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Why Can’t NAFTA Chapter 11 be More Like the WTO?
Investor-state arbitration cases under NAFTA Chapter Eleven are slow and expensive. To investors seeking relief, these cases take an eternity to complete. Other international dispute resolution mechanisms – NAFTA Chapter 19 (dealing with unfair trade issues), NAFTA Chapter 20 (dealing with general NAFTA issues), or WTO cases (dealing with everything from goods to services to IP rights) – proceed at reasonably predictable, timely clips. (Usually Chapter 19 cases take less than a year, Chapter 20 cases take about a year, and WTO cases take a year-and-a-half – and is this long because the WTO timeline includes an appeal.) In contrast, on average, Chapter 11 cases take three years. Why do they take almost three times longer?
In his recent Article, Mediation/Alternative Dispute Resolution in Oil, Gas and Energy Transactions: Superior to Arbitration/Litigation from a Commercial and Management Perspective,[1] Professor Thomas Walde notes that litigation before the courts to resolve disputes involving international business transactions has largely been replaced by litigation before international arbitral tribunals.
Professor Walde points out that supporters of the arbitral process claim it has advantages that include: greater neutrality, expertise, lower cost, greater confidentiality and more expeditious settlement of disputes. An arbitration services industry has developed with an interest in maintaining reliance on the arbitration system. However, as a result of a failure of management within this industry, Professor Walde notes that arbitrations are now a very high cost and high-risk activity which, in many cases, is inferior to the courts in terms of cost, risk, efficiency and time management.
Professor Walde’s comments are made in the context of international commercial arbitration, but would also describe the investor-state arbitration system applied in NAFTA Chapter 11. NAFTA gives investors the right to take investment disputes with NAFTA Member States to arbitral tribunals rather than being compelled to proceed through the domestic courts. The NAFTA did not establish an extraordinary process. Rather, it established a dispute settlement process that was intended to be used by investors and to give investors faster, less expensive access to expert tribunals to quickly resolve disputes. Despite these intentions, it appears that this goal is not being achieved. Experience to date demonstrates that NAFTA investor-state cases proceed very slowly and are very costly. They proceed much more slowly than NAFTA Binational Panel review under Chapter 19, than NAFTA state-to-state dispute settlement under Chapter 20, and state-to-state dispute settlement under the WTO Understanding on the Rules and Procedures Governing the Settlement of Disputes (the Dispute Settlement Understanding).
A review of the time lines for dispute settlement under these various mechanisms is instructive. The Binational Panel Review process, under NAFTA Chapter 19, ideally concludes in 315 days. Dispute settlement under NAFTA Chapter 20 should be concluded within 12 months. The addition of Appellate Body review makes WTO dispute settlement more complex, but normally the WTO process is concluded within 12 to 18 months. By comparison, NAFTA investor-state dispute settlement takes substantially longer. For the cases to date, on average it takes almost three years from the beginning of the case to the Final Award on Merits. This is approximately three times longer than the NAFTA timetables and two to three times as long as the WTO.
Three years is the average time that it has taken for NAFTA investor-state arbitration tribunals to issue Final Awards on Merits, but some cases go much longer. Waste Management Inc. and the United Mexican States is a case in point. The Notice of Arbitration in that case was filed on September 29, 1998. An Award on Jurisdiction was finally made on June 26, 2002, almost four years later. At the time of writing, the case is still proceeding over four and a half years after the Notice of Arbitration was issued. The case was delayed because the original Tribunal could not devise an expeditious manner for dealing with jurisdictional defects. The investor was forced to resubmit its claim in 2000 to restart the process. As a result of the underlying problems in the NAFTA investor-state dispute settlement system, this investor was denied access to quick and efficient dispute settlement.
Any investor would readily admit that “time is money” – and States recognize this. Compared to the national treasuries of Canada, Mexico or the United States, virtually all private investors that might avail themselves of the NAFTA Chapter 11 protections would be considered poor. Unlike a NAFTA Party, a private investor does not have an unlimited budget and is not able to afford the luxury of pursuing a case purely to establish a precedent. The investor is there because of a claim and wants – and often needs – to collect damages owed as a result of an alleged breach by the NAFTA Party. Do States rely on this imbalance to prolong the process, increase costs, and possibly even thwart justice (in the hopes the investor will, as a business decision, simply give up in the face of unending delays and mounting expenses)?
The obvious difference between NAFTA investor-state dispute settlement and state-to-state dispute settlement really is no difference at all. Investor-state dispute settlement involves private parties, but is not a commercial arbitration in the truest sense. Rather, these disputes concern the application of regulatory measures by a NAFTA Party that have a commercial impact on the investor or its investment. At base, these disputes are not very different from the issues litigated in NAFTA or WTO state-to-state dispute settlement. Questions of whether a particular measure accords National Treatment under Article 1102 are essentially the same as issues under GATT 1994 Article III. Why then do disputes taken under the WTO move so much faster?
One obvious answer is that state-to-state dispute settlement under the NAFTA and WTO proceeds on a timetable. The Member States are also required to cooperate fully. It is in their best interests to ensure effective and efficient dispute settlement.
