Dispute Settlement in the NAFTA and Beyond

Transcription

1 Dispute Settlement in the NAFTA and Beyond PATRICIA ISELA HANSEN SUMMARY I. INTRODUCTION II. COMPLIANCE III. PRIVATE RIGHTS OF ACTION IV. TRANSPARENCY AND PUBLIC PARTICIPATION V. ENVIRONMENTAL AND LABOR VI. CONFLICTS BETWEEN TRIBUNALS VII. CONCLUSION I. INTRODUCTION In our federal system in the United States, we think of individual states as laboratories of democracy, places where courageous citizens can try novel social and economic experiments without risk to the rest of the country. 1 In the world community, some of the most important governance laboratories are now found in regional agreements. Other speakers in this symposium have discussed the European Union (EU) s ongoing experiment with supranationalism. In my talk today, I willl focus on the very different experiment we have undertaken in this part of the world. This experiment began with the North American Free Trade Agreement (NAFTA), 2 which just celebrated its ten-year anniversary. It is now expanding to include a growing number of other agreements, including new bilateral agreements with Chile, Jordan, and Singapore, and a number of proposed new agreements including a proposed regional agreement (commonly known as CAFTA) with five Central American countries and the Dominican Republic. 3 The NAFTA and its progeny continue to be quite controversial. Many economic sectors have not yet fully adjusted to some of the more recent changes produced by the NAFTA. Moreover, the U.S. Congress has yet to ratify a number of proposed agreements, including the CAFTA. I would like to focus on one specific aspect of the controversy generated by all of these agreements, namely, the impact that these agreements may have J. Waddy Bullion Professor of Law, The University of Texas School of Law; A.B., Harvard; M.P.A., Princeton; J.D., Yale. 1. New State Ice Co. v. Liebmann, 285 U.S. 262, 311 (1932) (Brandeis, J.). 2. North American Free Trade Agreement, Dec. 17, 1992, Can.-Mex.-U.S., 32 I.L.M. 289 (1993) [hereinafter NAFTA]. 3. Central America-Dominican Republic-United States Free Trade Agreement, Aug. 5, 2004, art (not yet ratified) [hereinafter CAFTA], DR_Final_Texts/Section_Index.html (last visited Apr. 6, 2005). 417

2 418 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 40:417 on international dispute settlement. In my view, the agreements are producing valuable experiments that may provide important models for dispute settlement in the World Trade Organization (WTO) and other international agreements. This is particularly true oin five critical problem areas for international dispute settlement: compliance, establishment of private rights of action, transparency and public participation, environmental and labor protection, and avoidance of conflicts between domestic and international tribunals. II. COMPLIANCE The first area of innovation under the NAFTA and post-nafta agreements concerns compliance with international dispute settlement decisions. Unlike the laws of the EU, the NAFTA rules do not have direct effect in the national legal systems of all Member States. Like the WTO, the NAFTA relies primarily on ad hoc panels to determine if members are complying with their international obligations. If the panel finds that a NAFTA state has failed to comply with its obligations under the agreement, the state should ordinarily come into compliance with the decision within thirty days. If the state does not comply with a decision, the prevailing party in the dispute is authorized to impose trade sanctions against it. 4 Although trade sanctions are now automatically authorized in the WTO, the NAFTA experience with trade sanctions has been somewhat different from that of the WTO. Procedures for settling state-to-state disputes have has been used far more rarely in the NAFTA than in the WTO, with only three NAFTA panel decisions issued in over ten years. 5 As in the WTO, however, the threat of sanctions has not always been sufficient to produce compliance with panel decisions in politically sensitive cases. The most salient example of this is the 2001 decision of a NAFTA panel in a U.S. dispute with Mexico concerning cross-border trucking. In that decision, the NAFTA panel ruled that the NAFTA required the United States to allow Mexican trucks to operate in U.S. territory. 6 Almost four years later, the United States still is not in compliance with that decision. After considerable delay, the Bush administration finally sought to permit entry by Mexican trucks. However, a lawsuit filed in federal court sought to block this action based on an alleged failure to comply with federal statutory requirements. A recent decision by the U.S. 4. NAFTA, supra note 2, arts This number does not include panel decisions issued under the special NAFTA rules applicable to investor-state arbitration (discussed separately below) or antidumping and countervailing duty disputes (discussed in Patricia Isela Hansen, Judicialization and Globalization in the North American Free Trade Agreement, 38 TEX. INT L L.J. 489 (2003)). The three panel decisions issued under the NAFTA s general dispute settlement provisions are: Tariffs Applied by Canada to Certain U.S.