Renegotiating NAFTA: Reviewing the Investor–State Dispute Settlement

Background

The North American Free Trade Agreement (NAFTA) is a multilateral agreement entered into by United States, Canada and Mexico to regulate trade and investment within the three countries. Some of the terms in NAFTA are on removal of trade barriers, rules of origin, customs procedures, agriculture, sanitary and phytosanitary measures, government procurement, investment, protection of intellectual property rights, trade in goods and services and dispute settlement procedures. This agreement came into effect on January 1st, 1994. However, last year the Trump Administration prompted Canada and Mexico to begin renegotiating NAFTA as required by the Trade Promotion Act. So far, four rounds of NAFTA negotiations have occurred.

Chapter 11 Reform

While the negotiations may lead to a number of different modifications to NAFTA, it is imperative for provisions of chapter 11 to be reviewed and updated to align with modern international investment treaties and best practices. Chapter 11 of NAFTA provides for investor-state dispute resolution. In particular, the provisions relating to expropriation, national treatment, and most favored nations should be reviewed as they have been the source of many problems.

The following are recommendations for possible reforms to NAFTA to enable all states to realize their economic interests with less liability emerging from Chapter 11 suits:

1. NAFTA should include a provision that prohibits claims arising from investors that are premised on the negative impact a policy or law formulated in public interest has had on an investment.

Currently under NAFTA, Investors may bring a claim against a state for losses or administrative decisions made as a result of state regulations. Investors are allowed to frame domestic policies, and to take control of national economies by challenging state policies and practices that they consider to be contrary to their economic interests such as mining laws, environmental laws, trade regulation. For example, TransCanada challenged the US rejection of the Keystone XL pipeline in a NAFTA chapter 11 lawsuit. The rejection was made by the Obama administration based on a determination that the project would have a negative environment impact, contrary to US environment policies and regulations.

In order to make NAFTA favorable to state parties to the agreement, it is imperative that a provision on investment protection be incorporated into NAFTA. The new provision should shield states from claims challenging state regulations aimed at achieving legitimate policy objectives in public interest. It is necessary to include exceptions in the agreement preventing any claims to be brought for losses suffered by investors, for investments that have been rejected on public interest grounds, or that would infringe on a state`s domestic regulations, such as environment laws.

This is the current trend in recent investment agreements. The Comprehensive Economic Trade Agreement (CETA) between Canada and the European Union protects state parties to the agreement from claims that may be brought as a result of investment losses arising from regulatory measures. The agreement expressly states that parties have the right to regulate within their territories to achieve legitimate policy objectives such as the protection of public health, safety, environment or public morals, social or consumer protection or the promotion and protection of cultural diversity.

2. NAFTA should provide definitive acts constituting the minimum standard of treatment.

Claims can currently be brought under the national treatment, most favored nation and expropriation provisions in NAFTA. Under the national treatment and most favored nation provisions, and investor may bring claims on grounds that the minimum standard of treatment has been breached. However, the scope of the minimum standard of treatment in NAFTA is vague and broad. Therefore, it may serve as a basis for frivolous claims by investors. For example, NAFTA provides that fair and equitable treatment and level of security must be provided to investors, in accordance with the standards in international law. However, the standard of equitable treatment and level of treatment in international law is unclear since there are no definitive acts stated. The interpretation of NAFTA’s minimum standard of treatment issued by NAFTA parties in 2001 points out that the standard must be to the level accorded in international customary law. However, it still does not clearly portray what those international customary law standards are. Therefore, it is challenging to determine what the standard of treatment is in international customary law, and to track how these customs have evolved over time.

NAFTA should be reformed to include specific actions that constitute fair and equitable treatment, to provide a clear interpretation of what the minimum standard of treatment. United States should negotiate for the adoption of the minimum standard of treatment set out in the U.S. Model Bilateral Investment Treaty in 2012. It expressly states actions constituting fair and equitable treatment to include the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world. Adoption of this would align NAFTA with US domestic investment law, thereby resolving all potential conflict of laws. Similarly, the Comprehensive Economic Trade Agreement (CETA) between Canada and the European Union lists actions that constitute breaches of fair and equitable treatment. These are acts of denial of justice in criminal or administrative proceedings, and fundamental breach of due process, including a fundamental breach of transparency in judicial and administrative proceedings. Including definitive acts of minimum standard of treatment in NAFTA will make it coherent with best practices in most bilateral investment agreements and thereby ending the controversy.

Conclusion

In a nutshell, renegotiation of NAFTA is a progressive step towards the development of investment law in the United States and other member states. It is imperative that Mexico, Canada, and United States negotiate for terms that reflect modern bilateral investment treaties and domestic investment laws. The renegotiation process is an opportunity for these states to review NAFTA in an effort to address gaps, and weaknesses of the agreement. Reviewing the investor-state dispute settlement provisions will enable the agreement to offer better investor protection, and align it with contemporary domestic and international investment law.

Stella Obita is a student enrolled in the traditional LLM program, with a concentration of international trade, and investment law. She is an advocate of the High Court of Uganda. Prior to NYU law school, she was an Aryeh Neier Fellow at Open society Foundations,New York and State Attorney in the Ministry of Justice, The Gambia.