NAFTA Arbitrators in Environmental Case Agree to Accept Formal Public Input, A Legal First for Global Trade Hearings: IISD

Institute Praises Tribunal, Breakthrough on Methanex Case "A Triumph for Openness"

WINNIPEG — The decision by a NAFTA tribunal to accept and formally consider public submissions in a major environmental case represents a precedent-setting "triumph for openness" in international trade and investment arbitration, says the Canadian-based International Institute for Sustainable Development.

IISD has won a 3½ year battle to take part in NAFTA hearings this year into claims by Methanex Corporation that California violated guarantees of investors' rights when it banned a polluting gasoline additive manufactured in Canada. Methanex, of British Columbia, says its NAFTA Chapter 11 rights were violated when the state banned MTBE, a suspected carcinogen.

The breakthrough, communicated to IISD late Friday, was welcomed by the Institute's President David Runnalls as another new breach in the walls that have surrounded international trade and investment arbitration cases, until now conducted secretly "in-camera" with investors and governments as the sole participants.

Said Mr. Runnalls: "We set out in August 2000 to address the procedural deficiencies of the investor-state arbitrations, as well as concerns about rights accorded to investors under NAFTA's Chapter 11. This precedent-setting Tribunal decision builds on previous breakthroughs that opened the hearings to the public, thus making the process more transparent. Now the hearings are open for public input as well. The decision addresses almost all of our original procedural goals and we welcome this news.

"We look forward now to participating in the process of getting the interpretations of NAFTA's Chapter 11 right. Foreign investment is critical to achieving sustainable development today. But foreign investor rights that take priority over the right of policy-makers to govern and legislate in the area of sustainable development are self-defeating.

"Our goal is to leave the Tribunal with a strong and clear impression of what is at stake, and how appropriate interpretations of Chapter 11 can protect the legitimate interests of investors as well as the capacity of countries to actively pursue sustainable development goals."

IISD Senior International Lawyer Howard Mann of Ottawa said the Institute's submission to the Tribunal for formal consideration will represent "a true landmark, firmly establishing another global precedent towards the democratization of international investment cases and international investment law.

"This Tribunal has consistently shown its awareness of the public interests in this case," he added. "It has previously acknowledged that cases under Chapter 11 have important public policy and public welfare issues at their heart. Now they are working to ensure public interests can be fully aired and debated. They have had the courage of their convictions in setting out this procedure. Now it is up to us to show the effort has value."

Mr. Mann said IISD remains concerned about the substantive direction Chapter 11 cases are taking and "for the first time, we will now be able to express those concerns before a decision is made in an important case, not just afterwards."

Background

NAFTA Chapter 11, originally intended to protect foreign investors from expropriation and government harassment, has become "a strategic tool" for corporations and an offensive weapon against new environmental and other public welfare laws, according to IISD.

Chapter 11 provides foreign firms with the opportunity to directly sue a government through an investor-state dispute settlement mechanism. Commonly found in international investment agreements today (of which there are more than 2,000), this is a powerful tool for businesses looking to influence government policy. It costs only a few thousand dollars to prepare a notice of intent to arbitrate, which starts a potentially very costly process for government.

In a much-publicized case, Ethyl Corp, U.S. producer of a suspected carcinogen, argued that the Canadian government had unfairly discriminated against it by banning the good's import. Ethyl claimed US$ 250 million in damages for, among other things, expropriation of its goodwill and future earnings. The case was settled out of court for US$ 13 million, and the Canadian government was forced to scrap the ban.

The suit brought against the U.S. by the Canadian firm Methanex claims US$ 970 million in damages for California environmental regulations that phase out the company's gasoline additive MTBE due to concerns about groundwater poisoning caused by leaking storage containers and the product's suspected carcinogenicity.

IISD has warned that Chapter 11, improperly interpreted, could lead to a "regulatory freeze" in the three NAFTA countries, with environmental policy decisions inhibited by the threat of multi-million dollar corporate lawsuits. Governments could find themselves required to compensate firms harmed by new environmental regulations on the grounds they amount to "expropriation" under Chapter 11.

The IISD has recommended that NAFTA member countries, without reopening the agreement itself, draft a statement interpreting what they mean by "expropriation" and some of the other disciplines. Such interpretive statements, already successfully deployed by NAFTA countries in other areas, are legally binding in future arbitrations, and would easily limit the aggressive strategic corporate use of suits of this kind.

Two types of issues have concerned IISD, and motivated the initial August 2000 submission to the Tribunal to seek amicus status:

• The secrecy of the arbitration process, which had never been open to the public, which had not allowed documents to be made public, and which did not allow for amicus submissions to that point.

• The substantive provisions of Chapter 11, which had been used several times to that point to challenge new environmental laws, and was again being so used in the Methanex case.

IISD sought four results:

The Tribunal's new decision fulfills all but the fourth of these requests.

The NAFTA parties have, since the original IISD petition in August 2000:

For more information on this case and IISD's wider work on investment rules and sustainable development, please click here.