One of the most controversial aspects of the North American Free Trade Agreement (NAFTA) has been the provisions of Chapter 11, which provide a legal basis for private investors of one NAFTA country to sue the government of either of the other two NAFTA countries for breaches of a broad range of NAFTA legal commitments. In effect, an investor based in one NAFTA country is given the right to bypass the domestic court system and proceed straight to binding arbitration of alleged breaches of the provisions of Chapter 11 by a government of another NAFTA country. There is no right of appeal of such arbitral decisions except in extremely limited circumstances. The proceedings are normally conducted in private. The arbitrators chosen to hear the cases come from a small and relatively select group of international arbitrators who are frequently, if not exclusively, from private sector corporate backgrounds.

Under Chapter 11, investors have the right to seek compensation for government measures that constitute direct or indirect expropriation (NAFTA Article 1110), are “unfair or inequitable” (NAFTA Article 1105), discriminatory (NAFTA Articles 1102 and 1103) or that implement prohibited performance requirements such as technology transfer or achievement of minimum levels of local participation in projects (NAFTA Article 1106).

A recent study of the Chapter 11 track record by the Canadian Centre for Policy Alternatives[1] (“CCPA”) provides some sobering statistics and conclusions for Canada. The study concludes that, in terms of wins and losses, the results of Chapter 11 arbitration over almost 25 years for the Canadian government have been resoundingly negative. Canada has lost eight cases and paid out over $200 million in compensation to foreign investor claimants. In addition, the Canadian Federal government has incurred around $100 million dollars in legal fees in defending the cases. At present, total damage claims against Canada being made by foreign investors amount to over $475 million.

The CCPA study also notes that while the Government of Canada has successfully defended itself in nine cases and lost in eight, Mexico has won seven and lost five cases. Only the U.S. has an unbroken winning record, having won 11 cases and lost none at all. Overall, Canada has attracted significantly more investor-state claims (41) than either Mexico (23) or the U.S. (21). The US statistic is particularly striking given that the American economy is more than ten times the size of that of Canada.

Conversely, the system in operation seems to be particularly unfriendly to Canadian claimants. No Canadian investor has ever won a NAFTA case. This statistic would seem to belie the assertion by Canadian proponents of investor-state arbitration that the Chapter 11 mechanism is an important and effective tool for the protection of Canadian investor interests in the United States or Mexico.

Moreover, when the types of cases brought to Chapter 11 arbitration are considered, some troubling patterns emerge. A large number of cases have involved regulatory measures undertaken by various levels of Canadian governments on sensitive matters of public policy, including environmental approvals and proposed bans on harmful chemicals. Arbitral panels have frequently ignored environmental concerns and adopted strictly construed, property rights legal norms to underpin their decisions. Attempts by governments of all three NAFTA parties to rein in the tendencies of arbitral panels to find that public policy-based, non-discriminatory regulatory measures infringe the “legitimate expectations” of investors, have proven to be ineffective. This was borne out in a recent arbitral decision involving an environmental review panel’s attempt in Nova Scotia to halt an oceanside mining project on the basis of community concerns. The decision demonstrated a remarkable insensitivity on the part of the majority of the arbitral panel to such concerns, as well as an inclination to impose nation-wide standards of consistency that ignore regional specificities.

Annex 14-C of the draft United States-Mexico-Canada Agreement (“USMCA”) will, if the agreement enters into force, remedy this situation by providing for the end of Chapter 11 investor state rights as between the United States and Canada, three years after the termination of the existing NAFTA agreement. Despite continuing support for Chapter 11 procedures among many sections of the US business community, the current U.S. Administration has shown itself to be resolutely opposed to the potential intrusions on U.S. sovereignty that Chapter 11 poses. The United States Trade Representative Robert Lighthizer has made no secret of his opposition to investor state dispute settlement. He has also expressed the view that any risks to foreign investment can be adequately addressed through foreign investment insurance policies available to investors.

Ultimately, Canadian negotiators acceded to the US position on these matters. It remains a matter of some mystery to many in Canada as to why the Canadian government has shown itself to be so devoted, for so long, to a procedure that has very largely worked to the detriment of Canadian interests. In this area at least, Canadians owe Mr. Lighthizer and his team a vote of thanks.

Mark Sills
Colleague
Pilot Law LLP
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[1] See Sinclair, Scott “Canada’s Track Record Under NAFTA Chapter 11: North American Investor-State Disputes to January 2018”, Canadian Centre for Policy Alternatives, 2018

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