Fix the flaws of Chapter 11
NAFTA’S Chapter 11, which gives foreign investors the right to sue governments for unfair treatment, has been controversial from the start. And rightly so.
Canada, the U.S. and Mexico all have seen a need for some kind of guarantee that their investors would get fair treatment in the other countries.
Chapter 11 does this by granting foreign investors the right to arbitration of disputes with NAFTA governments, under international rules. The panels can hear complaints that government has treated a NAFTA investor differently than a domestic one, has failed to provide a minimum international legal standard of treatment or has expropriated assets without compensation.
That’s what each state wants from the others. But none are comfortable with having their sovereign powers limited. The U.S. has been the strongest critic, though it has never lost a Chapter 11 decision. It is pressing in current NAFTA talks for a right to opt out of arbitration. But Canada and Mexico, which have both lost arbitrations, want Chapter 11 to stay as a safeguard for fair treatment.
That’s a hard sell in Canada right now. The Federal Court of Canada decided Wednesday not to overturn a NAFTA arbitration that found a New Jersey company, Bilcon, was treated unfairly when its application for a quarry and marine terminal on Digby Neck was rejected by a Canada-nova Scotia environmental assessment panel in 2007.
Bilcon is seeking at least US$300 million from Ottawa to compensate for lost profits. While that is likely to be to be bargained down, there is still broad concern about NAFTA panels impinging on environmental regulation.
Bilcon complained that after being encouraged to invest in Nova Scotia and to go through a lengthy process to identify the environmental standards it had to meet, its project was arbitrarily rejected on the “new” ground of being incompatible with “community core values.” Two of the three NAFTA panel members agreed this violated the international legal standard of fairness. A third said there was no unfairness and that “community core values” was just shorthand for effects on the human environment that were clearly within the regulatory panel’s legal mandate.
The federal court said the arbitrators were acting within their authority in making a factual decision on whether Bilcon’s treatment met an international standard. It rejected Ottawa’s argument that they were infringing on the right of Canada’s courts to interpret its environmental law.
One clear lesson is regulators must be very careful, given Chapter 11, to show their procedures are demonstrably fair.
But Chapter 11 also has serious flaws that should be fixed in the current renegotiation. Unlike Canadian law, it doesn’t exempt government from liability when it makes a “true policy decision” such as a safety or environmental regulation that has costs for business.
A rewritten NAFTA should state that Chapter 11 doesn’t inhibit the exercise of normal regulatory powers and that using such powers is not an expropriation. As one Canadian judge has stated the principle: it can’t be legally wrong for government to govern.