-Origin Agriculture Products (U.S. v. Can.), Arbitral Panel Established Pursuant to Chapter 20 of the North American Free Trade Agreement, No. CDA (1996), (last visited Apr. 6, 2005); U.S. Safeguard Action Taken on Broom Corn Brooms from Mexico (Mex. v. U.S.), Arbitral Panel Established Pursuant to Chapter 20 of the North American Free Trade Agreement, No. USA , (1998), (last visited Apr. 6, 2005). The decision to remove the U.S. restrictions can be found in Proclamation No. 7154, 63 Fed. Reg. 67,761 (Dec. 3, 1998); Cross-Border Trucking Services (U.S. v. Mex.), Arbitral Panel Established Pursuant to Chapter 20 of the North American Free Trade Agreement, No. USA-Mex (2001), (last visited Apr. 6, 2005) [hereinafter Cross-Border Trucking]. 6. Cross-Border Trucking, supra note 5.

3 2005] DISPUTE SETTLEMENT IN THE NAFTA AND BEYOND 419 Supreme Court has now cleared the way for U.S. compliance, but a new policy has not yet been implemented. 7 The post-nafta agreements appear to be moving toward a newer and more flexible approach to compliance. Under the proposed CAFTA, for example, countries now have 105 days to come into compliance with a panel decision instead of the very short thirty-day period provided under the NAFTA. 8 After a seventy-five-day period, the prevailing party may notify the losing party that it intends to impose sanctions and specifiy the specific level of sanctions it intends to impose. 9 The other party may reconvene the panel if it believes the proposed sanctions are unjustified or manifestly excessive. However, the proposed sanctions may still be imposed thirty days after the initial notice is issued, and may remain in place until the panel determines that the sanctions should be reduced or eliminated. This approach may help resolve some of the problems that have arisen in the WTO, which allows WTO members a reasonable time to come into compliance with panel decisions and does not clearly specify the procedure to be used to determine the appropriate timing and level of sanctions. 10 The new agreements also give countries a new option that will allow them to avoid trade sanctions altogether by agreeing to pay an annual monetary fine. In most state-tostate disputes, the fine is automatically set at fifty percent of the value of the sanctions proposed by the prevailing party (which creates an interesting set of incentives for the party proposing the sanctions). 11 In environmental and labor disputes, however, the panel must be convened to determine an appropriate fine based on a list of relevant factors. 12 The efficacy of this new approach to compliance remains to be seen. However, it seems quite promising. The main problem associated with trade sanctions is the fact that they undermine the underlying purpose of trade agreements. Indeed, trade sanctions harm the countries that impose them as much as they harm the countries on which they are imposed. For this reason, many countries have been reluctant to use trade sanctions, even when they can. In the WTO, for example, some countries appear to be collecting a growing number of sanctioning chits official authorizations to impose sanctions but in many cases have not actually imposed any sanctions at all. This problem may continue under the new post-nafta agreements, which continue to rely on the threat of sanctions to induce payment of monetary fines. Nevertheless, the new experiments with monetary fines could provide a useful model for other trade agreements. III. PRIVATE RIGHTS OF ACTION The second area of innovation relates to the creation of private rights of action. The NAFTA does not create a general private right of action for violations of its provisions. However, it does permit NAFTA investors to obtain binding arbitral awards requiring national governments to pay monetary compensation for losses caused by violations of 7. Pub. Citizen v. Dep t of Transp., 134 S. Ct (2004). The Supreme Court did not rule on the NAFTA issues and is prohibited from doing so by U.S. law. See North American Free Trade Agreement Implementation Act, Pub. L. No , 102, 107 Stat (1993). 8. CAFTA, supra note 3, art Id. 10. Conflicting procedures for determinations regarding the implementation of panel reports and authorization of sanctions are set out in Articles 21 and 22 of the WTO Dispute Settlement Understanding. See Understanding on Rules and Procedures Governing the Settlement of Disputes, art. 22.2, Marrakesh Agreement Establishing the World Trade Organization, Annex 2, 1869 U.N.T.S. 401, 33 I.L.M (1994). 11. See, e.g., CAFTA, supra note 3, art Id. art Environmental and labor issues are discussed further below.

