Sowing the Seeds of an ISDS Legitimacy Crisis? The Notorious First Wave of NAFTA Chapter 11 Awards

Sowing the Seeds of an ISDS Legitimacy Crisis? The Notorious First Wave of NAFTA Chapter 11 Awards

Description

The early cases decided by arbitral tribunals under the Investment Chapter (Chapter 11) of the North American Free Trade Agreement (NAFTA) are among the original sources of the legitimacy crisis1 of Investor-State Dispute Settlement (ISDS). In several instances (though not all), tribunals found that regulatory measures were violations of either the national treatment (non-discrimination—Article 1102) or expropriation provisions of Chapter 11 (indirect expropriation—regulatory takings—Article 1110). Violations of fair and equitable treatment (‘FET’) (minimum standard of treatment—Article 1105) were also found. This chapter will examine six early NAFTA disputes, spanning the 1990s through the start of the new millennium: Ethyl v Canada, Pope & Talbot v Canada, Metalclad v Mexico, S.D. Myers v Canada, Feldman v Mexico, and Methanex v United States. In so doing, it will refer to parties’ relevant arguments and tribunal elaborations on Article 1105, though focus will be kept on national treatment and expropriation. On the facts, none of the results in these disputes unambiguously support the view that legitimate policy space is at risk from ISDS—even if some academic commentators have sought to present this case law as a basic threat to regulatory democracy. In Ethyl and S.D. Myers, while health hazards were asserted as a reason for the measures, only international and/or interprovincial trade were banned, not the allegedly harmful substance or activity itself—a classic protectionist fact pattern. In Pope, the investor sought to impugn the way that Canada had implemented that decision, allocating trading rights among different companies within the country, rather than the underlying policy decision of the government to have a managed trade arrangement with the US. In Methanex, the investors’ claim failed where California’s ban on methyl tertiary-butyl ether (MTBE) was a well-justified health and environmental policy. Metalclad, where the Tribunal appeared to find a regulatory taking based entirely on the measure’s economic effects on the investor, nevertheless considered public policy in the FET analysis, finding that the measures in question were not reasonably related to environmental and health objectives. When one appreciates the nature of these claims, the resulting awards do not suggest a complete disregard for legitimate public policy by arbitrators. The awards instead expose arbitrators’ difficulty in applying treaty texts that do not contain explicit exceptions or limitations to protect legitimate public policies. The NAFTA contains carve outs for investment protection for certain kinds of policies and at the outset permitted State Parties to lodge reservations for policies they sought to protect. Beyond that, the NAFTA Investment chapter did not have a general exceptions clause like Article XX of the General Agreement on Tariffs and Trade (GATT). This is significant with respect to national treatment and indirect expropriation. In the case of FET, public policy reasons are usually considered in the assessment of whether measures are arbitrary or unreasonable. In the case of national treatment and indirect expropriation, it would have been open to the arbitrators to refuse to consider policy justifications, once it was found that the measure provided the claimant less favourable treatment than domestic investors in like competitive circumstances. In Metalclad, with respect to indirect expropriation, the Tribunal did not go beyond the consideration of economic effects—assuming its assessment of the policy and regulatory context under FET was such that no police powers argument needed to be entertained. The national treatment rulings are interesting precisely because of arbitrators’ attempts to develop jurisprudential constructs to assess public policy, in the absence of an exceptions provision like GATT Article XX. This leads to the consideration of public policy in examining whether a claimant and competing domestic enterprises are truly in like circumstances. The tribunals differ in determining whether the standard of review applicable to policy measures is reasonableness, proportionality, or necessity. The tribunals sometimes operate from a consciousness that they are inventing Article-XX substitutes, while at least one tribunal repudiated the GATT/World Trade Organisation (WTO) acquis as a starting point for understanding national treatment in NAFTA’s Investment chapter (Methanex). These early national treatment cases reflect ‘cross-judging’—the influence of one international tribunal or dispute settlement regime on another, which generates imitation and differentiation. NAFTA tribunals have, on occasion, accepted any rational policy basis for a general regulatory scheme, precluding scrutiny of whether its detailed application embeds discrimination or protectionism (the Pope national treatment analysis). This demonstrates a flawed approach to cross-judging—borrowing from another regime without fully appreciating its features. In the case of Article XX of the GATT, the preambular provision requires, in addition to a requisite nexus between the general measure and one of the stated legitimate policy objectives, that the detailed practical application of the scheme not embed unjustifiable or arbitrary discrimination, nor constitute a ‘disguised restriction.’ Even if the results of these early NAFTA cases are consistent with appropriate deference to legitimate public policy, critics had good reason not to be satisfied by these results. The extreme indeterminacy in the handling of public policy, the lack of a treaty-based justificatory structure and the oscillation between standards of review gave rise to a danger of ‘regulatory chill’, whereby uncertainty about how a given tribunal might evaluate public policy justifications would lead risk-averse governments to avoid otherwise socially desirable regulatory changes. It is useful to consider the differences in remedial framework in the WTO and ISDS. In the WTO, if the adjudicator should find that some aspect of the way a regulatory scheme is applied does not satisfy the conditions of Article XX, the appropriate remedy would be for the regulating state to fix the issue going forward; no reparatory damages exist under the WTO system, often requiring the dismantling of entire regulatory programmes, as opposed to surgically excising some discriminatory element. In the ISDS context, the consequences are quite different: a damages award of many millions of dollars that reflects economic harm to the investor has already been made. When the NAFTA was negotiated, ISDS was largely seen as a system that gave corporations from the North an alternative to domestic litigation in settling disputes with countries in the South, the latter supposedly lacking in the rule of law, and thought likely to engage in arbitrary government actions. Canada reacted to the early cases against it as if they were an abuse of the system: a government with a highly developed domestic legal system should not see its own courts bypassed by foreign investors, nor should such investors attack regulations promulgated by advanced democratic governmental systems. This may explain the relative ease in presenting the defending states as engaged in legitimate governmental activity—even if aspects of discrimination or political motives were clearly present.

Source Publication

International Investment Law: An Analysis of the Major Decisions

Source Editors/Authors

Hélène Ruiz, Edoardo Stoppioni

Publication Date

2022

Sowing the Seeds of an ISDS Legitimacy Crisis? The Notorious First Wave of NAFTA Chapter 11 Awards

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