTA Articles 1105 (fair and equitable treatment) and 1110 (expropriation).⁹⁶ The Mexican government has challenged the award in the courts of British Columbia (the "seat" of the arbitration), charging that the tribunal exceeded its jurisdiction by finding that Mexico breached obligations that are not covered by Chapter 11, in interpreting Mexican law relating to the permitting authority of municipalities.⁹⁷

S.D. Myers, Inc. v. Canada

In July 1998, an Ohio firm, S.D. Myers, with a joint venture, S.D. Myers (Canada), Inc., claimed that it had been damaged through an effective taking of property rights. S.D. Myers has a polychlorinated biphenyl (PCB) remediation facility in Ohio,⁹⁸ but none in Canada. The claimant alleged that Canada violated NAFTA when it banned exports of PCB wastes from Canada to the United States (for disposal), acting to protect Canada's sole PCB treatment facility, Chem-Securities of Swan Hills, Alberta.⁹⁹ During the relevant period, the Canadian PCB remediator, Chem-Securities, was permitted to conduct PCB disposal business in Canada, resulting in allegedly discriminatory treatment against a foreign investor, S.D. Myers.¹⁰⁰

Canada argued that the interim order banning PCB exports was not a violation of NAFTA and, in any event, that Canada's ban was required by Canada's obligations under the Basel Convention on the Control of Transboundary Movements of Hazardous Waste and Their Disposal and under the Agreement of the Government of Canada and the Government of the United States Concerning the Transboundary Movement of Hazardous Waste.¹⁰¹ In November 2000, the tribunal concluded that Canada's actions violated S.D. Myers' rights under the national treatment and fair and equitable treatment provisions of Chapter 11 of NAFTA.¹⁰² The arbitrators had initially decided to determine the amount of damages in a separate phase of the proceeding,¹⁰³ presumably so as to avoid burdening the tribunal and the parties in the event that the tribunal had earlier determined that Canada had committed no compensable violation of NAFTA. The Canadian government is now challenging the tribunal's decision finding a NAFTA violation in the Federal Court of Canada, and seeking a stay in the damages phase, alleging that the tribunal misinterpreted the definition of "investment" under NAFTA.¹⁰⁴

Pope & Talbot, Inc. v. Canada

Pope & Talbot is not a case pitting investor protection against environmental regulation. However, it is one of only a few cases to date in which thetribunal has interpreted the scope of NAFTA Article 1110 with regard to "indirect" expropriations, and thus has implications for environmental regulatory cases brought under Article 1110. In Pope & Talbot, the American-owned firm had charged that Canada's allotment of export quotas under the United States-Canada Softwood Lumber Agreement (1996)¹⁰⁵ discriminated against Pope & Talbot's Canadian subsidiary, and that this action constituted violation of Chapter 11's national treatment, minimum standard of treatment, performance requirements, and expropriation provisions.¹⁰⁶ The tribunal has issued several decisions considering the various claims, including very extensive treatment of NAFTA's expropriation provisions (although no expropriation was found), [31 ELR 10656] analysis of the "national treatment" requirement (although no national treatment violation was identified), and analysis of the "fair and equitable treatment" obligation (while finding only one relatively minor, and peripheral, violation by Canada). Other issues, including claims under the national treatment and fair and equitable treatment provisions, remain pending.

Methanex Corp. v. United States

While there is no decision on the merits in Methanex as of this writing, this case, more than any other Chapter 11 action to date, squarely raises the conflict between environmental protection and investor rights. Methanex, a Canadian corporation with many overseas manufacturing facilities, including one in the United States,¹⁰⁷ brought an action against the United States. The basis of the claim¹⁰⁸ is an Executive Order in which the state of California¹⁰⁹ directed the removal of a gasoline additive known as methyl tertiary butyl ether (MTBE)¹¹⁰ from all gasoline sold in the state by no later than December 31, 2002.¹¹¹ The California action was taken based in large part on a study by the University of California at Davis, which concluded that "on balance, there is significant risk to the environment from using MTBE in California."¹¹² In other words, the state authorities are applying the "precautionary principle" to justify regulatory action, allegedly because waiting to act until there is clear scientific proof of danger to public health from MTBE could jeopardize those exposed to MTBE in the intervening period.¹¹³

Methanex concedes that MTBE is a polluter of underground aquifers and that remediation (largely through better control of underground storage tanks) is needed, but argues that there is no scientific proof that exposure to MTBE at "reasonably expected exposure levels" is dangerous to human health.¹¹⁴ Despite considerable research,¹¹⁵ there is apparently no conclusive evidence that drinking water with small traces of MTBE is dangerous to human health, although MTBE imparts an undesirable odor to the water that is noticeable to consumers and appears to penetrate underground aquifers more quickly and pervasively than other chemicals found in motor fuels.¹¹⁶ The MTBE problem is complicated by the fact that most of the substitutes, such as ethanol, create other environmental and human health problems.

Methanex does not manufacture MTBE. However, Methanex claims to be the world's largest producer and marketer of methanol,¹¹⁷ the principal ingredient of MTBE. Methanex is one of several U.S. producers and, possibly, importers of methanol.¹¹⁸ Methanex claims that the measures taken by California will effectively end Methanex's methanol sales in California, and contends that this constitutes a "substantial interference and taking of Methanex U.S.' business and Methanex's investment in Methanex U.S. These measures are both directly and indirectly tantamount to expropriation."¹¹⁹ Consequently, Methanex seeks damages in the amount of $ 970 million.¹²⁰ No decision on the merits has yet been rendered.

B. Questions Relating to Scope and Jurisdiction

A review of scope and jurisdictional issues is useful for several reasons. First, it demonstrates the scope and breadth of Chapter 11 jurisdiction, as written and applied by the tribunals. Second, it demonstrates the extent to which the NAFTA Parties, having negotiated and concluded Chapter 11, are now seeking to curtail its scope, clearly one potential means of dealing with unforeseen political problems and threats to government regulatory action. As one would have [31 ELR 10657] expected with a new procedure, virtually all of the cases that have reached NAFTA tribunals to date raised procedural challenges. For example, if a government can convince a court that an environmental regulatory action (as in Ethyl or S.D. Myers) is not covered by Chapter 11 because it is not an "investment" or because it is a "trade" matter, it protects its regulatory process (whether validly or otherwise) just as effectively as if the government had prevailed on the merits.

In Ethyl, the first case under Chapter 11, Canada argued that the tribunal lacked jurisdiction over the dispute, on several largely technical grounds. First, Ethyl had failed to meet certain procedural requirements, in that it had effectively anticipated Canada's legislative action in filing its Notice of Intent to Arbitrate rather than waiting until after the law had been enacted.¹²¹ Second, Ethyl had not timely filed its waiver of other remedies required under NAFTA Article 1121. The tribunal refused to treat either formality as jurisdictional.¹²² It effectively found that dismissing a claim on procedural grounds that could be immediately refiled would "disserve, rather than serve, the object and purpose of NAFTA."¹²³ It seemed significant to the tribunal that none of the so-called deficiencies was prejudicial to Canada.¹²⁴

Canada also sought dismissal of the claim for failure to claim a breach under Chapter 11, based on the scope of Chapter 11. Canada argued that there was no "measure" actionable under Chapter 11; that the measure did not "relate to an investment or an investor"; and that an expropriation/loss outside of Canada was not covered under NAFTA.¹²⁵ The tribunal either rejected these arguments or decided that they would be considered at the time the merits were reviewed, but the language used suggests little sympathy with Canada's position.

On the face of the Notice of Arbitration and the Statement of Claim, Ethyl states claims for alleged breaches by Canada of its obligations under Article 1102 (National Treatment), Article 1106 (Performance Requirements) and Article 1110 (Expropriation and Compensation). The Claimant indisputably is an "investor of a Party" namely the United States, and alleges that it has "incurred loss or damage by reason of, or arising out of," such breaches, all as required by Article 1116(1) …. Claimant's Statement of Claim satisfies prima facie the requirements of Article 1116 to establish the jurisdiction of this Tribunal.¹²⁶

The tribunal also rejected, at least for purposes of jurisdiction, the Canadian contention that the matter should have been considered under Chapter 3 of NAFTA (trade in goods) rather than under Chapter 11, noting that "Canada cites no authority, does not elaborate any argument, however, as to why the two necessarily are incompatible."¹²⁷ Ethyl also contended that this trade-related restriction jeopardized its Canadian investment in mixing and distribution facilities, and thus violated Chapter 11's national treatment provisions, suggesting that separating trade and investment measures may prove difficult or impossible (as in S.D. Myers, discussed later), or the tribunals may simply be unwilling to do so.

Finally, the tribunal suggested that the concept of "measure" should not be narrowly defined, citing the relatively broad definition from Canada's Statement on Implementation of the North American Free Trade Agreement.¹²⁸ It also determined that the fact that the loss complained of by Ethyl occurred partially outside Canada—since Ethyl exported MMT to Canada rather than producing it in Canada—was not a bar to jurisdiction, as Canada had argued.¹²⁹

The definition of "investment dispute" and thus the scope of Chapter 11 was again at issue in Pope & Talbot I. Canada had initially argued that the matter—an export quota and fee system applicable to softwood lumber exports to the United States—was not an "investment dispute" on grounds that the measure complained of had to be "primarily aimed" at investors of another Party.¹³⁰ However, the tribunal concluded that Canada's reading of Chapter 11 was overly narrow, agreeing with, although not citing, Ethyl:

There is no provision to the express effect that investment and trade in goods are to be treated as wholly divorced from each other. The reference in Section A of Chapter 11 to treatment of investments with respect to the management conduct and operation of investment is wide enough to relate to measures specifically directed at goods produced by a particular investment …. It appears to the Tribunal accordingly that the language of Section A of Chapter 11 does not support the narrow interpretation of investment dispute which Canada and Mexico seek to advance.¹³¹

The tribunal also rejected Canada's contention that the quota arrangement was a measure relating to trade in goods rather than to investment, which would have meant that it could be challenged only in an action between the governments under Chapter 20.¹³² In a later challenge to an effort by Pope & Talbot to amend its complaint, the tribunal, in an order citing Ethyl with approval, declined to adopt a strict construction of the relevant procedural articles of Chapter 11, citing a "due process" need for flexibility and a distaste for "a long list of mandatory preconditions," particularly where members of the tribunal saw no prejudice to Canada.¹³³

Similar scope and definitional issues were also present in S.D. Myers. S.D. Myers' activity operated through S.D. Myers Canada was essentially a trading enterprise, designed to collect and ship PCB hazardous waste to the firm's treatment facilities in Ohio, rather than an investment in manufacturing facilities per se. Nevertheless, the tribunal had no difficulty in determining that both S.D. Myers, Inc. (the U.S. firm) and S.D. Myers Canada were "investors" for purposes of Chapter 11.¹³⁴ The tribunal also rejected Canada's contention that the matter came within the scope of the [31 ELR 10658] trade provisions of Chapter 3 rather than the investment provisions of Chapter 11, citing Pope & Talbot II for the proposition that the NAFTA rights in the two chapters overlap and are cumulative rather than mutually exclusive.¹³⁵ It did not refer to Ethyl, presumably because that tribunal rejected Canada's similar contention in that case only for purposes of jurisdiction.¹³⁶

In Azinian, the Mexican government questioned the claimants' standing in a procedural challenge to its jurisdiction. Mexico suggested that the investors might not have had a "claim" under Articles 1116 or 1117; that they had not demonstrated ownership or control of an enterprise in Mexico; and that there was no proof that the corporate entity was valid under Mexican law.¹³⁷ The tribunal did not really decide these procedural issues. However, by implication it suggested some disagreement with the Mexican position, noting that the objections "seem unlikely to eliminate altogether the need to consider the merits" and indicated that standing would be dealt with later, at the same time as arguments on the merits.¹³⁸ Later, the tribunal determined that it would need to decide standing issues only if it decided that Mexico had "some degree of liability."¹³⁹ Since the tribunal found no liability on the merits, these questions became moot.

