The North American Free Trade Agreement (NAFTA)
The North American Free Trade Agreement (NAFTA) is an intergovernmental government that creates a free trade area in North America with the United States, Mexico and Canada. NAFTA's purposes include: eliminating trade barriers, promoting fair competition, increasing investment opportunities, providing protection for intellectual property rights, creating procedures for implementing and enforcing NAFTA, and establishing a forum for further enhancement and expansion of the benefits provided by NAFTA.
NAFTA establishes three new dispute resolution mechanisms: First NAFTA Chapter 20 (Chapter 20) applies to disputes between signatory states. Chapter 20 creates anon-binding process for dealing with most other disputes under the treaty and this process can only be initiated by governments at the federal level. There are several stages to the chapter 20 dispute resolution process including consultation, negotiation and the issuance of report by a five member arbitral panel. Secondly, NAFTA Chapter 19 (Chapter 19) applies to disputes between the signatory states relating to investigations of anti-dumping and countervailing duty (AD/CVD) investigations. This process may be initiated by private parties. And thirdly, Chapter 11 applies to disputes between signatory states and investors from another signatory state (foreign investors). This is one of the more controversial aspects of NAFTA that allows foreign investors to use binding arbitration against another signatory state that violates the investment provisions of NAFTA. Although NAFTA does not create a private right of action, it encourages alternative dispute resolution methods and the study of the methods' effectiveness to resolve private international disputes.
Chapter 20 establishes the dispute settlement process of conflicts between the parties over the interpretation and application of NAFTA. The process works in multiple stages, giving the disputing parties the opportunity to resolve conflicts in a cooperative manner prior to seeking resolution before a tribunal. The first stage of this process allows NAFTA parties to seek consultations with the other parties in an attempt to arrive at a mutually satisfactory resolution. Pursuant to Article 2006 of NAFTA, the parties have three responsibilities during the consultation phase: (1) to provide the other parties with sufficient information to enable a full examination of how the proposed measure might affect the operation of NAFTA; (2) to protect confidential or proprietary information; and (3) to avoid resolution that adversely affects the interests under NAFTA of any other party.
If the consultations fail to resolve a dispute within the identified statutory period, any of the parties may subsequently request a meeting of the Commission, which Chapter 20 charges with resolving disputes relating to interpretation or application of NAFTA. The Commission must convene shortly after a party has requested its involvement in a dispute, and must attempt to "resolve the dispute promptly." Moreover, in attempting to resolve the dispute, the Commission is permitted to call in technical advisors and make recommendations. It may also have recourse to good offices and have access to conciliation, mediation, or other dispute resolution procedures. If upon the termination of the allocated statutory period (generally thirty days), the parties still have not reached an agreement, any party to the dispute may request that the Commission convene an arbitral panel comprised of five members chosen by the parties from a predetermined roster of eligible panelists. Of the five panelists, the disputing parties must agree on a chairperson; each party then selects two additional panelists who are citizens of the other disputing party.
Upon the convening of a dispute resolution panel, Article 2012 of NAFTA lays out specific Rules of Procedure to which the panel must adhere. These rules guarantee the provision of at least one hearing before the panel, as well as an opportunity to provide initial and rebuttal submissions. Once the panel has heard all arguments and considered all submissions, it must issue an initial report containing: (1) its findings of fact; (2) its determination as to whether the measure at issue is or would be inconsistent with the NAFTA obligations; and (3) recommendations for resolution of the dispute. Thirty days after the issuance of this initial report, the panel must issue a final report. Up on receipt of the final report, the disputing parties must agree on a resolution that conforms with the panel's determinations and recommendations.
Notably, the findings contained in the final report are not binding on the parties. Article 2018 provides that upon receipt of the final report the parties shall agree on a resolution, and provides that such a resolution "normally shall conform to the determinations and recommendations of the panel." Thus, the parties are not required to follow the letter of a given panel's decision.
If the parties cannot come to an agreement, the complaining party still has some recourse. If within thirty days of receiving the final report the parties have not reached agreement on a mutually satisfactory resolution, Article 2019 of NAFTA empowers the complaining party to suspend benefits to the other party of equivalent effect until the parties resolve the dispute. In making its decision, the complaining party should suspend benefits in the same sector or sectors as that affected by the measure in question, unless the party believes that it is impracticable to suspend same-sector benefits. In such an instance, the complaining party may suspend benefits in other sectors. The cat and mouse game does not end there, however, and if the violating party believes that the suspended benefits are "manifestly excessive," it may then request that the Commission establish another panel to assess the claim.
Aside from Chapter 20, both Chapter 11 and Chapter 19 of NAFTA provide mechanisms for dispute resolution for different subject matters. Chapter 11 provides the rules for dispute resolution with respect to investment disputes; Chapter 19 provides the guidelines for disputes relating to anti-dumping or countervailing duties. Chapter 19 disputes are the most prolific; importantly, they do not require the initial procedural steps that the Chapter 20 disputes do, but rather proceed directly to the arbitration stage. As a result, Chapter 19 panels appear to resolve the disputes more effectively than do Chapter 20 panels, perhaps because the parties must deal with disputes at a faster pace.
