The Chapter 11 Dossier: Corporations Exercise Their Investor "Rights"

by Michelle Swenarchuk

Corporations have filed more than a dozen cases under NAFTA's Chapter 11 investment provisions, which enable corporations to sue governments for infringements of their "investor rights." Since they are conducted in confidential arbitral processes, inaccessible to public scrutiny and participation (in contrast to open proceedings in domestic courts), information on ongoing cases is sketchy. Available information on 15 of the cases is summarized below.

Suits against Canada

Ethyl Corporation

In this first investor-state case, Ethyl Corporation of the United States sued the Canadian government for $250 million and obtained, in 1998, a settlement of $13 million for the Canadian ban on the gasoline additive, MMT, a nerve toxin [see "Another NAFTA Nightmare," Multinational Monitor, October 1996]. The ban was reversed.

S.D. Myers

In October 1998, U.S.-based S.D. Myers Inc., which treats transformers containing toxic PCBs, filed a claim for $30 million for losses it claims to have incurred during a one-and-one-half-year ban (1995 to 1997) on the export of PCB wastes from Canada. The Canadian federal government states that Canada is bound by international conventions that stipulate that PCBs must be destroyed in an environmentally sound manner, and that U.S. standards for PCB disposal are not as high as Canada's. The wastes were destroyed in a Canadian facility in Alberta, and the export ban was revoked in 1997. The U.S. government also controls cross-border movement of PCBs. In November 2000, the arbitral tribunal found that the ban did contravene the investment chapter regarding national treatment and minimum standards of treatment of foreign investors, and it is now determining whether S.D. Myers suffered damages. In the meantime, the Canadian government has applied to the (domestic) Federal Court to have the tribunal's partial award set aside, arguing that the case concerned cross-border trade, not a Canadian investment, and that the award conflicts with a well-established Canadian policy requiring disposal of PCBs and PCB wastes in Canada to comply with the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal.

Sun Belt Water Inc.

This California-based company is suing Canada for the decision of the provincial government of British Columbia to refuse consent for the company to export bulk water from BC. The government subsequently enacted the Water Protection Act, which bans bulk water exports and inter-basin diversions by domestic and foreign investors alike. In a colorful claim which alleges a decade of "smelly" actions by successive BC governments, Sun Belt Water expounds on the growing world-wide demand for water, assumes that water export must be a positive benefit (ignoring environmental and conservation requirements) and makes extreme claims of improprieties by the BC government and BC courts. In a BC court action, Sun Belt did not achieve its desired result. It is therefore using NAFTA Chapter 11 to seek damages of "between" $1 billion and $10.5 billion. Besides using the investment chapter for very dubious business practices, the case raises the fundamental issues of the uses of the investment chapter to evade the result of an action in a domestic court, and to challenge a non-discriminatory policy and legislation by a subnational (provincial) government.

Pope and Talbot

The US-based lumber company Pope and Talbot has sued Canada, claiming approximately $510 million for alleged breaches of the NAFTA investment chapter related to changes in the profitability of its timber export business in Canada. Softwood lumber exports from Canada to the United States have been a source of contention and repeated trade disputes for decades. Forest products are among the most important exports from Canada, representing billions of dollars in export earnings, and over 90 percent of these products are exported to the United States. In 1996, in yet another attempt to resolve the ongoing timber wars, the Canadian and U.S. federal governments signed the Canada-US Softwood Lumber Agreement, governing exports of softwood lumber from four Canadian provinces, British Columbia, Alberta, Ontario and Quebec. The agreement, which will expire at the end of March 2001, establishes quotas for exports for each province, and requires producers to provide certain information regarding exports and pay an export levy if their exports exceed their particular quota. In arriving at such export agreements, the Canadian government consults extensively with industry. Pope and Talbot claimed that Canada has breached the NAFTA investment requirements regarding national treatment, most-favored nation treatment, minimum standard of treatment and performance requirements. The company's lawyers are critical of the Canadian government for its public release of the Notice of Intent to Submit a Claim, calling the release a "serious breach of international procedure." Pope and Talbot's operations are located in British Columbia. During the period of the softwood memorandum, BC's share of total softwood exports has declined relative to total Canadian softwood exports; Pope and Talbot argue that this decline is related to the agreement, and amounts to a breach of the NAFTA chapter. (Others point to the loss of BC's traditional markets in Asia, related to the Asian economic crisis.) In an interim award, the tribunal rejected the claim that expropriation had occurred, but decided to continue hearings on claims relating to national treatment and minimum standards of treatment. This case is an important indication of how far-reaching the impacts of the NAFTA investment chapter are and of how broadly multiple governmental powers and decisions may be challenged by an individual corporation for a huge compensatory claim.

United Parcel Service

UPS has filed a notice of intent to sue Canada for $100 million, alleging that Canada favors the public postal service, Canada Post, regarding provision of courier services [see "NAFTA's Investor "Rights""].

Ketcham Investments and Tysam Investments

U.S.-based Ketcham Investments and Tysam Investments jointly own West Fraser Mills, a timber company. Ketcham and Tysam allege in a December 2000 notice of intent to file a claim that their timber quota under the U.S.-Canada Softwood Lumber Agreement was arbitrarily cut, denying them rights afforded Canadian companies. They are seeking C$10 million in damages.