In Loewens, the United States sought dismissal of the action, inter alia, on grounds that judicial acts in litigation between private parties (alleged violations by a Mississippi state court relating to prejudice against foreigners, a huge punitive damages verdict, unreasonably large appeal bonding requirements, etc.) were not "measures" under Chapter 11. The tribunal disagreed, observing:

Article 201 defines "measure" as including "any law, regulation, procedure, requirement or practice." The breadth of this inclusive definition, notably the references to "law, procedure, requirement or practice," is inconsistent with the notion that judicial action is an exclusion from the generality of the expression "measures." "Law" comprehends judge-made as well as statute-based rules. "Procedure" is apt to include judicial as well as legislative procedure. "Requirement" is capable of covering a court order which requires a party to do an act or to pay a sum of money, while "practice" is capable of denoting the practice of courts as well as the practice of other bodies.¹⁴⁰

The tribunal concluded that traditional international law concepts of state responsibility include responsibility of the state for its judicial authorities, relying in part on the Azinian decision, using that tribunal's discussion and later conclusion that "what must be shown is that the court decision itself constitutes a violation of the treaty [NAFTA]."¹⁴¹

Waste Management was the first NAFTA case (and the only one to date) to be dismissed on procedural grounds, by a divided tribunal, relating to the waiver of national or other dispute settlement proceedings required by Article 1121. Waste Management submitted what a majority of the tribunal considered an incomplete waiver, stating that "this waiver does not apply, however, to any dispute settlement proceedings involving allegations that Respondent has violated duties imposed by other sources of law, including the municipal law of Mexico."¹⁴² A majority determined that the proceedings instituted in Mexican courts by Waste Management's Mexican subsidiary "fall within the prohibition of NAFTA Article 1121 in [that] they refer to measures that are also invoked in the present arbitral proceedings as breaches of NAFTA provisions …" and that, consequently, without a valid waiver by Waste Management, the tribunal lacked jurisdiction to decide the case.¹⁴³

In Metalclad, Mexico raised a procedural challenge, alleging that the claimant had improperly amended its claim in violation of NAFTA and the ICSID Additional Facility rules. The tribunal disagreed, holding that amendments to previously submitted claims and facts relating to those claims were permitted when facts and events occurred subsequent to the original filing of the claim and "arise out of and/or are directly related to the original claim."¹⁴⁴

Finally, in a case not otherwise relevant to this discussion, Feldman v. United Mexican States,¹⁴⁵ a NAFTA tribunal cited Metalclad, Pope & Talbot and Ethyl in rejecting a motion by Mexico to strike the claimant's ancillary claim of a violation of Article 1102 (national treatment) on the ground that even though the notice of claim had not specifically mentioned Article 1102, the alleged violation had "been in substance included in the notice of arbitration."¹⁴⁶ That tribunal also rejected Mexico's contention that because the claimant was a permanent resident of Mexico, as well as a citizen of the United States, he was barred from bringing a claim under Chapter 11. The tribunal concluded that "under 'general international law' citizenship rather than residence establishes the 'relevant connection' between a state and an individual."¹⁴⁷ However, the tribunal accepted Mexico's assertion that losses occurring more than three years before the claimant's submission of the notice of arbitration could not be considered by the tribunal.¹⁴⁸

C. National Treatment and Fair and Equitable Treatment

Only two NAFTA tribunals to date, S.D. Myers and Pope & Talbot, have ruled on the scope of Article 1102 (nondiscrimination/national [31 ELR 10659] treatment), although one may speculate that had the Ethyl case reached a decision on the merits, the claim of denial of national treatment might well have been accepted. Also, a NAFTA Chapter 20 panel in Cross-Border Trucking Services¹⁴⁹ has interpreted the scope of Article 1102 in a claim between Mexico and the United States.¹⁵⁰ Article 1105 (fair and equitable treatment) has been the subject of decisions in S.D. Myers, Metalclad, Azinian, and Pope & Talbot.

While there are potentially difficult problems in interpreting the requirement that each NAFTA government "accord to investors [investments] of another Party treatment no less favorable that it accords, in like circumstances, to its own investors," the tough cases have yet to arise under Chapter 11, because in the cases to date the discrimination has been open and blatant. The same can probably be said for the Article 1105 matters to date.

In S.D. Myers, there was considerable evidence before the tribunal suggesting that Canada had intentionally acted to favor a domestic PCB treatment facility over S.D. Myers rather than acting to protect public health. (One of the inherent problems of parliamentary democracies is that they tend to be relatively transparent; if government agencies, Parliament, and lobbying groups work together to take actions favoring local interests over foreigners, there is likely to be a broad public record documenting this process.) The Canadian government action apparently responded to "a vigorous lobbying campaign" by the domestic facility for an export ban.¹⁵¹ The government's export ban favored a domestic PCB treatment facility even though it was located in Alberta, much further than Ohio was from the principal Ontario and Quebec PCB sources. S.D. Myer's Ohio facility thus would have provided Canadian customers with a significant cost advantage.¹⁵² After an extensive review, the tribunal decided that favoring domestic suppliers over S.D. Myers was justified by neither bilateral nor multilateral treaties governing the disposal of hazardous waste.¹⁵³

In dealing with Article 1102, the tribunal first suggested that "the assessment of 'like circumstances' must also take into account circumstances that would justify governmental regulations that treat them differently in order to protect the public interest."¹⁵⁴ It also considered that evidence of Canada's protectionist intent was important in making a decision under Article 1102, but not decisive.¹⁵⁵ Ultimately, the tribunal decided that Canada could have found other ways to favor the domestic facility that would have not been in violation of NAFTA, and held that the Canadian orders banning PCB exports were a breach of Canada's national treatment obligations under Article 1102.¹⁵⁶

The S.D. Myers' tribunal's approach to Article 1105 was stated as follows:

[A] breach of Article 1105 occurs only when it is shown that an investor has been treated in such an unjust or arbitrary manner that the treatment rises to the level that is unacceptable from the international perspective. That determination must be made in light of the high measure of deference that international law generally extends to the right of domestic authorities to regulate matters within their own borders. The determination must also take into account any specific rules of international law that are applicable to the case.¹⁵⁷

Unfortunately, however, a majority of the tribunal eschewed a detailed analysis of Article 1105, simply determining that "on the facts of this particular case Canada's breach of Article 1102 essentially establishes a breach of Article 1105 as well," in part because the "minimum standard" was considered broader in scope than the national treatment provisions.¹⁵⁸ One member of the tribunal disagreed. While he concurred in finding a violation of Article 1102, he argued that an Article 1105 violation "must be based on a demonstrated failure to meet the fair and equitable requirements of international law. Breach of another provision of the NAFTA is not a foundation for such a conclusion."¹⁵⁹ S.D. Myers is the only tribunal to date to find a right to compensation based only on violations of national treatment and fair and equitable treatment without a determination of the existence of an expropriation under Article 1110.¹⁶⁰

Ethyl in its action against Canada alleged violations of national treatment (as well as the performance requirements and expropriation provisions) but not fair and equitable treatment,¹⁶¹ although because the interim award on jurisdiction led to a settlement, no award on the merits was rendered. However, if the allegation that the Canadian import ban on MMT is considered in the context of Canadian efforts to protect Canadian ethanol producers (whose product is a direct competitor with ethanol as a fuel additive), an analysis of the issues along the lines of S.D. Myers might well have occurred.¹⁶²

The most extensive treatment of national treatment to date occurs in Pope & Talbot III. There, the tribunal carefully analyzed the Article 1102 language with regard to the firm's claim that Canada's administration of the Softwood Lumber Agreement export quotas discriminated against Pope & Talbot.¹⁶³ After rejecting what the tribunal called "semantic arguments" made by Canada seeking to narrow [31 ELR 10660] the scope of Article 1102,¹⁶⁴ the tribunal proceeded with its interpretation of the provision: "Once a difference in treatment between a domestic and a foreign-owned investment is discerned, the question becomes, are they in like circumstances?"¹⁶⁵ Such differences would "presumptively violate Article 1102(2), unless they have a reasonable nexus to rational government policies that (1) do not distinguish, on their face or de facto,¹⁶⁶ between foreign-owned and domestic companies, and (2) do not otherwise unduly undermine the investment liberalizing objectives of NAFTA."¹⁶⁷

However, the tribunal then determined, inter alia, that Canada's differential treatment of British Columbia and non-British Columbia lumber producers, existing and new producers, holders of different levels of quotas under the agreement, did not violate Canada's national treatment obligations in the absence of discrimination between foreign investors (such as Pope & Talbot) and domestic investors who were similarly situated. The tribunal afforded Canada considerable leeway in its difficult efforts to administer the complex Softwood Lumber Agreement, using such terms as "reasonable nexus" and "rational choice."¹⁶⁸ As the tribunal effectively admitted, this required a case-by-case analysis, "evaluation of the entire fact setting surrounding, in this case, the application of the [softwood lumber regulatory] Regime."¹⁶⁹

In Cross-Border Trucking Services, the principal issue related to alleged violation by the United States of its obligations regarding cross-border trucking services under Chapter 12 of NAFTA. However, Mexico also argued that the United States had violated the national treatment and most-favored-nation treatment provisions of Chapter 11 by precluding Mexican investment in the U.S. motor carrier industry.¹⁷⁰ (Such investment was permitted by U.S. and Canadian-owned firms.) NAFTA provides in Annex I that "[a] person of Mexico will be permitted to establish an enterprise in the United States to provide: (a) three years after the date of signature of this Agreement [as of December 18, 1995], truck services for the transportation of international cargo between points in the United States …."¹⁷¹ The United States argued that Mexico had failed to show that any Mexican national had sought to invest in the U.S. trucking industry, and thus had failed to prove a violation, but did not deny the existence of a regulatory framework which permitted U.S. authorities to refuse to process applications from Mexican motor carriers.¹⁷² With respect to investment, the panel concluded that by failing to treat Mexican investors in the U.S. trucking industry in the same manner as U.S. (or Canadian) investors, the United States had breached its obligations under Annex I and Articles 1102 (national treatment) and 1103 (most-favored-nation treatment).¹⁷³

In addition to S.D. Myers, the NAFTA tribunals in Metalclad and Azinian have considered alleged violations of the fair and equitable treatment (but not national treatment) provisions. In Metalclad, the tribunal decided, inter alia, that Metalclad not been accorded fair and equitable treatment in accordance with international law. The tribunal first looked at NAFTA's objectives of promoting and increasing cross-border investment opportunities and transparency.¹⁷⁴ It then analyzed the question as to whether Metalclad required a municipal, as well as a federal, permit in order to construct and operate its waste disposal facility, including but not limited to the various assurances Metalclad received from federal authorities indicating that such permitting was exclusively within federal authority.¹⁷⁵ The tribunal's conclusion that Metalclad was not accorded fair and equitable treatment was based on the municipality's denial of a permit, the "procedural and substantive deficiencies of that denial," and Mexico's failure "to ensure a transparent and predictable framework for Metalclad's business planning and investment."¹⁷⁶

In Azinian, the claimants had initially argued that the city's cancellation of their contract constituted a denial of fair and equitable treatment under international law, Article 1105 (as well as a violation of the expropriation provision, Article 1110).¹⁷⁷ However, according to the tribunal the claimants largely abandoned this ground for relief in their arguments, and the tribunal essentially dismissed it out of hand.

The only conceivably relevant substantive principle of Article 1105 is that a NAFTA investor should not be dealt with in a manner that contravenes international law. There has not been a claim of such violation of international law other than the one more specifically covered by Article 1110.¹⁷⁸

Neither the claimants nor the tribunal squarely addressed the issue of whether the actions of the municipality or the Mexican courts constituted a denial of fair and equitable treatment.

