An obscure clause in the North American Free Trade Agreement is being used
by corporations and investors to override local labor and environmental laws,
bypassing established court systems in the process.
So far, as least 20 U.S., Canadian and Mexican corporations have seized on
the chance to collect multimillion-dollar settlements from governments that
thought they were only enforcing their own laws.
Governments that try to ban chemicals suspected of causing cancer have been
sued by the companies that make the chemicals. A chain of funeral homes that
lost a jury trial in Mississippi sued the U.S. government for damages. UPS is
alleging that the state-owned postal service in Canada is unfair competition.
The common thread in each suit is that the government allegedly is
"unfair," has damaged the investor and must pay.
The weapon they are using is Chapter 11 of the NAFTA treaty signed in 1993.
Chapter 11 --no relation to the Chapter 11 section of the U.S. Bankruptcy
Code -- was inserted into the treaty to make sure foreign investors are treated
"fairly and equitably" by host governments. At the time, it seemed like an
innocuous clause, assuring U.S. corporations that they could invest in Mexico
or Canada without fear that governments would seize their property.
Chapter 11 has turned out to be a much more potent force than its framers
Because of the way Chapter 11 is being used, "the balance of power between
sovereign nations and corporations has shifted against governments, providing
significant economic and legal strategic leverage to corporations," said Lydia
Lazar, assistant dean at Chicago-Kent College of Law and an expert on NAFTA
`A strategic windfall'
The clause, Lazar said, "is a strategic windfall for companies unhappy with
actions taken by local or federal governments, actions that impede or thwart
their corporate ambitions."
Some critics, including Lazar, say Chapter 11 enables corporations to sue
governments and collect damages if they feel existing laws damage their
business. In so doing, the critics say, traditional international law is being
turned upside down, more or less inadvertently.
Other experts, including lawyers who otherwise support the clause, worry
that the court proceedings, held before special NAFTA tribunals instead of
traditional national courts, are too private and secretive.
Activists, especially environmentalists, say the NAFTA clause gives only
companies and investors the legal power to take their complaints into court.
Non-economic groups, including labor unions and environmentalists, cannot do
that. The clause does not require the tribunals to hear the opinions of those
outsiders, although they may if they wish.
All sides agree that Chapter 11 is an important evolution of international
law and a step toward "private justice," even if it was not meant to be.
Todd Weiler, a Toronto lawyer specializing in NAFTA cases, argues that
Chapter 11 encourages foreign investment by "giving small and medium-sized
investors a remedy that might not be as available to them as to larger
companies. It gives them a chance for a fair hearing."
The cases, whether filed by big or small companies, are having a major
impact on governments and international law.
Methanex Corp., a Canadian company, makes the gasoline additive MTBE,
banned by California Gov. Gray Davis after a study found the possible
carcinogen in 10,000 groundwater sites in the state. Methanex claims $970
million in damages. The case is before a tribunal that includes former U.S.
Secretary of State Warren Christopher.
Loewen Group Inc., a Canadian funeral company, wants $725 million from the
U.S. government because a Mississippi jury convicted it of trying to drive a
Mississippi funeral home out of business and fined it $500 million.
United Parcel Service, a U.S.-based courier company, has sued for "a
minimum of" $230million, alleging that Canada Post, the government-run
Canadian postal system, is unfair competition.
Mondev International Ltd., a Canadian real estate development company, has
filed a $50million claim against the U.S. government because the Massachusetts
Supreme Court and the U.S. Supreme Court rejected its suit in Massachusetts
over a Boston project that went sour.
Metalclad Corp., a U.S. waste handling company, reached a $15.6 million
settlement with the Mexican government last month. Metalclad said it had done
extensive work to clean a landfill and build a hazardous waste plant in San
Luis Potosi, Mexico, when a new state government killed the project. Metalclad
said the project was legally authorized: The local government said the
landfill stood above subterranean streams supplying water to local residents.
Foreign investors only
NAFTA tribunals can hear only cases against governments filed by foreign
investors. Thus American-based UPS can sue the Canadian government but has no
claim under NAFTA against the U.S. government, even though it feels the U.S.
Postal Service also benefits from official U.S. subsidies. Canadian or Mexican
couriers, however, could sue the U.S. government.
NAFTA tribunals are made up of two judges chosen by the warring parties,
plus a third judge agreed on by both or appointed by arbitration centers,
usually the World Bank's International Center for the Settlement of Investment
The tribunals have no right to order governments to change laws. At most,
they can award damages if an existing law hurts an investor.
But UPS spokesman Tad Segal said a tribunal can urge a government to change
laws, and UPS says it hopes the Canadian government will be urged to end its
"unequal" benefits to Canada Post.
The threat of a NAFTA action can persuade a government to change its
In 1998, U.S. Ethyl Corp., maker of a gasoline additive called MMT, sued
after Canada banned MMT imports on environmental grounds. Without fighting the
case before a tribunal, Canada reversed the ban and agreed to pay Ethyl $13
The Ethyl case often is cited by environmentalists as an example of NAFTA's
chilling effect on environmentalism. The mere threat of a NAFTA suit, they
say, will force governments to change environmental laws or stop enforcing
Copyright 2001 Chicago Tribune