Trade & Environment

Over the last few decades there has been mounting debate regarding the impact of international commerce and trade on the environment. While much of this debate has focused largely on trade within the international arena, regional trade agreements such as the North American Free Trade Agreement (NAFTA) are increasingly coming under scrutiny politically and by civil society. One area of contention in this debate is Chapter 11 of NAFTA and its implications for environmental regulation within its Member countries. On October 13, 2009, the Centre for Trade Policy and Law, University of Ottawa Faculty of Law, Ogilvy Renault LLP and uOttawa‐Ecojustice Environmental Law Clinic jointly hosted a panel discussion titled “Environmental Regulation and Investor Expectation under NAFTA” to stimulate dialogue and advance the discourse on the topic.  There were over sixty participants including academics, lawyers, government officials and graduate students.

The discussion was lead by several distinguished panellists including: Andrew Newcombe (Assistant Professor, Faculty of Law, University of Victoria), Anthony VanDuzer (Associate Professor, Faculty of Law, University of Ottawa), Paul Conlin (Partner, Ogilvy Renault LLP), Will Amos (Staff Lawyer and Part‐Time Professor, uOttawa‐Ecojustice Environmental Law Clinic), Céline Lévesque (Associate Professor, Faculty of Law, University of Ottawa), and Debra Steger (Associate Professor, Faculty of Law, University of Ottawa). Each panellist provided an analysis of varying aspects of the nexus between environmental regulation and dispute settlement within the confines of Chapter 11 of NAFTA. Some of the major issues discussed were misconceptions about Chapter 11, the role of science in investor-state disputes, and governance issues within the Chapter 11 dispute-settlement system. Throughout the day the panellist made reference to three very predominant Chapter 11 cases; Dow AgroSciences LLC v. Canada, Methanex v. US, and S.D. Myers Inc. v. Canada. The details of these cases can be found in Annex 1 of this report.

Background

Chapter 11 of NAFTA is concerned with the relationship between NAFTA resident investors and the governments that are party to NAFTA (i.e. Canada, the United States and Mexico).  More specifically, through the establishment of a system of binding arbitration for disputes between these and NAFTA governments, Chapter 11 provides protection to these investors from arbitrary and excessive government regulations[1].

The underlying issue regarding Chapter 11 and environmental regulation concerns balancing the rights of the investor and the sovereign rights of member governments to protect the environment, public health and safety. Subsequently, conflicts arise between investors and member governments as investors argue that governments are abusing their rights in an attempt to protect domestic industries. On the other hand, governments would assert that they have the absolute authority to regulate in the interest of the public. Therefore, Tribunals formed pursuant to Chapter 11 face many difficulties in balancing these rights in order to arrive at a fair and objective resolution to the disputes. 

Misconceptions

At this juncture it is important to note that many debates about investor-state disputes under Chapter 11 of NAFTA have been political charged and have little regard for the facts of the matter. Moreover, these debates are often clouded by several misconceptions; many of which were addressed during the discussion, including:

(1)    Misconception: Chapter 11 does not recognize environmental concerns. 

Fact: Article 1114 - ‘Environmental Measures’ of NAFTA specifically states that Chapter 11’s provisions should not prevent members from imposing measures, otherwise consistent with this Chapter, to ensure that investment activities occur in environmentally sensitive manner. As a result, this serves as indication that Chapter 11 is not meant to impair Parties’ regulatory flexibility as it relates to the environment. However, this Article becomes contentious as it states that these measures are to be ‘otherwise consistent with this Chapter’. Given the inclusion of these words, it is felt that Tribunals have had to distort their interpretation of other provisions in order to find the requisite regulatory space needed for governments. Such distortion is evidently not sustainable and is an improper way of treaty interpretation according to Vienna Convention on the Law of Treaties. Therefore, it is hoped that there be an inclusion of a general exceptions clause within NAFTA which will not constrain government’s regulatory scope to protect the environment while precluding any abuse of such a provision by governments.

(2)    Misconception: Chapter 11 impinges upon national sovereignty and requires legislative amendment. 

Fact: Tribunals convened under Chapter 11 do not have jurisdiction to mandate changes to member states’ domestic laws. According to Article 1135 of Chapter 11, these Tribunals only have the authority to make final awards against a party in the form of monetary damages and/or the restitution of property. This contrasts with the dispute settlement mechanism within the WTO as the remedies provided by WTO panels and appellate bodies are much more complex. For instance, within the WTO the losing party is required to bring their offending measure or policy into compliance with their treaty obligations. If this isn’t possible (or the losing party refuses) then both parties to the dispute must negotiate on mutually-acceptable compensation and if this is unsuccessful, the winning party can then impose trade sanctions on the losing side.

(3)    Misconception: Chapter 11 is unique.

Fact: Chapter 11 provisions to protect the environment, public health and safety are not specific to merely NAFTA but are reflected in many of Canada’s Foreign Investment Promotion and Protection Agreements (FIPAs). Canada continues to incorporate such provisions in currently on-going FIPA negotiations such as with China and India.

(4)    Misconception: There are a large number of Chapter 11 disputes.

Fact: As of October 2009, in the past 15 years 26 claims have been brought against Canada. Of these twenty six (26) disputes, four (4) have been completed by arbitration and settlement, eight (8) have been discontinued, and the remaining fourteen (14) are still pending[2]. In regards to the financial impact of these disputes, as of January 2009 Canada has been required to pay approximately $18.6 million in compensation to investors. In comparison, Mexico has been required to pay a significantly higher total of around $50.6 million to investors while the United States has not been required to pay any damages to investors as yet[3].