The most comprehensive interpretation of Article 1105, and certainly the most troubling, is in Pope & Talbot III. Canada, as one might have anticipated, sought a narrow interpretation of the "fair and equitable treatment" standard, arguing on the basis of older cases that the "minimum standard of treatment" embodied in Article 1105 required "egregious" conduct before the necessary violation of international law could be found, and that Article 1105 thus does not go beyond traditional customary international law principles of fairness.¹⁷⁹ The tribunal disagreed, suggesting:

[31 ELR 10661]

Another possible interpretation of the presence of the fairness elements in Article 1105 is that they are additive to the requirements of international law. That is, investors under NAFTA are entitled to the international law minimum, plus the fairness elements.¹⁸⁰

The tribunal's acceptance of the "additive" approach is based on its conclusion that the U.S. and other BITs, upon which Article 1105 is based, represent an evolution of investor rights to include the fairness elements, "no matter what else their entitlement under international law … free of any threshold that might be applicable to the evaluation of measures under the minimum standard of international law."¹⁸¹ The tribunal reached this conclusion despite the fact that the language of Article 1105 is in fact somewhat different from that of most of the BITs, and refuses to defer to the U.S. government contention that the "drafters of NAFTA Chapter 11 'excluded any possible conclusion that the parties were diverging from the customary international law concept of fair and equitable treatment,'" because the United States could come up with no reasons other than the difference in language itself.¹⁸² Rather, it rejected the idea that the NAFTA Parties would have intended in NAFTA "to provide each other's investment more limited protections than those granted to other countries not involved jointly in a continent-wide endeavor aimed, among other things, at 'increasing substantially investment opportunities in the territories of the Parties.'"¹⁸³

The tribunal also reasoned that limiting fair and equitable treatment to customary international law standards would effectively permit the NAFTA Parties to treat foreign investors in a less favorable way than it treats domestic investors, running afoul of the national treatment and most-favored-nation provisions of Chapter 11.¹⁸⁴ Such a result would be "patently absurd." Accordingly, "the Tribunal interprets Article 1105 to require that covered investors and investments receive the benefits of the fairness elements under ordinary standards applied in the NAFTA countries, without any threshold limitation that the conduct complained of be 'egregious,' 'outrageous' or 'shocking,' or otherwise extraordinary."¹⁸⁵

Having forcefully set out this broad standard for Article 1105, the Pope & Talbot tribunal proceeds to determine on a situation-by-situation analysis, with one relatively minor exception, that none of Canada's actions administering the Softwood Lumber Agreement constituted Article 1105 violations.¹⁸⁶ The exception, ironically, had absolutely no direct relationship to any of the Chapter 11 violations originally raised by Pope & Talbot. Rather, it involved an apparently high-handed and arbitrary "audit" of Pope & Talbot's records initiated shortly after Pope & Talbot filed its notice of arbitration.¹⁸⁷ The Canadian Softwood Lumber Division (SLD) undertook a review of the firm's questionnaire responses submitted as part of the requirements for quota allocations,followed by a series of questions and a scheduled verification, including a demand that the relevant documents—several truckloads located in Portland, Oregon, at the firm's corporate headquarters—be transported to Canada so that SLD officials could inspect them there. Despite the firm's cooperation, the SLD effectively threatened Pope & Talbot denial of its quota if it did not comply with the SLD's demands, and refused to provide the firm with any information on the alleged errors in the data the company had submitted.¹⁸⁸ However, there is no evidence in the decision that Pope & Talbot was actually denied any benefits under the quota system, or otherwise penalized (other than through inconvenience), as a result of the audit.

While the tribunal had earlier declined a request for "interim measures" to prevent the SLD from reducing Pope & Talbot's quota allocation pending resolution of the investment dispute, on grounds that the tribunal lacked jurisdiction to do so,¹⁸⁹ it accepted the company's contention that the "verification episode" constituted a violation of fair and equitable treatment under Article 1105. In doing so, the tribunal variously characterized the actions of the SLD as "imperious," based on "naked assertions of authority," and designed to "bludgeon the Investment into compliance."¹⁹⁰ It was apparently important to the tribunal as well that the SLD had effectively lied regarding the facts of the incident to the Minister of International Trade.¹⁹¹ The tribunal concluded:

It is not for the Tribunal to discern the motives behind the attitude of the SLD; however, the end result for the Investment was being subjected to threats, denied its reasonable requests for pertinent information, required to incur unnecessary expense and disruption in meeting SLD's requests for information, forced to expend legal fees and probably suffer a loss of reputation in government circles …. In its totality, the SLD's treatment of the Investment during 1999 in relation to the verification review process is nothing less than a denial of the fair treatment required by NAFTA Article 1105, and the Tribunal finds Canada liable to the Investor for the resultant damages.¹⁹²

The result is, to some extent, worrisome. The government of Canada, having convinced the Pope & Talbot tribunal that its actions in administering the Softwood Lumber Agreement were in general nonexpropriatory (see below), nondiscriminatory, and consistent with the requirements of fair and equitable treatment, is nevertheless faced with a damages phase of the proceeding as a result of the high-handed actions of certain bureaucrats at the SLD in a [31 ELR 10662] peripheral, almost insignificant, aspect of the case. Moreover, a tribunal has found not only that the scope of the fair and equitable treatment language of Article 1105 goes beyond customary international law, which was predictableeven if possibly erroneous, but that a peripheral series of unfair and reasonable government actions which at most caused some annoyance to the foreign investor are in themselves a violation of the investment provisions of NAFTA, requiring compensation. (The tribunal did not provide guidelines as to how damages should be calculated, but simply invited the Parties to make submissions on the amounts, interest, and costs to be assessed.)¹⁹³

In Methanex, the claimant alleged a violation of fair and equitable treatment as well as an expropriation, on the ground that the actions of the governor and legislature of California in banning MTBE are unfair and inequitable, in that they are not based on scientific evidence; penalize one gasoline component simply because it provides evidence of release of gasoline into the environment; reflect a failure to consider alternative measures or measures to reduce gasoline leakage into the environment; and fail to take Methanex's interests into account.¹⁹⁴ To date, the Methanex tribunal has not yet addressed the merits of this claim.

D. Expropriation and Compensation

Protection against expropriation is perhaps the cornerstone of any investment protection agreement, including the U.S. BITs and NAFTA. Several tribunals have already issued opinions on the merits regarding alleged Article 1110 violations—Azinian, S.D. Myers, Metalclad, and Pope & Talbot—and Article 1110 is the focal point of the Methanex dispute as well. Predictably, this has been one of the most difficult areas of Chapter 11 for tribunals to interpret and apply on a case-by-case basis, principally with regard to defining the scope of "indirect" expropriation or actions "tantamount to expropriation" in determining whether government regulatory activity in environmental and other areas requires the payment of compensation.

The claimants in Azinian argued that the municipality's cancellation of its concession contract for waste disposal facilities, an action that had been upheld as valid by several Mexican courts, was nevertheless an act of expropriation.¹⁹⁵ Initially, the tribunal expressed skepticism that a contract breach necessarily would support a claim under NAFTA: "[A] foreign investor entitled in principle to protection under NAFTA may enter into contractual relations with a public authority, and may suffer a breach by that authority, and still not be in a position to state a claim under NAFTA."¹⁹⁶

The Azinian tribunal reasoned that because the claimants had recourse to Mexican courts which had upheld the legal validity of the municipality's actions, the question was whether "the Mexican court decisions themselves breached Mexico's obligations under Chapter [11] that the court decision itself constitutes a violation of the treaty."¹⁹⁷ However, the tribunal noted that the claimants had never criticized the court decisions as being violations of any NAFTA provisions, but only the actions of the municipality. If the courts determined the contract to be invalid, and no objection was raised to that court decision, by definition there was no contract to be expropriated.¹⁹⁸ Nor were the legal standards for annulment of public service contracts in Mexico questioned by the claimants, or otherwise characterized as a breach of Article 1110. In fact, the tribunal found that the evidence (of various breaches and failures to perform the contract by claimants) supported the conclusions of the Mexican courts.¹⁹⁹ Under the circumstances, the Azinian tribunal was not required to determine the scope of Article 1110.

In Pope & Talbot II, the tribunal again struggled with the scope of Article 1110. The essence of the claim was that Canada's export control regime had "deprived the investment of its ordinary ability to alienate its product to its traditional and natural market," and that by reducing the claimant's quota of lumber that could be exported to the United States without paying a fee, Canada violated Article 1110.²⁰⁰ The claimant argued that Article 1110 went beyond customary international law, and that "tantamount to expropriation" goes beyond a direct taking or creeping expropriation, covering "even non-discriminatory measures of general application which have the effect of substantially interfering with investments of investors of NAFTA Parties."²⁰¹ Canada argued that the right to sell lumber in the U.S. market was not a property right and that there had been no deprivation of the claimant's investment, given that it had continued to export lumber at all relevant times. Moreover, "mere interference is not expropriation; rather, a significant degree of deprivation of fundamental rights of ownership is required."²⁰² Canada also asserted that "tantamount" simply means "equivalent," and did not expand Article 1110's coverage beyond creeping expropriation to cover regulatory action.²⁰³

The tribunal essentially took a carefully circumscribed middle ground. It rejected Canada's narrower reading of Article 1110 and to some extent accepted the claimant's broader one, but on the facts found no expropriatory action under Article 1110. Regarding the scope of Article 1110, the tribunal noted:

Regulations can indeed be characterized in a way that would constitute creeping expropriation …. Indeed, much creeping expropriation could be conducted by regulation, and a blanket exception for regulatory measures would create a gaping loophole in international protections against expropriation.²⁰⁴

On this basis, it found that the lumber export control regime came within Article 1110. However, the tribunal determined that there had not been an expropriation, stating:

First of all, there is no allegation that the Investment [property] has been nationalized or that the [export control] Regime is confiscatory …. The investor remains in control of the Investment, it directs the day-to-day operations of the Investment, and no officers or employees of the Investment have been detained …. Canada does not [31 ELR 10663] supervise the work of the officers or employees of the Investment, does not take any part of the proceeds of company sales … does not prevent the Investment from paying dividends to its shareholders, does not interfere with the appointment of directors or management and does not take any other actions outing the Investor from full ownership and control of his investment.²⁰⁵

The tribunal considered it significant that Pope & Talbot "continued to export substantial quantities of softwood lumber to the United States and to earn substantial profits on those sales."²⁰⁶ It suggested further that in determining "whether a particular interference with business activities amounts to an expropriation, the test is whether that interference is sufficiently restrictive to support a conclusion that the property has been 'taken' from its owner."²⁰⁷

In S.D. Myers, the claimant, in addition to its national treatment and fair and equitable treatment claims, also characterized Canada's action barring exports of PCB to the United States for treatment as "tantamount to expropriation" under Article 1110. However, the tribunal, having already found a compensable violation of NAFTA's national treatment and fair and equitable treatment provisions, disagreed. After first suggesting that the term "expropriation" should be interpreted "in light of the whole body of state practice, treaties and judicial interpretations of that term in international law cases," the tribunal noted that the term usually connotates the "taking" of "property" with a view toward transfer of ownership.²⁰⁸ It then attempted to draw a distinction between deprivation of ownership rights and the "lesser interference" of regulation: "The distinction between expropriation and regulation screens out most potential cases of complaints concerning economic intervention by a state and reduces the risk that governments will be subject to claims as they go about their business of managing public affairs."²⁰⁹ Seeking to further explain the distinction, the tribunal posited that

expropriation usually amounts to a lasting removal of the ability of an owner to make use of its economic rights, although it may be that, in some contexts and circumstances, it would be appropriate to view a deprivation as amounting to an expropriation, even if it were partial or temporary.²¹⁰

The tribunal also concluded that the words "tantamount to expropriation" were designed to embrace the concept of "creeping" expropriation rather than to "expand the internationally accepted scope of the term expropriation," relying on Pope & Talbot II.²¹¹

Ultimately, the tribunal decided that the interference by Canada in S.D. Myer's business—the closing of the border—was temporary. While it had the effect of eliminating the firm's competitive advantage, that factor is relevant to the question of compensation for violation of Articles 1102 and 1105, "but does not support the proposition on the facts of this case that the measure should be characterized as an expropriation within the terms of Article 1110."²¹²

In Metalclad, the tribunal had a much clearer case of expropriation than either Pope & Talbot or S.D. Myers, assuming that the facts (discussed earlier in part III(A)) found by the tribunal are correct. A crucial legal finding by the tribunal—now under appeal to the courts of British Columbia by Mexico—was that "the exclusive authority for siting and permitting a hazardous waste landfill resides with the Mexican federal government."²¹³ Even if the municipality had denied Metalclad's local construction permit based on environmental concerns, in the view of the tribunal the municipality had exceeded its authority, although it is evident from the decision that the tribunal felt that the denial came without any "basis in the proposed physical construction or any defect in the site." Thus, the municipality's action "effectively and unlawfully prevented the Claimant's operation of the landfill."²¹⁴

Such action fit within the tribunal's views regarding the scope of Article 11, which

includes not only open, deliberate and acknowledged takings of property … but also covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of the property even if not necessarily to the obvious benefit of the host state.²¹⁵

The tribunal, in reaching its finding of indirect expropriation, found it very important that Metalclad had reasonably relied on the representations of the Mexican federal government of its exclusive authority: "These measures [of the municipality], taken together with the representations of the Mexican federal government, on which Metalclad relied, and the absence of a timely, orderly or substantive basis for the denial by the Municipality of the local construction permit, amount to an indirect expropriation."²¹⁶

Separately, the tribunal found that the state government's decree fixing Metalclad's site as an "ecological preserve" effectively barring the landfill operation permanently, was "further ground for a finding of expropriation." This it characterized as an act "tantamountto expropriation."²¹⁷ Arguably, the tribunal might have treated the ecological decree as a direct rather than an indirect expropriation, since it had the effect of depriving Metalclad of all beneficial use of its property. However, the tribunal did not choose to do so.