4 420 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 40:417 NAFTA investment rules. 13 To summarize very briefly, those rules prohibit NAFTA governments from treating a NAFTA investor in a manner that is discriminatory; that amounts to an uncompensated expropriation; or that is inconsistent with international law, including fair and equitable treatment and full protection and security. 14 The NAFTA investment rules have been the subject of intense criticism and debate in the three NAFTA countries. Some of you may have seen the Bill Moyer television special entitled Trading Democracy, which is highly critical of NAFTA investor-state arbitration. In this program and in many critical articles, criticism has focused on concerns that the number of private claims, and the expense associated with those claims, may rise to levels that will have an undesirable chilling effect on economic regulation at both the national and the local level. The NAFTA experience demonstrates that private investors are indeed both willing and able to mount significant challenges to domestic regulatory measures. The number of investor claims has certainly exceeded the number of government-initiated claims under the NAFTA. Moreover, although the NAFTA investment rules were originally perceived to be aimed at Mexico, a significant number of investor claims are also being brought against the United States and Canada. In the past ten years, a total of twenty-three arbitration proceedings have been initiated: ten against the United States, nine against Mexico, and four against Canada. Final awards have been issued in only seven cases. 15 These awards are fairly evenly split, with four ruling in favor of the investors and three dismissing the claims of the investors. 16 Several of the awards have involved environmental and health measures. Despite concerns about the potential chilling effect that might result from an overly aggressive use of investor-state arbitration, it has not yet proved possible to amend the NAFTA itself. However, these concerns appear to have had a significant influence on the post-nafta agreements, which establish new procedures for dismissal of claims that are found to be legally insufficient and for the revision of proposed arbitral awards. Tribunals may issue preliminary rulings dismissing claims on the merits if they determine that the factual allegations relied on by the investor are insufficient to justify a final award as a matter of law. 17 If the tribunal determines that a claim is frivolous, it may order the investor to pay the costs and attorneys fees the government incurred to defend the claim. 18 The new agreements also attempt to reduce the risk of error in a final arbitral award by requiring tribunals to provide the disputing parties with a draft of their proposed awards and permitting the parties to comment and provide additional information regarding proposed decisions. 19 IV. TRANSPARENCY AND PUBLIC PARTICIPATION A third area of innovation relates to transparency and public participation in international dispute settlement. Like the WTO, the NAFTA does not permit anyone other than Member States to participate in state-to-state dispute settlement. Moreover, no one other than the investor and the NAFTA states may participate in investor-state arbitration. 13. NAFTA, supra note 2, arts. 1116, Id. arts For a listing of these cases, see U.S. Department of State, NAFTA Investor-State Arbitrations, at (last visited Apr. 6, 2005). 16. See id. 17. See, e.g., CAFTA, supra note 3, art Id. 19. Id.