Private Commercial Disputes under NAFTA - NAFTA does not create a private right of action, however, it promotes alternative dispute resolution (ADR) methods and mandates the study of the methods' effectiveness to resolve private international disputes. ADR methods offer many advantages over litigation when resolving international investor disputes. Although American businesses embrace litigation to resolve disputes, many other cultures view litigation as a personal failure. International investors using arbitration may not have to worry about some of the factors that can plague them in international litigation, including: choice of law, forum non convenience, home country bias, foreign judicial procedures, or foreign rules of evidence.
NAFTA mandates that the signatory states create an Advisory Committee on Private Commercial Disputes (Advisory Committee) to study the effectiveness of arbitration and other ADR methods to resolve private international commercial disputes. The Advisory Committee was charged with:
1. compilation, examination, and assessment of existing means for the settlement of private international commercial disputes;
2. identification of sectors and types of businesses that would particularly benefit from the use of alternative dispute resolution (ADR);
3. promotion of the use of arbitration and other procedures for the resolution of private international commercial disputes in the NAFTA region, including ways to increase private sector awareness of the benefits of using ADR;
4. facilitation of the use of arbitration and other procedures in the NAFTA region, including the use of model ADR and other contractual clauses;
5. opportunities for expanded cooperation between institutions with an interest or involvement in ADR in the NAFTA region; and
6. issues relating to the enforcement of arbitration agreements and awards, and other litigation issues related to ADR.
The Advisory Committee issued its initial report in November 1996, concluding that "[e]ach NAFTA country has laws and procedures in place to support the use of arbitration, including the recognition and enforcement of arbitral awards, at both the federal and state/provincial levels. No new legislation is recommended at the present time." The Advisory Committee observed a growing interest in ADR methods other than arbitration, noting that "[t]he availability, uses and effectiveness of mediation, conciliation and other forms of ADR are being explored further by the [Advisory] Committee." The Advisory Committee included a brochure of the ADR methods available to parties contracting in the NAFTA region and suggested model clauses to include in private contracts. The Advisory Committee further established subcommittees to study various aspects of ADR in the signatory states.
Investor-State Disputes Under Chapter 11--A Controversial Past - Chapter 11 permits foreign investors to invoke binding international arbitration against another signatory state that violates the investment provisions of NAFTA. Although other countries have attempted to secure similar protections under the Organisation for Economic Co-operation and Development (OECD), currently NAFTA is the only international agreement that provides these protections. Section A of Chapter 11 (section A), designed to deter "illegal takings of U.S. and Canadian businesses by the Mexican government," protects the rights of foreign investors from governmental action by signatory states. Specifically, foreign investors are protected from signatory states' measures. Section A affords four basic protections to foreign investors: parity with investors in the signatory state; freedom from performance requirements; free investment-related funds transfers; and expropriation only in accordance with the international law.
Section B of Chapter 11 (section B) establishes a procedure for binding international arbitration between a signatory state and a foreign investor. The adoption of section B "represents the first time Mexico has entered into an international agreement providing for investor-state arbitration."
Under other multilateral trade regimes, including GATT, companies that suffer damages due to the actions of a foreign government have no right of private action against the host state; their only remedy is to persuade their home state to pursue a trade complaint on their behalf. Where this remedy is unavailable or inadequate (which is almost invariably the case), the investor's only option is to pursue its complaint under the sometimes inhospitable judicial system of the host country.
Section B allows foreign investors to use international arbitration to resolve a dispute when a foreign investor alleges that foreign investors' investment has been damaged by a signatory state's violation of section A. The foreign investor has three years from when the foreign investor acquires knowledge of the alleged section A violation to notify the signatory state of the foreign investor's intent to submit a claim. Before filing a claim, the foreign investor and signatory state (the disputing parties) are required to attempt settlement. If the disputing parties fail to settle, and the foreign investor wants to pursue arbitration, the foreign investor must notify the signatory state within ninety days of submitting the claim. After following these procedures, the foreign investor may submit the claim to arbitration no earlier than six months after the alleged violation. Arbitration fora available to the foreign investor are:
(a) the ICSID Convention [Convention on the Settlement of Investment Disputes Between States and Nationals of Other States], provided that both the disputing Party and the Party of the investor are parties to the Convention;
(b) the Additional Facility Rules of ICSID, provided that either the disputing Party or the Party of the investor, but not both, is a party to the ICSID Convention; or
(c) the UNCITRAL [United Nations Commission on International Trade Law] Arbitration Rules.
The United States is the only signatory state that is a party to the ICSID Convention; therefore, Chapter 11 disputes by foreign investors cannot be heard under this convention. However, claims brought by American investors or claims against the United States may be brought under the ICSID Additional Facility Rules or UNCITRAL. The Additional Facility Rules are only available for investment disputes between signatory states and foreign investors. Specifically, the Additional Facility Rules apply in the following situations:
(i) conciliation or arbitration proceedings for the settlement of investment disputes arising between parties one of which is not a Contracting State or a national of a Contracting State;
(ii) conciliation or arbitration proceedings between parties at least one of which is a Contracting State or a national of a contracting State for the settlement of disputes that do not directly arise out of an investment; and
(iii) fact-finding proceedings.
While there are other international arbitration fora, the available rules for arbitration under Chapter 11 are limited to the three enumerated in the chapter. The arbitration fora available for each signatory state under Chapter 11 are outlined in Table 1.
Remedies available under Chapter 11 arbitrations include: monetary damages and applicable interest, however, no punitive damages are allowed; restitution of property; and costs in accordance with the selected arbitration rules. According to published arbitration awards, arbitrators have used discretion assessing costs.