Finally, a note on a pending action, Methanex, is appropriate. The facts in Methanex may, for the first time, present the tribunal with a potential expropriation through government regulation situation which was discussed in detail by the Pope & Talbot II tribunal, where drawing the line between reasonable regulation and a compensable taking will be more difficult. In Methanex, the California action may well meet all of the requirements of Article 1110—a nondiscriminatory action, for a public purpose, in accordance with due process of law and fair and equitable treatment—but [31 ELR 10664] that in itself may not excuse the United States, on behalf of California, from paying compensation if the action is expropriatory and Article 1110 is interpreted in an expansive manner. Methanex is arguing both for a violation of NAFTA's fair and equitable treatment requirements and an indirect taking through substantial interference by regulatory action (banning the use of MTBE in California). Pope & Talbot II and S.D. Myers both suggest that creeping or indirect expropriation requires a substantial interference with a claimant's "investment," rather than simply a loss of profits. In Methanex, as in those cases, it may be very difficult to show that a California action to ban a gasoline additive which is produced using methanol produced by Methanex in the United States and/or Canada can reach the level of substantial interference in Methanex's business. Also, while Methanex may be able to demonstrate some loss of business value or profits, given the other factors that affect the methanol industry it may also be difficult to show that these losses are proximately caused by the California ban. These factors may ultimately be decisive.

E. Treatment of Environmental Provisions

The various environmental provisions relevant to Chapter 11 have not been widely discussed in tribunal decisions to date. This could be the result of any of a number of factors. First, the environmental nexus may be peripheral to the dispute, as in Azinian. Second, the respondent governments may have simply chosen not to argue environmental provisions as a basis for their actions, in part because of the weakness of the language. Third, the lack of opportunity for environmental organizations to submit amicus curiae briefs (particularly in cases such as Metalclad) also has deprived the tribunals of expert opinion in the environmental law area, whether or not the tribunals would have chosen to accept those views. Fourth, insofar as this author has been able to determine, none of the arbitrators appointed to NAFTA Chapter 11 panels to date have been persons with substantial environmental law—as contrasted to international investment law—expertise, although some may be sensitive to environmental concerns.

In any event, the S.D. Myers decision is the only final decision to date to propose and discuss general principles for interpreting NAFTA, and related international agreements, in the context of environmental concerns:

. Parties have the right to establish high levels of environmental protection. They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states;

. Parties should avoid creating distortions to trade;

. Environmental protection and economic development can and should be mutually supportive.²¹⁸

However, the S.D. Myers tribunal did not find it necessary to discuss in detail any of these principles in rendering its decision, except to note that if the state "can achieve its chosen level of environmental protection through a variety of equally effective and reasonable means, it is obliged to adopt the alternative that is most consistent with open trade."²¹⁹ (As noted earlier, the finding of a violation by Canada of Article 1102 was based in part on the tribunal's belief that Canada could have found a less-trade distorting means of favoring the domestic PCB processor.)²²⁰ Whether these criteria, with their potentially conflicting objectives, will prove of any use to future tribunals or litigants before them remains to be seen.

The Metalclad tribunal referred in passing to Article 1114, but ultimately did not feel the need to interpret its scope, stating:

This conclusion [that the municipality had violated the fair and equitable treatment requirements in denying Metalclad a permit] is not affected by NAFTA Article 1114, which permits a Party to ensure that investment activity is undertaken in a manner sensitive to environmental concerns. The conclusion of the Convenio and the issuance of the federal permits show clearly that Mexico was satisfied that this project was consistent with, and sensitive to, its environmental concerns.²²¹

The tribunal simply assumed that the Mexican federal action issuing Metalclad's permits represented a determination by the Mexican government that environmental concerns had been analyzed and the approvals based in part on that analysis. It is unclear whether the record before the tribunal supports such a conclusion.

One can be reasonably sure that the tribunal in Methanex will be required to balance the environmental provisions of NAFTA against those relating to investor protection in a much more extensive manner than has occurred in other cases to date. As the NAFTA language and these early decisions indicate, it will not be an easy task.

F. A Summary and Assessment

Arbitration awards, both final and interim, are providing an increasingly broad body of interpretations of the various procedural and jurisdictional, as well as the operative, provisions of NAFTA Chapter 11. What do they tell us about the scope and applicability of investor protection provisions where possible conflicts are raised with environmental regulation?

The procedural decisions and orders under Chapter 11 to date, despitewidely varying subject matter, follow a pattern. First, except in circumstances where a particular procedural requirement is clearly jurisdictional—waiver of pursuit of other court proceedings in Waste Management, running of NAFTA's three-year period to commence arbitration proceedings in Feldman—or where a party is prejudiced, the tribunals are unlikely to refuse to consider an issue simply because it was not clearly described in the notice of arbitration, or the timing of filing was incorrect. This seems particularly true when the result of a contrary decision would simply mean the re-filing of the case or the filing of a parallel action based on the same facts but different Chapter 11 provisions.

Second, and more importantly, despite creative efforts by government lawyers to narrow the scope of coverage of Chapter 11, tribunals to date have not shown much sympathy. The broad NAFTA language relating to "measures," "investor," "investment disputes," "enterprise," "laws" or "claim" has been given its ordinary meaning by the tribunals that have been asked to interpret it. For example, it is entirely [31 ELR 10665] possible that the drafters of NAFTA did not intend "trade" disputes to be covered by Chapter 11, but this is not what the language of Chapter 11 says, and three tribunals—Ethyl, S.D. Myers, and Pope & Talbot—have rejected government assertions to this end. While it is possible that the Canadian government, in its challenge of the S.D. Myers award, will be able to convince a Canadian court that S.D. Myers did not in fact have an "investment" in Canada as that term is used in NAFTA, thereby seeking a much narrower interpretation, there is no reason to assume that the court will be any more open than the tribunal to this interpretation. Similarly, in Loewens and in Azinian, tribunals have determined that national court decisions were "measures" under Chapter 11 subject to review by arbitral tribunals, an approach which would presumably apply to court decisions relating to environmental regulation as well.

Although there are only two final decisions to date on national treatment, S.D. Myers, this concept may well prove to be one of the easiest for tribunals to assess, particularly in the relatively open democratic systems of the NAFTA Parties. Where, for example, Canadian authorities have apparently tried to favor domestic interests over foreign ones (Ethyl and S.D. Myers), there has been a public record in the government and Parliament that made it relatively straight-forward to demonstrate discrimination against foreign interests.²²² One can reasonably expect that there will be more Chapter 11 cases in which denial of national treatment is the focus of the action. On the other hand, as Pope & Talbot III suggests, the term "in like circumstances" is critically important, and where a host government treats similarly situated investors (domestic and foreign) in essentially the same manner (de jure and de facto), and the government actions are consistent with the tribunal's view of NAFTA's investment liberalization objectives, no national treatment violation is likely to be found.

However, questions arising under Article 1105—fair and equitable treatment in accordance with international law—are already proving more troublesome for the tribunals. The S.D. Myers tribunal essentially suggested that a violation of this provision would require treatment in such an unjust or arbitrary manner that it would be unacceptable from an international law perspective. In the case before it, having found a national treatment violation, a majority of the tribunal decided that those facts established a violation of Article 1105 as well, without really explaining why. Since a violation of either Article 1102 or Article 1105 would be grounds for an award against the affected NAFTA Party, the issue of whether a violation of the first is ipso facto a violation of the second as well may not be very important.

The Pope & Talbot tribunal, in contrast, interpreted the fair and equitable treatment language in a more expansive way, finding, on the basis of questionable legal reasoning, that the language of Article 1102 goes beyond the customary law requirements found by the S.D. Myers tribunal. In Pope & Talbot, reasonable government administrative action was considered acceptable, but high-handed and arbitrary action (in the view of the tribunal in light of the facts presented) was not, regardless of whether the latter rose to the level of a customary international law violation.²²³ It is also evident from Pope & Talbot that a general pattern of actions that do not violate Chapter 11 is not enough to absolve a government from liability if a particularly arbitrary or high-handed administrative action is also evident, even if the latter is largely peripheral to the principal dispute. It remains unclear whether a dispute limited entirely to questions about an unfair administrative action, without more, would be sufficient basis for finding a compensable violation of Article 1102.

In Metalclad, there had been no allegation of discrimination, but the tribunal (which also found an indirect expropriation) had no difficulty concluding that the facts also represented a violation of Article 1105.²²⁴ There, the tribunal appears to have looked at the facts as a whole, and deduced a pattern of Mexican government statements and actions (or inactions) that in the aggregate resulted in a violation. The Azinian tribunal, which ultimately found no violations by the municipality or Mexican courts, suggested that a violation of Article 1105 would require a violation of international law, but did not define what that might be, except to indicate that it was not present on the facts before the tribunal. By its terms, and in light of the decisions of three tribunals, it is evident that Article 1105 requires a showing of state actions violating customary international law, which is a high standard. Future decisions are likely to reflect a case-by-case, fact-by-fact analysis as well. It also seems unlikely that where a tribunal finds a violation of Articles 1102 or 1005, or both, it would excuse such a violation based on Article 1114 (as indeed the Metalclad tribunal declined to do).

In the area of expropriation, the four tribunals that have rendered decisions to date—Azinian, S.D. Myers, Metalclad, and Pope & Talbot—have all taken approaches suggesting that Article 1110 does not go beyond customary international law, particularly when dealing with indirect or creeping expropriations, measures "tantamount to expropriation." The rationale has varied to some extent, with the Pope & Talbot tribunal going further in its consideration of when a regulatory act might rise to the level of a taking than the other three (although ultimately finding no expropriation). Significantly, there has been no evidence of a desire to reach out and expand the scope of the obligation to compensate under NAFTA beyond traditional limits. In the single case where an Article 1110 violation has been found—Metalclad—the facts, if correctly determined by the tribunal, present a relatively traditional case of indirect or "creeping" expropriation.

Of course, the Methanex decision, still pending, is undoubtedly the case of those brought to date which raises the investor protection-environmental regulation dichotomy most squarely. It is conceivable that the tribunal could find that the California regulatory ban on MTBE constituted an indirect expropriation, although the existing jurisprudence will be difficult to overcome in the absence of a demonstration that the regulation (rather than other economic factors) has effectively destroyed (or very seriously injured) Methanex's business in the United States.

To date, the tribunals simply have not paid much attention to Article 1114 or any of NAFTA's other unique environmental provisions. This is not particularly surprising, given [31 ELR 10666] the lack of guidance in Chapter 11 as to how these clauses are to be interpreted, in conjunction with the strong investor protections elsewhere in that chapter. Methanex may prove a useful opportunity for the United States, as respondent, and for Canada and/or Mexico as third-Party commentators, to explain how Article 1114 fits into the Chapter 11 scheme. Methanex is also the first Chapter 11 case in which a tribunal has decided in principle that it has the power to admit amicus curiae submissions from the International Institute for Sustainable Development, Communities for a Better Environment, the Earth Island Institute, and indicated that it probably will accept such submissions based on procedural limitations that have yet to be determined.²²⁵ Such submissions can be reasonably expected to add to the legal dialogue on these difficult issues.

IV. The Extent of the Problem and How to Deal With It

At the beginning of this Article, I essentially suggested that the potential investor protection-environmental regulatory conflicts should be resolved in favor of the regulations when they were reasonable and nondiscriminatory, even where there is a diminution of the value of an investment, but in favor of the investor where there is discriminatory and/or unfair or inequitable government action under international law, or an expropriation (direct or indirect) under international law, regardless in the latter case whether the government actionis taken under the guise of environmental regulation. On the whole, the Chapter 11 tribunals that have rendered decisions on the merits to date have done reasonably well in making this distinction, notwithstanding the NAFTA governments' understandable unhappiness with losing decisions and, perhaps in retrospect, with their drafting of Chapter 11 nine years ago.