5 2005] DISPUTE SETTLEMENT IN THE NAFTA AND BEYOND 421 However, NAFTA panels have begun to accept amicus curiae briefs from organizations that are not parties to the disputes in investor-state arbitration. This practice has been approved by the NAFTA countries, which have approved the use of specific procedures for the acceptance of amicus briefs. 20 In addition, the United States and Canada have now agreed that all hearings in investor-state arbitration proceedings involving either country will be open to the public. Similar provisions are now found in the new post-nafta agreements, which call for open hearings and consideration of amicus submissions in both investor-state arbitration and state-to-state dispute settlement. 21 A working group has also been established to develop new rules for open hearings in state-to-state dispute settlement under NAFTA. These innovations may help to calm current misgivings about the use of amicus briefs in international dispute settlement. Some of you may be surprised to learn about these misgivings, since the use of amicus briefs in U.S. courts is not very controversial. But the WTO Appellate Body s decision to invite amicus submissions in a recent case provoked a storm of protest among many countries, particularly among less developed countries. 22 The outcry apparently had a strong effect on the Appellate Body, which subsequently decided that it would not accept a single one of the many amicus submissions that were offered in response to its invitation. I believe that the fears that have been expressed regarding amicus submissions are largely overblown; and that critics have failed to appreciate the potential benefits involved. The NAFTA experience demonstrates the enormous outcry that can result when the public is shut out from processes that are seen as affecting broad segments of society. As Petros Mavroidis has argued, 23 amicus submissions can serve two useful functions: exposing tribunals to a broader range of facts and opinions than the disputing parties themselves may be able to provide and sensitizing tribunals to the broader social impact of their decisions. At the very least, amicus submissions can help tribunals frame their decisions in ways that will minimize the risk of widespread misunderstandings and confusion. As critics correctly point out, there is a real risk that amicus submissions may confer an undue advantage for wealthier countries; however, the NAFTA experience will help demonstrate whether this risk can be successfully managed by the tribunal process. V. ENVIRONMENTAL AND LABOR A fourth area of experimentation relates to the treatment of environmental and labor issues. The NAFTA countries negotiated additional side agreements on environmental and labor cooperation after the NAFTA itself was negotiated. Those side agreements provide for the imposition of monetary fines against countries that are found to have engaged in a persistent pattern of ineffective enforcement of domestic environmental or labor laws. They also establish a unique mechanism allowing private citizens to petition for investigation of specific environmental and labor issues and for the publication of 20. Statement of the Free Trade Commission on Non-Disputing Party Participation, (last visited Apr. 6, 2005). 21. See, e.g., CAFTA, supra note 3, arts , 10.21, See Communication from the WTO Appellate Body, European Communities Measures Affecting Asbestos And Asbestos-Containing Products, WTO Doc. WT/DS135/9 (2000), available at (last visited Apr. 28, 2005). 23. Petros Mavroidis, Amicus Curiae Briefs Before the WTO: Much Ado About Nothing (Harvard Jean Monnet Working Paper 2/01), available at (last visited May 18, 2005).

6 422 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 40:417 factual reports regarding the results of those investigations. 24 This mechanism has been actively used. Over forty citizen submissions have been filed under the environmental side agreement, and nearly thirty have been filed under the labor side agreement. 25 A number of factual reports; public hearings and conferences have resulted from these investigations. Although these dispute settlement mechanisms are far less powerful than investorstate arbitration, they have provoked significant opposition from a number of countries who view them as unduly intrusive and insufficiently sensitive to social, economic, and cultural differences between different countries. Ironically, the side agreements have also produced significant criticism from environmental and labor organizations, which tend to view the agreements as toothless and ineffective. The new post-nafta agreements introduce a number of important changes relating to the treatment of environmental and labor issues. However, these changes seem unlikely to overcome the fundamental concerns of environmental and labor groups. Labor advocates are likely to be unhappy about the decision to limit the new agreements to certain core labor principles. 