Regulatory powers vs. investment protection under NAFTA's Chapter 1110: Metalclad, Methanex, and Glamis Gold.

• Author: Elcombe, Joshua

Abstract

Article 1110 of the North American Free Trade Agreement (NAFTA) grants certain private investors a right to compensation for government measures which effectively expropriate investments. A number of commentators contend that, in the Chapter 11 arbitration of Metalclad Corp. v. United Mexican States, the arbitration Tribunal interpreted Article 1110 too expansively. Critics argue that the Tribunal categorised valid regulatory exercises as expropriations, thereby crippling the governments' ability to protect the environment and public health. Thus, as some commentators believe, Chapter 11 and Article 1110 in particular constitute a fundamental derogation--or usurpation--of state sovereignty. Opponents of Metalclad therefore welcomed the subsequent decision in Methanex Corporation v. United States of America, which they claim eased Article 1110's overly constrictive restraints on the states" regulatory capacities. The Tribunal in Methanex relied on the government measure's legitimate regulatory purpose to hold that the measure was not tantamount to expropriation.

This note argues that the threat raised by the Metalclad case has not gone away. Methanex was wrongly decided from a legal perspective, since it relied on an incorrect interpretation of the NAFTA text. The three latest decisions under Article 1110 took an ambiguous stance towards Methanex and did not consider the governmental purpose behind the measures at issue. The weaknesses of Methanex and the Metalclad-style analyses adopted in these subsequent cases demonstrate that the problems with Chapter 11, and, in particular, the possibility that Article 1110 cripples governments' regulatory abilities, cannot be rectified through Tribunal litigation.

This note goes on to suggest that the means to reform Article 1110 lies with the NAFTA governments and not with the Tribunal. Belying the views of academics who characterise Chapter 11 as a constitutional derogation of sovereignty, the governments retain considerable freedom to alter NAFTA's investment protection regime. The most feasible method to limit the reach of Article 1110 is through an interpretative statement by the Free Trade Commission (FTC), a body which has generally received too little scrutiny relative to its potential importance. This note supports a suggestion originally put forward by Barutciski, namely, that the FTC can specify that measures enacted for certain enumerated purposes, such as "the protection of life, health and public safety", fall within governmental "police power". In other words, the FTC could declare that measures tailored to these specified objectives do not constitute expropriations within the meaning of Article 1110.

Resume

L'article 1110 de l'Accord de libre-echange nord-americain (ALENA) prevoit un droit d'indemnisation pour certains investisseurs prives dans te cas ou des mesures gouvernementales permettraient l'expropriation de leurs investissements. Certains commentateurs pretendent que le tribunal d'arbitrage dans le cas Metalclad Corp v. United Mexican States: a interprete l'article 1110 de facon trop large. Selon eux, le tribunal a determine que certains exercices de reglementations etaient essentiellement des expropriations, et ceci aurait eu pour effet d'affaiblir les pouvoirs gouvernementaux aux niveaux de l'environnement et de la sante publique. Ainsi, tel que le soutiennent certains commentateurs, le chapitre 11--et l'article 1110 en particulier--constituerait une derogation fondamentale, voire une usurpation, de la souverainete etatique. Les opposants a la decision Metalclad ont accueilli favorablement la decision subsequente rendue dans le cas Methanex Corporation v. United States of America, puisque selon eux, cette derniere venait assouplir les contraintes exagerees imposees aux capacites de reglementation des etats. Dans Methanex, le tribunal s'est fonde sur les fins reglementaires legitimes des mesures gouvernementales et a determine que ces mesures n'equivalaient pas des expropriations.

Ce commentaire soutient que la menace posee dans Metalclad continue de montrer son ombre. D'un point de vue juridique, le jugement Methanex est fonde sur une interpretation fautive du texte de I'ALENA, et est par consequent errone. Les trois dernieres decisions rendues sous l'article 1110 adoptent une relation ambigue vis-a-vis Methanex et ne considerent pas l'objectif gouvernemental motivant les mesures en question. Les points faibles des analyses deployees dans Methanex et autres causes rendues subsequemment et semblables a Metalclad illustrent que les problemes lies au chapitre 11 et, en particulier, la possibilite que l'article 1110 affaiblisse la capacite de reglementation des gouvernement, ne pourront etre regles par les interpretations juridiques.