Notwithstanding criticism of the process, the Chapter 11 decisions to date are at least relatively well reasoned, and none can reasonably be characterized as advocating expansion of the protection of foreign investors at the expense of reasonable government regulation of the environment or otherwise. Azinian confirmed that both municipal government and court actions were not unreasonable, let alone amounting to violations of international law, and effectively treated the fact that the concession agreement was for a waste disposal facility, i.e., environmentally related, as irrelevant, which it was. Metalclad came to the opposite result, finding both a denial of fair and equitable treatment and an indirect expropriation. In this instance, the tribunal appears to have looked carefully at the facts, including those relating to the environmental interests of the state and municipality, but ultimately rejected those as grounds for permitting Mexico to escape international legal responsibility for having continuously misled Metalclad with regard to its possible obligations to local authorities. Whether the tribunal erred under NAFTA in directly or by implication finding that under Mexican law the federal government has exclusive authority over the permitting for a waste disposal facility will presumably be determined by a Canadian court. In any event, it seems likely that the tribunal would have reached the same conclusion whether or not the project was for construction and operation of a hazardous waste disposal facility or for some totally unrelated purpose.

S.D. Myers in some respects is probably the easiest case to date. There was ample evidence that Canada had banned exports of PCBs for disposal not for any health, safety, or environmental reasons, but simply to favor a local supplier, despite Canada's efforts to present itself as a defender of the Canadian environment. If this case and Metalclad withstand the court challenges, they will undoubtedly have a chilling effect on national government behavior (environmentally connected or otherwise) that discriminates against foreign investors or violates customary principles of international law. This is one of the major objectives of Chapter 11 and accepted principles of international law; such activity should be discouraged.

Of the cases decided to date, Pope & Talbot, even though it does not involve environmental regulation, probably raises the most serious questions about the future. In addition to blurring the distinction between de jure and de facto discrimination, the decision concludes that "fair and equitable treatment" should have a broad scope not limited by traditional customary international law principles. Further, a distinct unreasonable or inequitable phase of the governmental proceedings may be the grounds for compensation, even if the overall pattern of government conduct does not constitute a violation of Chapter 11's provisions, and even if the governmental action does not cause appreciable harm to the foreign investor. Certainly, the actions of the Canadian Softwood Lumber Division, however high-handed and unreasonable, do not in themselves rise to the seriousness of conduct that appears to have been contemplated as actionable generally under Chapter 11. There is no reason to assume that a similar approach could not be applied in the future to actions by environmental regulatory agencies that appear to a tribunal to be high-handed or unreasonable.

Methanex admittedly raises challenges that go beyond these existing decisions. There is a risk, of course, that the tribunal will find that the U.S. (California) MTBE ban is an expropriatory act requiring compensation, a result that would be very unfortunate unless there are facts regarding California's regulatory activity that would suggest arbitrary or unfair actions in banning MTBE. However, the apparent lack of any discrimination against foreigners, and the reasonable analytical process that California apparently undertook before imposing the ban, will presumably make it very difficult for the tribunal to find a violation of Article 1105, and discourage the finding of a taking under Article 1110. This is a crucially important decision in the application of Chapter 11. If the tribunal finds a compensable taking, it will confirm the worst fears of the environmental community. On the other hand, if the tribunal declines to find a taking, even those opposed to NAFTA may have to admit that the system does not pose a serious threat to responsible environmental regulation by governments.

To date at least, there is little evidence to suggest that the sky is falling, or that government regulatory action will have to be circumscribed as result of NAFTA investor actions, at least beyond what most persons would find reasonable. In particular, fair and equitable treatment violations have only been found in three instances where the Canadian or Mexican government action has been viewed as blatant (S.D. Myers, Metalclad, and Pope & Talbot), and an expropriation has been found in only one of four instances, (Metalclad), [31 ELR 10667] again where the government action appears egregious. Only one tribunal to date—Pope & Talbot—has reached out in the sense of broadening the scope of NAFTA language beyond what most view the customary international standards to be, and there is considerable question as to whether future tribunals will consider this interpretation as worth following. At the same time, the tribunals appear quite willing to interpret the broad language of NAFTA in accordance with the tribunal members' view of the language and its intent, notwithstanding efforts by all the NAFTA governments to encourage narrower readings, particularly with regard to scope and jurisdictional issues.

Thus, some risks remain in pending and future cases. Tribunal members are human, and they will fail to understand language nuances and negotiating history, or simply make mistakes. Perhaps more significantly, they are highly likely to continue to interpret broad scope provisions of NAFTA as they are written. If governments and their nationals are sufficiently unhappy with this approach, it would make a great deal of sense for the NAFTA Parties to issue a series of binding interpretations of the NAFTA definitional sections "measures," "investment," "investor," etc. and of Articles 1105 and 1110, under the authority provided under Article 1131(2). This assumes, of course, that the three governments (and their cabinet agencies) can agree on the appropriate scope of these provisions themselves.

However, such an action has major political and investment security implications for all three NAFTA Parties. It will be difficult for the United States to narrow the scope of Chapter 11 without by implication narrowing the scope of the 40 U.S. BITs now in force that contain similar language, treaties designed to provide broad protection to American investors abroad. Canada has fewer such agreements, but the same problem arises. For Mexico, the issue is whether the scope of Chapter 11 can be narrowed without suggesting to current and potential investors in Mexico that Mexico is reducing the level of security offered to foreign investors. The NAFTA governments have been committed for years, if not decades, to the facilitation and protection of foreign investment. A significant narrowing of the scope of NAFTA Chapter 11 thus represents a major change in policy which cannot be taken lightly, and the effort might well be postponed unless or until there is a "loss" by one of the NAFTA governments that provides a stronger basis for concern than exists today.

The other alternative, and probably the only practical alternative if the NAFTA Parties cannot agree on binding interpretations, is to continue doing what they are doing—make an intensive effort to appoint the best available arbitrators and trust in a process that so far has worked reasonably well. (Needless to say, it would also be helpful if the more egregious bureaucratic actions, such as that of the Softwood Lumber Division in Pope & Talbot, could be reined in, as such actions are difficult for tribunals to ignore.) The opinions to date suggest that the NAFTA governments have done moderately well in explaining their views effectively to the tribunals, although the tribunals have frequently rejected the governments' positions. However, extreme government positions—such as Canada's in arguing before the Pope & Talbot tribunal that only discrimination against multiple investors is actionable under Article 1102—seriously undermine government credibility with the arbitrators. In environmentally related cases, it probably makes sense to encourage participation by responsible nongovernment organizations or for the concerned NAFTA governments to submit in detail their views on resolving any investment-environmental conflicts, as a means of "educating" the arbitrators.

The practice of challenging adverse decisions (S.D. Myers and Metalclad) in national courts (Canada in both instances) is understandable, given the tendency of government lawyers, like all attorneys, to resort to all available remedies, but it may be short-sighted in the medium and long term. If every decision lost by a government is challenged in court, regardless of the merits, and if the courts entertain a review on the merits, the efficacy of the Chapter 11 process will be seriously damaged, and the United States and Canada, in particular, may weaken respect for investor-host state dispute settlement worldwide. Aside from the unlikelihood that any Chapter 11 tribunal will again agree to Canada as the situs for the arbitration, the process of a long and time-consuming appeal is likely to discourage at least some potential panelists from being willing to serve and smaller investors from exercising their rights under Chapter 11.

One area in which change is long overdue is in the area of the lack of transparency of the proceedings. The most valid criticism of the Chapter 11 process to date is that the proceedings, despite major public policy implications, are largely insulated from public view. In many instances, it is impossible to obtain any accurate information concerning the status of the proceeding or the arguments being made by the Parties. In some cases, even the interim orders cannot be made public because of opposition of one or both of the parties. No wonder that conspiracy theorists and other skeptics are critical: If this is a proper judicial process, why are the governments keeping it secret?

Confidential business information or government documents can be protected through administrative protective orders, public and nonpublic versions of submissions and hearings, and other mechanisms that are used routinely in national courts. Why, for example, should the Microsoft antitrust case be public but Methanex be confidential? There simply is no reasonable excuse for this situation, and the three governments should agree that in all proceedings they will waive their rights under the ICSID and UNCITRAL rules to secrecy, except when confidential information is required.

In terms of its future negotiating objectives, it would seem prudent for the United States, in particular, to go slowly in proposing language similar or identical to Chapter 11 for other bilateral and multilateral investment agreements, including but not limited to the negotiations toward a FTAA, until that language can be thoroughly reviewed in light of the emerging Chapter 11 arbitral decisions. Losses by the United States in the Methanex and Loewen cases could make such a reassessment a wise political as well as legal choice.

In this respect, of course, the outlook could be worse (or perhaps better, from the investors' point of view). Suppose, for example, that the NAFTA Parties had been successful several years ago, and negotiations at the OECD of the MAI, with Chapter 11-like provisions, had ended with agreement rather than failure.²²⁶ Not only NAFTA investors, but European [31 ELR 10668] (and Japanese) investors and their counsel could be filing the same types of investment protection actions against the regulatory actions (environmental and otherwise) of any of the OECD governments, and in vastly greater numbers!

1. This Article draws extensively on the research and analysis undertaken for a concurrent article discussing similar issues, David A. Gantz, Potential Conflicts Between Investor Rights and Environmental Regulation Under NAFTA's Chapter 11, 33 GEO. WASH. INT'L L. REV. (forthcoming 2001).

2. Dec. 17, 1992, U.S.-Can.-Mex., 32 I.L.M. 289 (chs. 1-9); 32 I.L.M. 605 (chs. 10-22) [hereinafter NAFTA].

3. See, e.g., Transcript prepared by Media Q, in Exclusively for Environment Canada, Jan. 16, 2001, on behalf of the Canadian Labour Congress, Council of Canadians, and the Sierra Club of Canada (criticizing the panels' decisions in Ethyl Corp. v. Canada and S.D. Myers, Inc. v. Canada under Chapter 11 of NAFTA, on various grounds, including alleged inconsistency with the Basel Convention, violations of Canadian sovereignty, disregard of Canadian law, etc.) (copy on file with author).

4. Anthony DePalma, NAFTA's Powerful Little Secret; Obscure Tribunals Settle Disputes, but Go Too Far, Critics Say, N.Y. TIMES, Mar. 11, 2001, § 3 (Magazine), at 1.

5. See About OECD: Membership, at http://www.oecd.org/about/general/member-countries.htm (last visited Feb. 8, 2000) (indicating that Canada and the United States are among the 20 original members in 1961, with Mexico joining in 1994); MAI Negotiating Text, 24 Apr. 1998, at http://www.oecd.org/daf/cmis/mai/maitext.pdf (last visited Jan. 26, 2000).

6. See K. Scott Gudgeon, United States Bilateral Investment Treaties: Comments on Their Origin, Purposes, and General Treatment Standards, 4 INT'L TAX & BUS. L. 105 (1986); U.S. DEP'T OF STATE, FACT SHEET. U.S. BILATERAL INVESTMENT TREATY PROGRAM 1 (May 5, 1999), available at http:www.state.gov/www/issues/economic/ifd_bitprogram.html (last visited Apr. 14, 2000).

7. See Negotiating Group on Investment: Public Summary of U.S. Position (Jan. 17, 2001), at http://www.ustr.gov/regions/whemisphere/invest.html (last visited Apr. 10, 2001).

8. See Administration Works on Investment Position for Singapore FTA, INSIDE U.S. TRADE, Dec. 15, 2000, at 2, available at http://www.insidetrade.com/sec-cgi/as_web.exe?SECIT2000+D+50328 (last visited Jan. 4, 2001).

9. See U.S. Singapore FTA Talks Miss Target, to Continue in January, INSIDE U.S. TRADE, Dec. 22, 2000, at 1, available at http://www.insidetrade.com/sec-cgi/as_web.exe?SEC_CURRENT+D+10732 (last visited Jan. 4, 2001).

10. Similar language is found in the United States-Vietnam Bilateral Trade Agreement concluded in July 2000. See Agreement Between the United States of America and the Socialist Republic of Vietnam on Trade Relations, July 13, 2000, ch. IV. art. 4.