26 Environmental groups are likely to be unhappy with the decision (in every agreement other than CAFTA) to do away with the concept of an independent environmental secretariat. 27 Both groups have complained about the new agreements failure to authorize the use of trade sanctions in environmental and labor disputes. 28 The new agreements do set out specific agendas for government cooperation on labor and environmental issues and establish streamlined procedures for environmental and labor disputes. 29 Moreover, advocates argue that the limitations in the new agreements may produce greater cooperation on environmental and labor issues among the various governments involved. VI. CONFLICTS BETWEEN TRIBUNALS A final area of experimentation relates to the avoidance of conflicts between the rulings of different tribunals. The NAFTA and its progeny say very little on this subject. Unlike the WTO, the agreements do not establish an appellate body to review panel decisions. However, the agreements do permit parties to seek judicial review of investorstate arbitration awards in national courts at the place of arbitration. 30 Some countries also permit investors to bring claims arising under international agreements in domestic tribunals. Often these countries require the investors to make a definitive election of 24. See North American Agreement on Environmental Cooperation, Sept. 13, 1993, arts , 32 I.L.M. 1480; see also North American Agreement on Labor Cooperation, Sept. 13, 1993, art. 16.3, 32 I.L.M (requiring government agency to establish a procedure to receive public communications on labor law matters arising in the territory of another NAFTA party). 25. A summary of petitions filed under the labor agreement is available at the Mexican Ministry of Labor website, at Summaries of petitions filed under the environmental agreement are available at the Commission for Environmental Cooperation website, at See, e.g., CAFTA, supra note 3, art (defining labor laws ). 27. Id. art Most other agreements rely on the governments themselves to respond to citizen submissions. 28. The U.S. agreement with Jordan appears to authorize the use of trade sanctions in labor and environmental disputes. See Agreement on the Establishment of a Free Trade Area, Oct. 24, 2000, U.S.-Jordan, art. 17.2, 41 I.L.M. 63 (2003). However, an exchange of letters between the two governments subsequently disavowed this use of trade sanctions. See 147 Cong. Rec. H (2001). Subsequent agreements do not permit the imposition of trade sanctions in environmental and labor disputes unless a party has refused to pay an assessed fine. 29. See, e.g., CAFTA, supra note 3, chs & Annexes 16.5, See NAFTA, supra note 2, art (providing that arbitral awards are not final if revised, set aside or annulled by a court under the ICSID Additional Facility Rules or UNCITRAL Arbitration Rules).

7 2005] DISPUTE SETTLEMENT IN THE NAFTA AND BEYOND 423 remedies. 31 If an investor chooses to raise a claim arising under the agreement in a domestic legal proceeding, it may not later raise this claim in an international proceeding. If the investor chooses to take its claim directly to an international tribunal, it may not later raise that claim in a domestic legal proceeding. NAFTA tribunals have adopted a very deferential approach to prior rulings by domestic tribunals. For example, in the Azinian decision, 32 the panel ruled that it was required to defer to a Mexican tribunal s determination regarding the validity of a contract unless the decision, or the underlying proceedings, could be characterized as a denial of justice. Similarly, in the Loewen case, 33 the panel refused to consider a Canadian investor s challenge to a jury verdict issued in a Mississippi state court in a breach of contract case unless the investor exhausted all of its domestic remedies. The panel ruled that the investor was required to exhaust all available appeals in the U.S. judicial system, including a petition for certiorari in the U.S. Supreme Court. This was required despite the fact that the investor would have been required by state law to post a bond nearly equivalent to its entire net worth in order to pursue its appeal. The future of this new exhaustion requirement is unclear, since it has not been expressly incorporated in the NAFTA or in any of the new post-nafta agreements. Moreover, the exhaustion requirement spelled out in Loewen applies only when an investor chooses to raise its claim initially in a domestic court. If the investor may instead chooses to raise its claim directly in a NAFTA tribunal, the tribunal may be required to address difficult issues of domestic law, with little guidance from domestic courts. In the Metalclad case, for example, a NAFTA panel was asked to resolve an issue concerning the separation of powers between the federal and state governments under the Mexican Constitution. 