Suits Against the United States

Loewen

The B.C-based Loewen Group is suing for compensation arising from alleged discrimination, denial of minimum standard of treatment and expropriation, claiming that a $500 million Mississippi state court verdict against it amounts to a breach of NAFTA. The verdict came in a suit brought against Loewen by a Mississippi company, O'Keefe, alleging fraudulent practices and other anti-competitive practices. Loewen was denied an appeal of the court decision due to a state law which requires an appellant to post 125 percent of the damage award ($625 million in this case) which Loewen could not post. (Loewen eventually settled the claim for $175 million.) The company seeks to recover $775 million in damages, interest and legal expenses through this investor-state claim and alleges that the Mississippi decision against it was based on anti-Canadian bias. A tribunal has agreed to hear the case. This case demonstrates, as does Sun Belt, the use by a corporation of the NAFTA Investment chapter to essentially reverse the results of domestic court proceedings, and to circumvent the course of normal commercial civil litigation. Having lost to a competitor in the courts, it claims compensation from the U.S. federal government.

Methanex Corp.

In June 1999, this Vancouver-based company announced that it will sue the U.S. government for $970 million due to a California order to phase out use of the chemical MTBE (methyl tertiary butyl) a methanol-based gas additive, by late 2002 [see "NAFTA's Investor "Rights""].

Mondev

In September 1999, Mondev International Ltd., a Montreal-based real estate development firm, filed a claim against the U.S. government for $16 million. The case arises from the refusal of the city of Boston to permit it to expand a mall into a vacant lot in the 1980s although Mondev had a contract with the city. Mondev successfully sued the city and its redevelopment authority for $16 million, but the court decision was reversed on appeal due to state law protecting the redevelopment authority from liability. Mondev seeks to recover the damages through the NAFTA Chapter 11 investor-state route.

ADF Group

ADF, a Canadian fabricator of structural steel for complex structures, is suing the United States, seeking $90 million in compensation. ADF entered into a contract with Shirley Contracting Corporation to provide materials for construction of a Virginia highway interchange. ADF sought to fabricate products in Canada, using U.S.-made steel. U.S. federal government authorities held that this arrangement ran afoul of a "Buy America" requirement. ADF proceeded to attempt to fulfill the contract using its U.S. facilities and subcontracting to other U.S. facilities. It alleges the Buy America rules violate Chapter 11 requirements for national treatment and for bans on performance requirements.

Suits Against Mexico

Metalclad

This case involves a claim by U.S.-based Metalclad, a waste-disposal company, that the Mexican state of San Luis Potosi breached Chapter 11 of NAFTA in refusing permission for a waste disposal facility.

The governor deemed the plant an environmental hazard to surrounding communities, and ordered it closed down on the basis of a geological audit performed by environmental impact analysts at the University of San Luis Potosi. The study had found that the facility is located on an alluvial stream and therefore would contaminate the local water supply. Eventually, the governor declared the site part of a 600,000 acre ecological zone.

Metalclad sought compensation of some $90 million for expropriation and for violations of national treatment, most favored nation treatment and prohibitions on performance requirements. This figure is larger than the combined annual income of every family in the county where Metalclad's facility is located.

In August 2000, a tribunal found that Mexico had breached the Investment chapter and awarded Metalclad $16.7 million, the amount it had spent in the matter. In this case, Metalclad proceeded to begin construction of the facility without having local approvals, claiming that it had assurances from the Mexican federal government. The case raises important questions about whether governments retain the authority to enact environmental controls on foreign investors and about the powers of local governments.

The Mexican government has appealed the award to the Supreme Court of British Columbia, since hearings of the case were held in British Columbia, and the Canadian government and government of Quebec have intervened.

Waste Management Inc.

This case involves a claim filed in 1998 against the Mexican government for $60 million by Waste Management, Inc. It concerns an exclusive 15-year concession to its subsidiary to provide solid waste management to Acapulco. The company claims that it was guaranteed payment by the state of Guerrero and the Mexican federal development bank, Banobras, and that the obligations have not been met, constituting actions tantamount to expropriation.

Desona/Azinian

U.S.-based DESONA and its individual investors, Robert Zinian et. al. filed this claim for over $14 million and costs in 1997 against the Government of Mexico. The claim related to a waste management business in Mexico. Desona claimed that a long series of unfair and conflicting decisions and actions by local authorities contributed to its losses, and culminated in the forcible removal of its managers from its waste collection and landfill business in Naucalpan, a suburb of Mexico City on four days notice.

The case was dismissed by the arbitral panel in November 1999, in a scathing decision critical of the company's actions and record of dishonesty. However, since the case turned on the finding of invalidity of the contract on which the claim was based, it does not assist governments and citizens regarding the problem of the impact of Chapter 11 claims on legislative actions.

Cemsa/Feldman

This is the first NAFTA investor-state suit involving a tax issue. U.S. investor Feldman, sole owner of the corporation CEMSA, filed a claim against the Mexican government in May 1999 for $50 million, alleging that his company was wrongly denied excise tax rebates and export rights for its cigarette exporting business. Again, allegations of numerous irregular actions by Mexican authorities are made, including that CEMSA was required to provide invoices from its vendors which stated the amount of tax included in the purchase price. However, CEMSA claims that the tax authorities did not require that manufacturers provide this information, so that CEMSA could not comply with the requirement.

Adams

This case involves a dispute over title to and use of land on which U.S. investors had built vacation homes. A group of Mexican landowners won a claim in Mexican courts that the disputed land had been illegitimately taken from them by the Mexican government, which later authorized its use by the U.S. investors. The Mexican Supreme Court ordered the land returned to the landowners, and Mexican authorities did subsequently return the land, including the vacation homes on it. The U.S. investors are seeking $75 million in compensation under Chapter 11.