11. Convention on the Settlement of Investment Disputes Between States and Nationals of Other States, Mar. 18, 1965, 17 U.S.T. 1270, T.I.A.S. No. 6090, 575 U.N.T.S. 159 [hereinafter ICSID Convention]; see ICSID, ADDITIONAL FACILITY FOR THE ADMINISTRATION OF CONCILIATION, ARBITRATION, AND FACT-FINDING PROCEEDINGS (1979) (mandating use when either the host government or the government of the foreign investor is not a party to the ICSID).

12. UNCITRAL Arbitration Rules, G.A. Res. 31/98, Dec. 15, 1976, available at http://uncitral.org/english/texts/arbconc/arbitrul.htm (last visited Jan. 23, 2001).

13. "No person shall be … deprived of life, liberty, or property without due process of law; nor shall private property be taken for public use without just compensation," applicable also to state action under the Fourteenth Amendment, which provides that "no State shall make or enforce any law which shall … deprive any person of life, liberty, or property, without due process of law." Arguably, an international agreement that provides foreign investors with greater rights against the United States or state governments in investment disputes than are afforded U.S. nationals under the U.S. Constitution would itself raise equal protection concerns. U.S. CONST. amend. XIV ("No State shall make or enforce any law which shall … deny any person within its jurisdiction the equal protection of the laws.").

14. Metalclad Corp. v. Mexico, ICSID Case No. ARB(AF)/97/1 (Aug. 26, 2000), 40 I.L.M. 36 (2001) [hereinafter Metalclad]; Pope & Talbot, Inc. v. Canada, Phase 2 Award (Apr. 10, 2001), at http://www.naftaclaims.com (last visited Apr. 15, 2001) [hereinafter Pope & Talbot III]; Pope & Talbot, Inc. v. Canada, Interim Award (June 26, 2000), at 2-3 [hereinafter Pope & Talbot II], at http://www.appletonlaw.com/4b3P&T.htm (last visited Dec. 17, 2000); Waste Management, Inc. v. Mexico, ICSID Case No. ARB(AF)/98/2 (June 2, 2000), 40 I.L.M. 55 (2001) [hereinafter Waste Management]; Pope & Talbot, Inc. v. Canada, Interim Award (Jan. 20, 2000), at 22-23 [hereinafter Pope & Talbot I], at http://appletonlaw.com/4b3P&T.htm; Ethyl Corp. v. Canada, June 24, 1998, 38 I.L.M. 708 (1999) [hereinafter Ethyl]; S.D. Myers, Inc. v. Canada (Nov. 13, 2000) (Partial Award), at http://www.appletonlaw.com/4b2myers.htm (last visited Dec. 17, 2000) [hereinafter S.D. Myers]; Azinian v. Mexico, ICSID Case No. ARB(AF)/97/2 (Nov. 1, 1999), 39 I.L.M. 537, 555 (2000) [hereinafter Azinian].

15. Some, but not necessarily all, of the pending cases include: Adams v. Mexico, Notice of Arbitration, Feb. 16, 2001 (claiming denial of justice regarding lack of access to Mexican court proceedings resulting in loss of real property by group of American investors) (on file with author); ADFGroup Inc. v. United States, Notice of Arbitration, July 19, 2000, ICSID Case No. ARB(AF)/00/1 (on file with author) (challenge to U.S. "Buy American" rules regarding purchase of steel for highway project); Ketcham Invs., Inc. & Tysa Invs., Inc. v. Canada, Notice of Intent to Arbitrate, Dec. 22, 2000, at http://www.dfait-maeci.gc.ca/tna-nac/K&T-e.pdf (last visited Mar. 27, 2001) (alleged denial of national treatment arising out of Softwood Lumber Agreement export restrictions); Feldman v. Mexico, Interim Decision on Preliminary Jurisdictional Issues, ICSID Case No. ARB(AF)/99/1 (Dec. 6, 2000), quoted in INTERNATIONAL LAW IN BRIEF 4-5 (Feb. 3-9, 2001) (alleging national treatment and other Chapter 11 violations based on taxation of cigarette exports) [hereinafter Feldman]; Mondev Int'l Ltd. v. United States, Notice of Arbitration, Sept. 1, 1999, at www.naftalaw.org/mondev.pdf (alleging denial of justice arising out of Massachusetts actions affecting real property); Methanex Corp. v. United States, Notice of Intent to Submit a Claim to Arbitration, July 2, 1999, at http://www.methanex.com/investorcentre/mtbe/noticeofintent.pdf [hereinafter Methanex] (alleging expropriation arising out of California regulation banning the sale of methanol-based gasoline additive methyl tertiary butyl ether (MTBE), discussed in detail infra part II.A.7); Sun Belt Water, Inc. v. The Queen (U.S. v. Canada), Notice of Intent to Submit a Claim to Arbitration, Nov. 27, 1998, reprinted in AMERICAS TRADE, Dec. 24, 1998, at 13 (alleging violations of national treatment and other Chapter 11 proceedings arising out of an export ban on water); Loewen Group, Inc. v. United States, ICSID Case No. ARB(AF)98/3, Oct. 30, 1998, Notice of Claim, at http://www.naftalaw.org/loewen.pdf (claiming denial of justice arising out of a Mississippi court decision awarding actual, emotional distress and punitive damages in the total amount of $ 500 million against a Canadian funeral home operator); United Parcel Serv. v. Canada (see Rick Brooks, UPS Sues Canada for $ 156 Million, Citing Unfair Competition by Post Office, WALL ST. J., Apr. 24, 2000, at A2 (alleging Chapter 11 violations based on competition from Canadian postal service)).

16. Metalclad, S.D. Myers, and Pope & Talbot. In S.D. Myers and Pope & Talbot, separate phases of the proceeding are being conducted to determine the amount of compensation.

17. Metalclad, S.D. Myer, Ethyl, Azinian, Waste Management, Sun Belt Water, and Methanex.

18. NAFTA, supra note 2, art. 1131(2).

19. Id. art. 1136(1).

20. Id. art. 1131(1). The exception occurs when the Free Trade Commission under NAFTA—cabinet level officials of the three governments—issues an interpretation of NAFTA which is then binding on the tribunals. Id. art. 1131(2).

21. See Statute of the International Court of Justice, June 26, 1945, 59 Stat. 1055, T.S. No. 993, 3 Bevans 1179, art. 38 (providing a hierarchy of sources: international conventions; international custom; general principles of law recognized by civilized nations; judicial decisions (although not binding in subsequent cases) and the writings of publicists, both of the latter as subsidiary means of determining the rules of international law).

22. See part III, infra.

23. See Eleanor Roberts Lewis, The United States Bilateral Investment Treaty Program: Protection for U.S. Investors Overseas, in THE COMMERCE DEPARTMENT SPEAKS ON INTERNATIONAL TRADE AND INVESTMENT 127, 132-51 (Ginger Lew, Chair 1994) 127, 132-151 (text of "model" BIT). Currently, 31 U.S. BITs have entered into force, and another 10 were approved by the U.S. Senate in October. See Gary G. Yerkey, Investment: Senate Backs Bilateral Investment Treaties Aiding Investors in 10 Developing Countries, Daily Int'l Trade Rep. (BNA), Oct. 20, 2000, at D6.

24. NAFTA, supra note 2, art. 1131(1).

25. Id. art. 102(2). For a discussion of some of the possible international law sources of relevance to interpreting the provisions of Chapter 11, see Gantz, supra note 1, at pt. V.

26. Vienna Convention on the Law of Treaties, May 23, 1969, U.N. Doc. 39/27, art. 31. Under Article 32 of the Vienna Convention, supplementary means of interpretation—including preparatory work and circumstances of its conclusion, are to be referred to only when interpretation under Article 31 "leaves the meaning ambiguous or obscure; or leads to a result which is manifestly absurd or unreasonable." The United States is not a Party to the Vienna Convention, but most of its provisions are accepted as evidence of customary international law.

27. Id.

28. NAFTA, supra note 2, art. 1131(2).

29. See Pettigrew Sees Mexican Openness to Clarify NAFTA Investment, INSIDE U.S. TRADE, Mar. 2, 2001, at 13-14 (quoting Canadian Trade Minister Pierre Pettigrew).

30. Id.

31. Gudgeon, supra note 6, at 105.

32. NAFTA, supra note 2, art. 201.

33. Id. art. 1139 (excluding claims to money arising solely from commercial contracts or extensions of credit, or other claims to money that do not involve the interests noted earlier).

34. Id. art. 201.

35. "Most-favored-nation" treatment simply means that a NAFTA Party must grant to the investors and investments of another Party treatment no less favorable than the treatment it affords to investors of any other nation; as between national treatment and most-favored-nation treatment, the investor and investment receive the most favorable of the two. Id. arts. 1103, 1104.

36. Id. art. 1102.

37. Id. art. 1102(3).

38. General Agreement on Tariffs and Trade, Oct. 30, 1947, 61 Stat. A-11, T.I.A.S. 1700, 55 U.N.T.S. 194, art. III. See JOHN H. JACKSON, WORLD TRADE AND THE LAW OF GATT 273-303 (1969).

39. See, e.g., Ralph Nader & Lori Wallach, GATT, NAFTA, and the Subversion of the Democratic Process, in THE CASE AGAINST THE GLOBAL ECONOMY 92, 106-07 (Jerry Mander & Edward Goldsmith, eds. 1996).

40. NAFTA, supra note 2, art. 1105(1).

41. Daniel M. Price & P. Bryan Christy III, Overview of the NAFTA Investment Chapter: Substantive Rules and Investor-State Dispute Settlement, in THE NORTH AMERICAN FREE TRADE AGREEMENT: A NEW FRONTIER IN INTERNATIONAL TRADE AND INVESTMENT IN THE AMERICAS 165, 174 (Judith H. Bello et al., eds. 1994).

42. SeeJ.L. BRIERLY, THE LAW OF NATIONS 287 (6th ed. 1963).

43. See F.A. Mann, British Treaties for the Promotion and Protection of Foreign Investment, BRIT. Y.B. INT'L L. 242, 244 (1981), quoted in RUDOLF DOLZER & MARGRETE STEVENS, BILATERAL INVESTMENT TREATIES 59 (1995).

44. See David A. Gantz, The Marcona Settlement: New Forms of Negotiation and Compensation for Nationalized Property, 71 AM. J. INT'L L. 474, 476 (1977).

45. NAFTA, supra note 2, art. 1110(1) (emphasis added). Paragraphs 2-6 provide generally for compensation "equivalent to the fair market value of the expropriated investment immediately before the expropriation took place"; that compensation be paid without delay and be fully realizable; include interest in a hard currency; and be freely transferable. Id. arts. 1110(2-6).

46. Treaty Between the Argentine Republic and the United States of America Concerning the Reciprocal Encouragement and Protection of Investment, art. IV (1991).

47. See Lewis, supra note 23, at 137-38.

48. Canada-U.S. Free Trade Agreement, Jan. 2, 1988, 27 I.L.M. 281. Article 1605 of the CFTA, provides in pertinent part that:

Neither Party shall directly or indirectly nationalize or expropriate an investment in its territory by an investor of the other Party or take any measure or series of measures tantamount to an expropriation of such an investment, except:

(a) for a public purpose;

(b) in accordance with due process of law;

(c) on a non-discriminatory basis;

(d) upon payment of prompt, adequate and effective compensation at fair market value.

Id. art. 1605 (emphasis added).

49. See Gudgeon, supra note 6, at 105; Statement of President Ronald Reagan, 19 WEEKLY COMP. PRES. DOC. 1216-1218 (Sept. 9, 1983).

50. RESTATEMENT (THIRD) OF THE LAW OF FOREIGN RELATIONS OF THE UNITED STATES § 712 cmt. g (1987) [hereinafter RESTATEMENT] (emphasis added).

51. See part II(C), infra.

52. NAFTA, supra note 2, art. 1114(1) (emphasis added).

53. Id. art. 1114(2). The proviso fails to address strengthening health, safety or environmental measures, although one could perhaps read in such an implication.

54. See id. pmbls. 9 and 11.

55. The North American Agreement for Environmental Cooperation (NAAEC), 32 I.L.M. 1482 (1993).

56. Id. art. 1. Each Party is also required to "ensure that its laws and regulations provide for high levels of environmental protection and shall strive to continue to improve those laws and regulations." Id. art.3.