34 The issue was quite complex, since the whole concept of federalism is currently undergoing major changes in Mexico. States and local governments are acquiring new powers, and the contours of those powers are far from clear. Not surprisingly, the disputing parties were each able to present an expert to support their conflicting interpretations of the Mexican Constitution. However, the NAFTA does not create any procedure for international tribunals to consult with domestic courts on domestic law issues or to certify such issues to a domestic court. This sets the stage for significant conflicts between international and domestic tribunals on issues of domestic law. The absence of an appellate mechanism has also posed significant problems for dispute settlement under the NAFTA. In the Metalclad case, a Canadian court set aside the most controversial part of the arbitral award, applying a standard that appeared far less deferential than the standard typically applied in commercial arbitration. 35 In two other cases, Canadian courts were more deferential and upheld the challenged awards. 36 This has resulted in significant uncertainty about the applicable standard of judicial review for arbitral awards. Courts in each of the NAFTA countries may apply different standards and arrive at different results on important NAFTA investment issues. 31. See, e.g., CAFTA, supra note 3, art & Annex 10-E. 32. Azinian v. Mexico, Award (NAFTA Arb. Trib. Nov. 1, 1999), reprinted in 39 I.L.M. 537 (2000). 33. The Loewen Group, Inc. v. United States, No. ARB(AF)/98/3 (Int l Centre for the Settlement of Inv. Disputes, June 26, 2003), available at (last visited Apr. 19, 2005). 34. Metalclad Corp. v. Mexico, Award (NAFTA Arb. Trib. Aug. 30, 2000), reprinted in 40 I.L.M. 36 (2001). 35. Mexico v. Metalclad Corp., [2001] 89 B.C.L.R.3d 359, paras (B.C.). 36. See Attorney General of Canada v. Mexico, [2004] F.C. 38, available at (last visited May 18, 2005); Mexico v. Feldman (Ontario Superior Court of Justice, 2003), available at tt.pdf (last visited May 18, 2005).

8 424 TEXAS INTERNATIONAL LAW JOURNAL [VOL. 40:417 The NAFTA parties have taken a number of steps to try to reduce the risk of conflicting decisions by different tribunals. One solution has been the adoption of ministerial interpretations to clarify the specific meaning of disputed NAFTA provisions. The NAFTA parties have successfully used this process to provide more precise definitions of the meaning of NAFTA terms such as fair and equitable treatment and measures equivalent to expropriation. 37 However, this option is not only politically difficult but has also been criticized as an improper attempt to amend the agreement without the approval of Congress. A second response has been the NAFTA parties unprecedented decision to make the NAFTA negotiating texts available to the public so that they can be used to clarify the meaning of disputed terms. 38 This is useful, but hardly likely to provide a definitive solution in most cases. As a result, the NAFTA parties appear to be considering the establishment of an appellate body to review the decisions of arbitral tribunals and ensure a greater level of uniformity. The new post-nafta agreements expressly contemplate the possibility of a future appellate mechanism with authority to review awards issued under a number of different agreements. 39 VII. CONCLUSION Of course, even the creation of a single appellate authority will not fully eliminate the increasing risk of confusion and conflict associated with the proliferating number of different trade agreements in the hemisphere. If we are not able to resolve this problem, we could in the future end up with what Jagdish Bhagwati has called a spaghetti bowl of international obligations and dispute settlement mechanisms too tangled and complex for anyone to manage. 40 In that case, the costs of our current regional experiments may well outweigh their potential benefits. For right now, however, these regional laboratories are producing a number of valuable experiments that are likely to have an important impact on dispute settlement far beyond the NAFTA itself. 37. See Interpretation of the Free Trade Commission of Certain Chapter 11 Provisions (July 31, 2001), available at (last visited May 18, 2005). 38. The NAFTA negotiating drafts are now available at the U.S. Trade Representative s website, at s/section_index.html (last visited May 18, 2005). 39. See, e.g., CAFTA, supra note 3, Annex 10-F (calling for the immediate establishment of a negotiating group to develop an appellate mechanism within one year after the agreement enters into force). 40. See, e.g., Jagdish Bhagwati, U.S. Trade Policy: The Infatuation with Free Trade Areas, in JAGDISH BHAGWATI & ANNE O. KRUEGER, THE DANGEROUS DRIFT TO PREFERENTIAL TRADE AGREEMENTS 1 (1995).