Establishing a timetable to govern investor-state arbitration would clearly move things along faster. Even though these timetables could be amended by parties to a dispute, it is likely that there would be fewer delays in a system governed by a timetable than in the current, fluid, process.
The fact that the process includes private parties does not mean that timetables and strict schedules cannot be applied. NAFTA Chapter 19 Panel dispute settlement, which replaces judicial review by the courts, allows private parties to challenge administrative decisions. Chapter 19 Panel review has worked very well and disputes proceed expeditiously because they are based on a pre-established schedule.
NAFTA and WTO state-to-state dispute settlement also operates effectively because the Member States are required to fully cooperate to resolve any matter taken to dispute settlement. Although there have been some problems in some cases, cooperation among the Members has served these dispute settlement processes well.
There is no reason why the NAFTA Parties should oppose full and open cooperation with investors. The Parties established investor-state dispute settlement in Chapter 11. The Parties are also subject to a good faith obligation to ensure that the objectives of the NAFTA are achieved. Consequently, if full and open cooperation with investors is required to achieve the objective of a quick and efficient investor-state dispute settlement mechanism, it should be adopted.
Another possible explanation rests with the NAFTA Parties themselves; do they have an interest in an effective investor-state dispute settlement system?
NAFTA Chapter Eleven has been under fire ever since the first complaints were filed against Canada and the United States. Did these two parties incorrectly assume that Mexico would be the only target? Rather than review the facts of the cases brought to determine whether regulators had imposed measures on investors and investments that violate the Agreement, critics from the NGO community and Civil Society simply concluded that investor-state claims were attacks on state sovereignty. Rather than ask whether the measure at issue was justified or whether it was just an attempt to raise a disguised barrier to international trade or investment, there has been a tendency to accept that all government action is legitimate. Public opinion seems to have turned against investor-state dispute settlement.
Criticisms levelled at investor-state dispute settlement that it threatens sovereignty and stops government from taking necessary action to address important issues are simplistic and unsupportable. There is no question that governments are entitled to adopt consumer protection measures, environmental protection measures, or take other regulatory action so long as those measures comply with NAFTA obligations – this is not a difficult task. Governments can also choose to adopt discriminatory regulatory measures and maintain them so long as damages are paid to the aggrieved investor. Governments will only incur costs if they impose measures that violate the agreed trade obligations and result in quantifiable damages to investors and investments. Taking this action is a choice open to Government. Government can choose not to travel down this road and, if this prudent choice is made, will incur no unnecessary costs. The NAFTA Parties are sophisticated and understand full well the Agreement that they negotiated, it is inconceivable that they would consider the existence of investor-state dispute settlement to be a credible threat to the legitimate exercise of their regulatory authority.
Investor-state dispute settlement should also be in the best interests of the NAFTA Parties. If they abide by the obligations in their Agreement, the NAFTA Parties will not be harmed by investor-state dispute settlement. The right of investors to proceed to dispute settlement under Chapter Eleven will only serve to ensure that the Parties abide by those obligations. Investor-state dispute settlement would only be contrary to the Parties’ best interest if they intend to violate the terms of their Agreement. None of the Parties could, in good faith, take this position.
However, it is clear that investor-state dispute settlement is not working as it was intended. The investor-state dispute settlement system is undisciplined and out of control. The arbitration process takes far too long, with the result that it is far too expensive. Imposing clear timetables on arbitral tribunals would go some way to help, but there must be a willingness to make the system work as it was intended. At this point, there appears to be no willingness among the NAFTA Parties to improve the system, but unless they act, NAFTA investor-state dispute settlement will fall into disrepute. Is this really the result that the NAFTA Parties want?
The international investment climate is uncertain. The purpose of effective dispute settlement is to reduce these uncertainties so that investment flows will increase. Increasing investments was a central purpose of NAFTA Chapter Eleven and NAFTA investor-state dispute settlement. Unless the Parties work to ensure that investor-state dispute settlement works quickly and effectively, they will not realize the full benefit of investment flows.
Unlike international commercial arbitration, NAFTA investor-state dispute settlement has not suffered from a failure of management so much as it has suffered from an absence of management, which primarily takes the from of a lack of structural and procedural discipline. This absence of real discipline in investor-state dispute settlement has resulted in a drawn out and overly expensive arbitration process. A more structured dispute settlement process, including a reasonable and expeditious timetable, must be imposed to ensure that the investor-state arbitration system delivers quick and efficient dispute settlement. More importantly, the NAFTA Parties must be willing to the take the steps necessary to ensure that NAFTA investor-state dispute settlement quickly and efficiently resolves disputes.
Peter Clark
Gordon LaFortune
Grey, Clark, Shih and Associates, Limited
901 – 100 Sparks Street
Ottawa, Ontario, Canada
K1P 5B7
(613) 238-7743
www.greyclark.com
[1] Published in Oil, Gas & Energy Law Intelligence, Vol. I, Issue 2, March 2003