57. NAFTA, supra note 2, art. 102(1)(c).

58. Including Charles E. Roh, Esq. and Daniel Price, Esq. of the U.S. Trade Representative's Office, and Jonathan Fried, Esq. of the Canadian Trade Ministry.

59. While Chapter 11 theoretically permits the "disputing investor" to submit her dispute to resolution under ICSID Additional Facility rules, or ad hoc arbitration under UNCITRAL arbitration rules, NAFTA, supra note 2, art. 1120, only the second and third options currently exist, since ICSID arbitration (other than via the Additional Facility) is only available where the investor's nation and the host nation are both parties to the ICSID Convention, and neither Mexico or Canada are currently among the 131 nation Parties. ICSID Convention, supra note 11, art. 25. For a list of members as of October 1, 1999, see ICSID, List of Contracting States, at http://www.worldbank.org/icsid/constate/c-states-en.htm (last visited Feb. 9, 2000).

60. See NAFTA, supra note 2, art. 1123 (specifying that arbitration under Chapter 11 shall be by three arbitrators, unless the disputing Parties agree otherwise) and art. 1124 (making the ICSID Secretary General the "appointing authority" under Chapter 11, whether the arbitration is under ICSID or UNCITRAL rules).

61. Id. art. 1120(2).

62. Id. art. 1136(2), 1136(3). The ICSID Convention, supra note 11, provides that "the award shall be binding on the parties and shall not be subject to any appeal or to any other remedy except those provided for in this Convention." Id. art. 53. Under the ICSID Convention, the "other remedies" operate through the ICSID Secretary General or the tribunal, not external court systems. Id. arts. 50-51. The rules of the ICSID Additional Facility—which apply in situations where one party to the arbitration is not a member of ICSID—provide only that "The award shall be final and binding on the parties." Id. art. 53(4). This offers very limited protection against outside court review in accordance with national (or provincial) law relating to court review of arbitral awards, since it is the law of the situs that governs actions to set aside the award. See Clyde C. Pearce & Jack Coe Jr., Arbitration Under NAFTA Chapter Eleven: Some Pragmatic Reflections Upon the First Case Filed Against Mexico, 23 HASTINGS INT'L & COMP. L. REV. 311, 341-42 (2000).

63. See, e.g., ICSID Convention, supra note 11, art. 52; New York Convention on the Recognition of Enforcement of Foreign Arbitral Awards, June 10, 1958, art. 5, 21 U.S.T. 2517, T.I.A.S. 6997, 330 U.N.T.S. 38.

64. In Metalclad, supra note 14, the government of Mexico brought an action in the courts of Vancouver, British Columbia, the seat of the arbitration (even though all of the hearings and tribunal meetings were held in Washington, D.C. or elsewhere) for review of the award. The action against S.D. Myers has been filed in the federal court in Ontario. See Outline of Argument, Feb. 5, 2001 (copy on file with author); NAFTA: Mexico Set to Challenge NAFTA Ruling in Favor of U.S. Waste Management Firm [Metalclad], Daily Int'l Trade Rep. (BNA), Feb. 20, 2001, at D-2; NAFTA: Canada Appeals NAFTA Chapter 11 Case [S.D. Myers], Arguing That Panel Exceeded Its Jurisdiction, Daily Int'l Trade Rep. (BNA), Feb. 9, 2001, at d4. Interestingly, two of the lawyers for Metalclad appear to have anticipated that the choice of the situs or place of arbitration as Vancouver, British Columbia, might ultimately prove significant. See Pearce & Coe, supra note 62, at 328-29, 341-42.

65. NAFTA, supra note 2, art. 1135(1).

66. Id. art. 1135.

67. Id. art. 1110(2) (using what is essentially a fair market value standard).

68. Id. arts. 1116(1)(a) and 1117(1)(a) (permitting investors "to submit to arbitration under this [§ B] a claim that another party has breached an obligation under [§ A]").

69. Id. art. 1135(1)(a). Restitution may be ordered by a tribunal, but the responding government has the option of paying monetary damages in lieu of returning the property to the investor. Id. art. 1135(1)(b).

70. Id. art. 1121(2)(b).

71. In United Parcel Serv. v. Canada, the Canadian postal workers union has sought standing to participate in the proceeding. See NAFTA: Lobby Group, Union Apply for Standing in UPS Chapter 11 Case Against Canada, Daily Int'l Trade Rep. (BNA), Nov. 20, 2000, at D-6. In Methanex, supra note 15, Decision of the Tribunal on Petitions From Third Persons to Intervene as "Amicus Curiae," para. 53 (Jan. 15, 2001), the tribunal decided in principle that it had the power to accept amicus curiae submissions, but has not yet determined what procedural limitations will actually apply to such briefs. (Copy on file with suthor.)

72. In NAFTA, Annex 1137.4, where Canada or the United States are parties, any of the Parties to the arbitration may make the award public, but none is required to do so. When Mexico is a Party to the arbitration, the applicable arbitration rules determine whether the award is to be public. The ICSID Additional Facility rules are silent on publication of the award. The ICSID Rules of Procedure for Arbitration Proceedings permit publication of the award only with the consent of both Parties (NAFTA, supra note 2, art. 48(4)), although ICSID may publish excerpts of the legal rules applied by the tribunal. The UNCITRAL arbitration rules provide that the award is to be made public only with the consent of both Parties (Id. art. 32(5) (UNCITRAL rules)), and hearings are to be in camera unless both Parties agree. Id. art. 25(4).

73. NAFTA, supra note 2, art. 1128.

74. The most comprehensive sources of Chapter 11 documents are two websites, http://www.toddweiler.com and http://www.appletonlaw.com (maintained by Canadian attorneys, Todd Weiler and Barry Appleton, respectively, who are active in prosecuting and/or studying Chapter 11 cases).

75. For a detailed discussion of Ethyl, see Julie A. Soloway, Environmental Trade Barriers Under NAFTA: The MMT Fuel Additives Controversy, 8 MINN. J. GLOBAL TRADE 55, 84 (1999); Timothy Ross Wilson, Trade Rules: Ethyl Corporation v. Canada (NAFTA Chapter 11)—Part I: Claim and Award on Jurisdiction, 6 NAFTA L. & BUS. REV. AM. 52 (2000), Timothy Ross Wilson, Trade Rules: Ethyl Corporation v. Canada (NAFTA Chapter 11)—Part II: Are Fears Founded?, 6 NAFTA L. & BUS. REV. AM. 205 (2000).

76. S.C. 1977, c. 11 (June 14, 1997).

77. Ethyl, supra note 14; for a discussion of the Ethyl case, see Soloway, supra note 75, at 84.

78. Soloway, supra note 75, at 70-71.

79. 16 R.S.C. (1985) (4th Supp.); see Soloway, supra note 75, at 67-68.

80. See Soloway, supra note 75, at 81.

81. For example, Canada had challenged the tribunal's jurisdiction on grounds that Ethyl had failed to timely submit a waiver of its rights under any Canadian court or tribunal, a condition precedent to arbitration under Article 1121. Ethyl, supra note 14, para. 91, 38 I.L.M. at 729. See discussion in Part IV(A), infra.

82. See Canada: Canadian Government Withdraws Ban on Trade, Import of Gasoline Additive MMT, Daily Int'l Trade Rep. (BNA), July 21, 1998,at D-2.

83. Azinian, supra note 14, 39 I.L.M. at 538-39.

84. Id. at 531 (para. 97).

85. See Notice of Institution of Arbitration Proceedings Submitted Pursuant to the North American Free Trade Agreement (USA Waste Serv. v. Mexico), Sept. 29, 1998, reprinted in AMERICAS TRADE, Apr. 22, 1999, at 10; see also NAFTA: U.S. Firm Poised to Seek Arbitration Under NAFTA Investor-State Provisions, Daily Int'l Trade Rep. (BNA), July 15, 1998, at D-4; Waste Management, supra note 14, at 1 (copy on file with author).

86. See Rossella Brevetti, NAFTA: U.S. Waste Control Firm Refiles Case Under NAFTA Investor-State Provisions, INT'L TRADE DAILY (BNA), Oct. 3, 2000, at D-7.

87. THE NAFTA: REPORT ON ENVIRONMENTAL ISSUES 130 (1993).

88. It is estimated that Mexican industry generates 10 million tons of hazardous waste per year, yet at the present time there is only one legal hazardous waste disposal site in the entire nation. Anthony DePalma, Mexico Is Ordered to Pay a U.S. Company $ 16.7 Million, N.Y. TIMES, Aug. 31, 2000, at C4.

89. Metalclad, supra note 14, at 1 (para. 1).

90. Id. at 12-14 (paras. 32, 38, 40).

91. Id. at 15 (paras. 45-46).

92. Id. at 16 (para. 48).

93. Id. at 17-18 (paras. 50-54).

94. Id. at 18 (para. 57).

95. Id. at 19 (paras. 59-60).

96. Metalclad, supra note 14, paras. 76-92, 103-105, 123-125, 128, 131.

97. See Peter Menyasz, Mexico Set to Challenge NAFTA Ruling in Favor of U.S. Waste Management Firm, Int'l Env't Rep. (BNA), Feb. 28, 2001, at 162.

98. See S.D. Myers, supra note 14, at 16 (para. 92).

99. Statement of Claim Between S.D. Myers, Inc. v. Canada, at 6 (Oct. 30, 1998) (on file with author). Because the United States permitted PCB imports only for a limited period, the changing nature of U.S. law is relevant to the determination of damages. See Statement of Defense, S.D. Myers, Inc. v. Canada, June 18, 1999, at 4-5.

100. See Notice of Intent to Submit a Claim to Arbitration Under Section B of Chapter 11 of the North American Free Trade Agreement (S.D. Myers, Inc. v. Canada), July 21, 1998, reprinted in AMERICAS TRADE, Sept. 3, 1998, at 24.

101. Statement of Claim Between S.D. Myers, Inc. v. Canada, at 2 (Oct. 30, 1998) (on file with author).

102. S.D. Myers, supra note 14, at 75 (para. 301).

103. Id. at 75 (paras. 302-303).

104. See Menyasz, supra note 97, at 161-62.

105. 35 I.L.M. 1195 (1996) (May 29, 1996).

106. Pope & Talbot I, supra note 14, at 2-4, 10.

107. Methanex, Global Facilities, at http:www.methanex.com/corporate information/globalfacilities.htm (last visited Aug. 19, 2000).

108. See Notice of Intent to Submit a Claim to Arbitration Under Article 1119, Section B, Chapter 11 of the North American Free Trade Agreement, July 2, 1999. As of October 2000, the three arbitrators had been chosen and memorials had been filed. The company expects a decision in 2001. Methanex, Q&A background on Methanex's NAFTA Claim and MBTE (June 2000), at http://www.methanex.com/investorcentre/mtbe/naftaQ&A.pdf (last visited Aug. 19, 2000).

109. Under Article 105 of NAFTA, the Parties "shall ensure that all necessary measures are taken in order to give effect to the provisions of this Agreement, including their observance, except as otherwise provided in this Agreement, by state and provincial governments."NAFTA, supra note 2, art. 105. Thus, in the event of measures of a U.S. state that are arguably violations of Chapter 11, the U.S. federal government is responsible.

110. According to Methanex, "MTBE (methyl tertiary butyl ether) is a gasoline component manufactured from methanol and isobutylene by oil refiners and chemical manufacturers." Since the 1970s, MTBE has been used as an affordable and effective source of octane, first as lead was phased-out of gasoline and subsequently as gasoline aromatics levels, including benzene, have been reduced. Since the mid-1990s, clean air legislation has required the use of oxygenates in gasoline (reformulated gasoline) to reduce tailpipe emissions. MTBE is the refiners' "oxygenate of choice." News Release, Methanex Seeks Damages Under NAFTA for California MTBE Ban. June 15, 1999, at 1.

111. Executive Order No. D-5-99 of the State of California, Mar. 25, 1999, at 3, at http://www.governor.ca.gov/state/govsite/gov_home page.jsp (last visited Feb. 2, 2000).

112. Id. at 1.

113. For a discussion of the precautionary principle, see DAVID HUNTER ET AL., INTERNATIONAL ENVIRONMENTAL LAW AND POLICY 360-63 (1998).