Ce commentaire suggere qu'il en revient aux gouvernements signataires de l'ALENA de corriger le tir par rapport a l'article 1110. Contrairement a l'opinion de certains universitaires, qui qualifient le chapitre 11 de derogation constitutionnelle a la souverainete, les gouvernements jouissent toujours d'une certaine liberte leur permettant de modifier le regime de protection des investissements prevu par l'ALENA. La methode la plus viable de limiter la portee de l'article 1110 suggere l'emission d'un guide interpretatif par la Commission du libre-echange, un organe ayant ete la cible de peu d'interet malgre son importance potentielle. Ce commentaire appuie une suggestion avancee par Barutciski, a savoir que la Commission du libre-echange peut determiner que les mesures edictees pour des buts enumeres, tel que >, sont inclus dans les pouvoirs de > de l'Etat. En d'autres termes, la Commission du libre-echange pourrait declarer que les reglements, qui sont adapte a ces objectifs, ne constituent pas des expropriations au sens de l'article 1110

I INTRODUCTION II THE ORIGINS AND STRUCTURE OF CHAPTER 11 III THE METALCLAD DECISION: THE ORIGINAL SCOPE OF ARTICLE 1110 IV CRITICISMS OF METALCLAD AND ARTICLE 1110 V RAYS OF HOPE: EVIDENTIARY RECORDS AND THE METHANEX DECISION VI THE LIMITATIONS OF METHANEX VII CHAPTER 11 CASES POST-METHANEX: TURNING POINTS THAT FAILED TO TURN VIII THE FREE TRADE COMMISSION AND REFORM OF ARTICLE 1110 IX CONCLUSION I INTRODUCTION

The investment protection regime created by Chapter 11 of the North American Free TradeAgreement (1) (NAFTA) has generated considerable controversy. Chapter 11 imposes obligations on the Canadian, U.S., and Mexican governments and gives private investors the ability to enforce NAFTA's investment provisions through the Chapter 11 arbitration process. Article 1110 grants investors the right to compensation for expropriations executed by the NAFTA countries. A number of commentators contend that, in the Chapter 11 arbitration of Metalclad Corp. v. United Mexican States, (2) the arbitration Tribunal interpreted Article 1110 too expansively. Critics argue that the Tribunal categorised valid regulatory exercises as expropriations, thereby crippling the governments' ability to protect the environment and public health. Thus, as some commentators believe, Chapter 11 and Article 1110 in particular constitute a fundamental derogation--or usurpation--of state sovereignty. Opponents of Metalclad therefore welcomed the subsequent decision in Methanex Corporation v. United States of America, (3) which they claim eased Article 1110's overly constrictive restraints on the states' regulatory capacities. The Tribunal in Methanex considered the Californian government's purpose for a measure in deciding whether or not it was an expropriation under Article 1110.

In fact, the claim that regulatory measures have been immunised against Article 1110 is premature. The Methanex case does little to restore governments to their pre-Metalclad position, not only because Tribunal decisions lack the force of binding precedent, but also because the Methanex Tribunal relied on a significant misinterpretation of the NAFTA text. The Tribunal avoided Article 1110's compensation requirement by conflating the meaning of "expropriation" in Chapter 11 with a typical definition from international law, despite the fact that the NAFTA parties have contracted out of the customary international law approach. The academic commentary has largely supported the award for its positive environmental implications, but has ignored the Tribunal's questionable legal reasoning. The three latest Article 1110 cases point to this critical flaw in Methanex. The Tribunais in Fireman's Fund Insurance Company v. United Mexican States, (4) Corn Products International, Inc. v. United Mexican States, (5) and Glamis Gold, Ltd. v. United States of America (6) used language similar to Methanex but really assessed the investors' expropriation claims through Metalclad-style analyses.

Given that the Metalclad precedent is alive and well despite the Methanex case, the need to reform Chapter 11 continues. The Methanex/Metalclad tug-of-war illustrates that blame for the effects of Article 1110 should not lie with the Tribunal, but rather with the governments that drafted the provision. In the same vein, calls to reform Article 1110 should not be directed at the Tribunal arbitrators but rather at the NAFTA states. Through the Free Trade Commission (FTC), the NAFTA governments retain considerable control over the treaty's investment protection regime. The scholarly literature on Chapter 11 has focused on the Tribunal litigation rather than scrutinising the FTC. (7) While significant legitimacy concerns attach to the FTC, it is this body and not the Tribunal that can solve the Article 1110 dilemma. An interpretive statement by the FTC could correct the interpretive problems at the heart of the Methanex decision.

II THE ORIGINS AND STRUCTURE OF CHAPTER 11

The three North American governments sought to use NAFTA's investment protection rules to advance their national interests. Mexico had spent most of the 1980s recovering from a...