Science and Investor-State Disputes

After clarifying many of these misconceptions it is important to focus on the factual side of Chapter 11 and many of the disputes which it covers. A focus on the facts coincidentally brings to the forefront the legal concept of burden of proof, i.e., the responsibility of a party to a dispute to prove the facts of the issue[4]. Given that disputes under Chapter 11 concern health, safety and environmental regulations imposed by governments, the facts usually refer to the science underlying the disputed regulations. As a result, the burden of proof generally falls on the complaining party, investors would try to show that the science informing a particular government regulation is flawed or incorrect and thus the regulation is arbitrary and is being used to protect a domestic firm or industry. Conversely, governments in their defense would simply counter that they employed sound science in their decision making process.

In light of such a dilemma, it was advised during the panel discussion that tribunals should not focus on the correctness or substance of the science used but should rather determine whether the decision-making process was science-based, objective and subject to due-process. Despite this however, tribunals are often challenged and have crossed this boundary by expressing their views on the correctness of the science employed. For instance, drawing reference to Methanex v. USA, the Tribunal stated that:

"‘The Tribunal is not persuaded that the UC (University of California at Davis) Report was scientifically incorrect: the Tribunal was much impressed by the scientific expert witnesses presented by the USA and tested under cross-examination by Methanex; and the Tribunal accepts without reservation these experts’ conclusions[5]. “

Direct proclamation on the correctness of the science muddies the standard of the arbitration process. Preferably, the Tribunal should limit itself to examining certain aspects such as: whether international practices, norms and standards informed the decision-making process, whether there was an open and inclusive regulatory process, whether the process was tainted by bias, and whether the findings were reviewed by scientific peers. As a result, once such factors and other objective and due-process criteria are analysed, the Tribunal can then determine whether the government regulation was arbitrary and consequently breaches the Party’s treaty obligations.

Governance Issues

Governance has always been an issue when it comes to any framework or agreement that is meant to define a relationship between two or more nation-states. It should be noted however that governance within this context does not mean government in the political sense but rather speaks to the overall decision-making process governing these transnational relationships[6]. Governance issues raise important questions about accountability and legitimacy of agreements such as NAFTA. Consequently, with this in mind the major governance issue identified by panellists regarding investor-state disputes under Chapter 11 was the lack of a structured, predictable and transparent dispute system. Two of the most notable deficiencies in Chapter 11’s dispute settlement system were highlighted as follows:

1. Lack of a secretariat: The presence of a secretariat is crucial to ensuring some form of institutional memory, consistency, and coherence in tribunal decisions. Without such support, applying the legal concept of jurisprudence is almost impossible and brings into question the reliability of the dispute-settlement system.
2. Lack of a tribunal roster: Under Chapter 11, Tribunals are ad-hoc and appointed to arbitrate specific cases, after which they are dissolved. As a result, it was stressed that the composition of these Tribunals is potentially the most influential factor on the results of a dispute. Moreover, although there is a small ‘club’ of persons appointed to these Tribunals, in many instances some of these individuals also serve as counsel in disputes within the International Centre for the Settlement of Investment Disputes (ICSID) thus presenting conflict of interest issues. Therefore, there is a need for a permanent roster of independent persons to arbitrate Chapter 11 disputes in order to promote transparency and also consistency in Tribunal decisions.

In light of its deficiencies the panellists put forward suggestions for reform such as: the establishment of a small secretariat, a tribunal roster, appellate body review, and the imposition of time frames for disputes. The World Trade Organization (WTO)’s Dispute Settlement Mechanism (DSM), although not perfect, can provide some guidance for reforming Chapter 11’s legal architecture as it contains, among other things, a secretariat and an appellate body. However, any changes made to Chapter 11’s system must be made in recognition of the fact that such changes cannot occur overnight and must be adapted to suit Chapter 11’s peculiar situation of dealing with disputes between investors and states (and not inter-state disputes as in the WTO). Nevertheless, provided that these changes are made to reflect some of the main hallmarks of a legal system, i.e. security, predictability, transparency and due-process then Chapter 11 of NAFTA would be closer to overcoming some of its governance challenges.

Conclusion

Although modest in its total membership, NAFTA governs the largest trading relationship within the northern hemisphere. Consequently given its far reaching scope, the Chapter 11 vs. the environment debate will continue to be heated within each of its member states. Moreover, with governments becoming more environmentally conscious and keen on regulating industries, the contention between governments and investors will hopefully stimulate more similarly themed discussions. With this in mind several issues not addressed during the day’s discussion require further investigation. More specifically, issues such as governance, civil society’s expectations on environmental regulation within NAFTA and the application of the precautionary principle in environmental risk assessment were identified as areas for future dialogue. Additionally, in light of these issues the Canadian government should engage in developing strategies (both offensive and defensive) as it relates to NAFTA reform so that Canada will already have a ‘wish-list’ of what it wants to see improved in upcoming NAFTA talks. However, with President Obama currently fixated on domestic health care issues and economic reform, NAFTA discussions may not be put on the table in the foreseeable future.

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[1] (Gaines, 2000)

[2] (Foreign Affairs and International Trade Canada, 2009)

[3] (Public Citizen, 2009)

[4] (Martin, 1983)

[5] Methanex Corp. v. United States (NAFTA Ch. 11/UNCITRAL Aug. 3, 2005), 44 ILM 1345 (2005) (Final Award)

[6] (Lamy, 2006)