114. Methanex, Q&A Background on Methanex's NAFTA Claim and MTBE (undated 1999 version), at 4, at http://www.methanex.com (visited on various occasions in 1999).

115. See Santa Clara Valley Water District Methyl Tertiary-Butyl Ether Groundwater Protection Project Plan (May 19, 1998) ("to identify and establish those changes that are necessary in our ongoing programs and projects to protect the qualify of the Santa Clara Valley Water District's (District) groundwater supply from the threat of MTBE"), at http://www.scvwd.dst.ca.us/wtrqual/ct0506c.htm (last visited Nov. 10, 1999).

116. According to Methanex, MTBE is more soluble than other gasoline additives and travels faster and farther. See Methanex, Q&A Background supra note 114, at 5 (1999) (on file with author); see also David Stout, EPA Urges Substitution of an Additive to Gasoline, N.Y. TIMES, Mar. 21, 2000, at A-20 ("But while MTBE may have effectively made the air clearer, when it leaks from underground gasoline tanks … it travels readily to wells. At very low concentrations it is thought to make water dangerous to drink, and no one disputes that it smells bad.").

117. News Release, Methanex Closes Kitimat Methanol Plant (July 4, 2000), at http://www.methanol.com.

118. Methanex states that its investments in the United States include Methanex Methanol Company, which may be an importer or distributor, and a production plant in Louisiana. Press Release, Methanex Seeks Damages Under NAFTA for California MTBE Ban (June 15, 1999), at http://www.methanex.com.

119. Methanex, supra note 15, at 3.

120. Id. at 4. The damages are based in part on a decline in Methanex's stock price between October 1997 and the announcement of the California ban in March 1999, and immediately following the issuing of the announcement. Methanex, Q&A Background on Methanex's NAFTA Claim and MBTE (June 2000), at http://www.methanex.com/investorcentre/mtbe/naftaQ&A.pdf (last visited Aug. 19, 2000).

121. Ethyl, supra note 14, para. 13(1), 38 I.L.M. at 712.

122. Id. para. 14, 38 I.L.M. at 712.

123. Id. paras. 85, 91, 38 I.L.M. at 729.

124. See Alan C. Swan, Ethyl Corporation v. Canada: Award on Jurisdiction (Under NAFTA/UNCITRAL), 94 AM. J. INT'L L. 159, 169 (2000).

125. Ethyl, supra note 14, para. 12, 38 I.L.M. at 712.

126. Id. para. 61, 38 I.L.M. at 724.

127. Id. paras. 63-64, 38 I.L.M. at 725.

128. "The term 'measure' is a non-exhaustive definition of the ways in which governments impose discipline in their respective jurisdictions." Id. para. 66, 38I.L.M. at 725.

129. Id. para. 73, 38 I.L.M. at 727.

130. Pope & Talbot I, supra note 14, at 6 (para. 16).

131. Id. at 11-12 (para. 26).

132. Id. at 14 (para. 33).

133. Pope & Talbot, Inc. v. Canada, Award Concerning the Motion by the Government of Canada Respecting the Claim Based Upon Imposition of the "Super Fee," at 12-13 (paras. 26-28) (Aug. 7, 2000).

134. S.D. Myers, supra note 14, at 57 (para. 231).

135. Id. at 73 (paras. 294-296).

136. Ethyl, supra note 14, para. 61, 38 I.L.M. at 724.

137. Azinian, supra note 14, at 542 (para. 43).

138. Id. at 543 (para. 48).

139. Id. at 549 (para. 77).

140. The Loewen Group, Inc. v. United States, Decision on Hearing of Respondent's Objection to Competence and Jurisdiction, at 10 (para. 40) (Jan. 5, 2001), at http://www.naftalaw.org/Loewen%20 Award%20on%20Jurisdiction.pdf.

141. Id. at 12-13 (paras. 47-48) (referring to Azinian, supra note 14, at 28-29 (paras. 98-99)). In Azinian, the tribunal concluded that the Mexican court decision, while a measure under NAFTA, constituted no denial of justice or other violation of international law.

142. Waste Management, supra note 14, at 4. In fact, Waste Management's Mexican subsidiary, ACAVERDE, had brought separate legal proceedings against two of the Mexican entities charged in the NAFTA complaint, Banco Nacional de Obras y Servicios Publicos and the city of Acapulco. Id. at 6, 16.

143. Id. at 19, 22. One member of the three-person tribunal dissented, arguing that the limiting language in the waiver did not make it unacceptable under Article 1121, because the claims advanced by ACAVERDE in separate legal proceedings differed from the claims being advanced under NAFTA Chapter 11. See id. at 17 (dissenting opinion).

144. Metalclad, supra note 14, at 22 (para. 57).

145. Feldman, INT'L LAW IN BRIEF, supra note 15.

146. Id. at 5 (citing paras. 52, 57-59).

147. Id. at 5 (citing paras. 30, 36-37).

148. Id. at 5 (citing paras. 40, 44-45, 47); see also NAFTA, supra note 2, arts. 1117(2) and 1137(1).

149. In the Matter of Cross-Border Trucking Servs., Secretariat File No. USA-MEX-98-2008-01 (Feb. 6, 2001), at http://www.ustr.gov/enforcement/trucking.pdf (last visited Feb. 28, 2001) [hereinafter Cross-Border Trucking Services].

150. See infra notes 163-66 and accompanying text.

151. S.D. Myers, supra note 14, at 23 (para. 122).

152. Id. at 20 (para. 112).

153. Id. at 18-19 (paras. 103-105), 47-50 (paras. 205-216) (discussing Canada-United States: Agreement Between the United States and Canada Concerning the Transboundary Movement of Hazardous Waste, Oct. 28, 1986, reprinted in EDITH BROWN WEISS ET AL., INTERNATIONAL ENVIRONMENTAL LAW: BASIC INSTRUMENTS AND REFERENCES 616 (1992)). The Basel Convention on the Control of Transboundary Movements of Hazardous Waste and Their Disposal, Mar. 22 1989, reprinted in 28 I.L.M. 657 (1989).

154. S.D. Myers, supra note 14, at 62 (para. 250).

155. Id. at 63 (para. 254).

156. Id. at 64 (para. 255). Interestingly, the two alternatives suggested by the tribunal—require the government to treat its wastes in Canada or subsidize the Canadian treatment facility—would likely have violated the WTO Government Procurement Agreement or the WTO Subsidies Agreement, respectively.

157. Id. at 65-66 (para. 263).

158. Id. at 66 (paras. 265-266).

159. Id. at 66 (para. 267).

160. Id. at 75 (para. 301).

161. Ethyl, supra note 14, 38 I.L.M. at 711 (para. 7).

162. See Soloway, supra note 75, at 70-71 (discussing the conflict between imported MMT and a relatively new Canadian ethanol industry that some believed needed "infant industry" protection).

163. See Pope & Talbot III, supra note 14, at 9-46 (paras. 33-104).

164. The tribunal rejected Canadian contentions that the language "investments of investors" meant that a single investment that had been discriminated against (rather than multiple investments) would not be covered. Id. at 3-14 (para. 38), and that discrimination was not actionable unless the challenged treatment was "disproportionately" in favor of the national investor. Id. at 32 (paras. 71-92).

165. Id. at 36 (para. 79).

166. The tribunal earlier rejected Canada's contention that a higher standard of proof of discrimination should be required with regard to de facto discrimination than with regard to de jure discrimination. Id. at 31 (para. 71).

167. Id. at 35-36 (para. 78).

168. Id. at 39, 41, 42, 45, 46 (paras. 88, 93, 97, 103, 104).

169. Id. at 33-34 (para. 75).

170. Cross-Border Trucking Servs., supra note 149, at 1, 31 (paras. 2, 146).

171. NAFTA, supra note 2, Annex I-U-20.

172. Cross-Border Trucking Servs., supra note 149, at 77 (paras. 283-284).

173. Id. at 82 (para. 297).

174. Metalclad, supra note 14, at 26 (paras. 74-76); see also NAFTA, supra note 2, art. 102(1).

175. Metalclad, supra note 14, at 27-30 (paras. 79-89).

176. Id. at 31-32 (paras. 97-101).

177. Azinian, supra note 14, at 20 (para. 75).

178. Id. at 26 (para. 92).

179. Pope & Talbot III, supra note 14, at 47 (para. 108).

180. Id. at 48 (para. 110) (emphasis added).

181. Id. at 48-50 (paras. 110-111).

182. Article 1105 states that "each Party shall accord to investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security." The Model BIT states that "investment shall at all times be accorded fair and equitable treatment, shall enjoy full protection and security and shall in no case by accorded treatment less than that required by international law." See id. at 49, 52 (paras. 111, 114). Under NAFTA Article 1128, any NAFTA government may "make submissions to a Tribunal on a question of interpretation of this Agreement." A strong argument can be made that under the BIT language the "fair and equitable treatment" obligation exists independently of the obligation to comply with international law, while under Article 1105 the "free and equitable treatment" must be "in accordance with international law" and thus is limited by that phrase.

183. Id. at 53 (para. 115).

184. Id. at 55 (para. 117).

185. Id. at 55 (para. 118).

186. Id. at 57, 58, 59, 60, 71-72 (paras. 121, 123, 124, 128, 155).

187. Id. at 72-81 (paras. 156-172).

188. Id. at 76-78 (paras. 163-167).

189. Id. at 79-80 (paras. 169-170).

190. Id. at 81-82 (paras. 173-175).

191. Id. at 83-86 (paras. 177-179).

192. Id. at 87-88 (para. 181).

193. Id. at 92 (para. 196).

194. Methanex, supra note 15, at 3.

195. Azinian, supra note 14, at 24-25 (paras. 85-87).

196. Id. at 23 (para. 83) (emphasis in original).

197. Id. at 27-29 (paras. 97, 99).

198. Id. at 29 (para. 100).

199. Id. at 33 (para. 120).

200. Pope & Talbot II, supra note 14, at 28 (para. 81).

201. Id. at 29 (para. 84).

202. Id. at 30-31 (paras. 87-88).

203. Id. at 31 (para. 89).

204. Id. at 35 (para. 99).

205. Id. at 36 (para. 100).

206. Id. (para. 101).

207. Id. at 37 (para. 102).

208. S.D. Myers, supra note 14, at 69 (para. 280).

209. Id. at 69 (para. 282).

210. Id. at 70 (para. 283).

211. Id. at 71 (para. 286).

212. Id. at 70 (para. 284).

213. Metalclad, supra note 14, at 33 (para. 105).

214. Id. at 34 (para. 106).

215. Id. at 33 (para. 103).

216. Id. at 34 (paras. 107-108) (citing Biloune v. Ghana Inv. Centre, 95 I.L.R. 183, 207-10 (1993) (Judge Schwebel, President; Wallace and Leigh, Arbitrators) (observing that the investor placed "justified reliance" on government representations and began construction before a building permit had been issued, resulting in a finding of an indirect expropriation)).

217. Id. at 35-36 (paras. 109-111).

218. S.D. Myers, supra note 14, at 51 (para. 220).

219. Id. at 51 (para. 221).

220. Id. at 66 (paras. 265-266).

221. Metalclad, supra note 14, at 32 (para. 98).

222. See Soloway, supra note 75, at 68-71.

223. Of course, one could argue that the SLD audit incident was so egregious as to constitute a violation of customary international law compensable under even a more narrow interpretation of Article 1105 (assuming there is no de minimis exception under Chapter 11).

224. Metalclad, supra note 14, at 32 (para. 101).

225. Methanex, supra note 15, at 2, 23 (paras. 1, 53).

226. See, e.g., European Union: As French Cheer, EC Leader Concedes MAI Talks Moribund, Sees Hope for WTO, Daily Int'l Trade Rep. (BNA), Oct. 22, 1998, at D-5; OECD: OECD Investment Negotiations Stall as France Stays Away From Meeting, Daily Int'l Trade Rep. (BNA), Oct. 21, 1999, at D-3; Peter T. Muchlinski, The Rise and Fall of the Multilateral Agreement on Investment, 34 INT'L LAW. 1033 (1999); Robert Stumberg, Sovereignty by Subtraction; The Multilateral Investment Agreement, 31 CORNELL INT'L L.J. 491 (1998) (expressing a highly critical view of the MAI as an abridgment of national sovereignty through the expropriation provisions).

31 ELR 10646 | Environmental Law Reporter | copyright © 2001 | All rights reserved