Origins
The North American Free Trade Agreement (NAFTA) entered into force on 1 January 1994. Most of the NAFTA is enforceable through its Chapter 20 state-to-state dispute settlement procedure. However, the Parties’ obligations relating to the treatment of investment, set out in section A of Chapter 11 (and two obligations found in Chapter 15 (Competition Policy, Monopolies and State Enterprises)), are also enforceable at the instance of a qualified ‘investor of a Party’. In this respect, Chapter 11 resembles a Bilateral Investment Treaty (BIT) enforceable by a private investor, although there are important differences between NAFTA and bilateral investment treaties.
Geographical seat/contact details
Although the NAFTA Parties established a Secretariat with offices in each national capital, the Secretariat plays no role in the administration of investor-state arbitrations. (The national sections administer Chapter 20 state-to-state dispute settlement proceedings and Chapter 19 bi-national panel reviews of national antidumping and countervailing duty determinations.)
Investor-state arbitration under the NAFTA conceivably can take place under three different sets of arbitral rules:
Regional scope
The investment chapter falls within a broad agreement on the liberalisation of trade in goods and services. It applies to measures adopted or maintained by a Party relating to: (a) investors of another Party; (b) investments of investors of another Party in the territory of the Party; and (c) with respect to two provisions, all investments in the territory of the Party (art 1101).
An ‘investor of a Party’ is defined by art 1139 as a Party or state enterprise thereof, or a national or an enterprise of such Party, that seeks to make, is making or has made an investment. An ‘enterprise of a Party’ means an enterprise constituted or organised under the law of a Party and means ‘any entity constituted or organised under applicable law, whether or not for-profit, and whether privately-owned or governmentally-owned, including any corporation, trust, partnership, sole proprietorship, joint venture or other association’ (art 1139). Thus, a German enterprise that made an investment in a Mexican financial institution through its US subsidiary was able to have its subsidiary gain the necessary standing to assert a NAFTA claim in its own name (Fireman’s Fund Insurance Corpn v United Mexican States, ICSID Case No ARB(AF)/02/01). The term ‘national’ is defined as a natural person who is a citizen or permanent resident of a Party and any other natural person referred to in Annex 201.1. A national of a state other than one of the three NAFTA Parties who is a permanent resident of any one of those Parties will be considered to be an investor of such Party (Marvin Roy Feldman Karpa v United Mexican States, ICSID Case ARB(AF)/99/1, Interim Decision on Preliminary Jurisdictional Issues, 6 December 2000, at para 36).
Useful statistics
The investor-state arbitral mechanism has been invoked against all three NAFTA Parties. According to the website maintained by the government of Canada, www.dfait-maeci.gc.ca/tna-nac/nafta-en.asp, 12 notices of intent to submit a claim have been filed against Canada. Of those, two proceeded to a hearing on the merits (Pope & Talbot, Inc and SD Myers, Inc), both leading to modest awards of damages. At the time of writing, a third claim is proceeding to a hearing on the merits (United Parcel Service of America, Inc (UPS)). The other claims are in their initial stages, are inactive, or have been withdrawn.
According to the website maintained by the government of Mexico, www.economia-snci.gob.mx/sic_php/ls23al.php?s=18&p=1&l=1, 14 claims have been filed against Mexico. Of those, seven have been heard on the merits (Azinian, Metalclad, Feldman, Waste Management, GAMI, International Thunderbird Gaming, and Fireman’s Fund). Azinian, Waste Management and GAMI Investments, Inc were dismissed and Metalclad and Feldman resulted in damages awards (the latter a minor award of damages). Mexico applied for judicial review of the Metalclad award by the Supreme Court of British Columbia and the award was set aside in part (United Mexican States v Metalclad Corpn, 2001 BCSC 664). Mexico also applied for judicial review of one aspect of the Feldman award in the Superior Court of Ontario (United Mexican States v Marvin Roy Feldman Karpa, Ottawa Registry No 03-CV-23500). That application was dismissed as was an appeal to the Ontario Court of Appeal (United Mexican States v Marvin Roy Feldman Karpa, Registry No C41169, 11 January 2005).
At the time of writing, International Thunderbird Gaming and Fireman’s Fund have not yet been decided. Mexico is currently defending three claims (Corn Products International, Archer Daniels Midland Company and Tate & Lyle Ingredients Americas, Inc (a single claim brought by two co-investors) and Bayview Irrigation District (a large number of individual claims that have been registered as one claim by the ICSID Secretariat)). A claim brought by Cargill is in its early stages.
According to the website maintained by the government of the United States, www.state.gov/s/l/c3439.htm, 11 claims have been filed against the United States. Of those, four have been heard on the merits with the United States defending each claim successfully (Mondev, ADF, Loewen and Methanex). The United States is currently defending five claims (Canfor, Terminal Forest Products and Tembec et al (which have been consolidated as a single proceeding), Glamis Gold Ltd and Grand River Enterprises Six Nations, Ltd et al). There are also over a hundred claims brought by Canadian cattle producers against the United States’ closure of its border due to BSE (‘mad cow’) concerns and one case (Kenex Ltd) appears to be inactive.
The Parties’ websites are valuable sources of information as they include awards, tribunal decisions on procedural and other issues, pleadings filed in prior cases, and ‘Article 1128 submissions’ on interpretative issues filed by non-disputing NAFTA Parties. A useful guide to Chapter 11, written by experienced counsel, will be published by Kluwer in early 2006: M Kinnear, A Bjorklund and J Hannaford Investment Under NAFTA: An Annotated Guide to Chapter 11 of the North American Free Trade Agreement.
ORGANISATIONAL FRAMEWORK
Administrative elements
If the ICSID Additional Facility has been invoked, the ICSID Secretariat administers the proceeding. (See the ICSID Additional Facility for the Administration of Conciliation, Arbitration and Fact-Finding Proceedings, published by the ICSID Secretariat, which sets out Introductory Notes, the Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat; Schedule A: the Administrative and Financial Rules (Additional Facility); Schedule B: the Conciliation (Additional Facility) Rules; Schedule C: the Arbitration (Additional Facility) Rules; and Schedule D: the Fact-Finding (Additional Facility) Rules.) To date, most NAFTA arbitrations have been administered by the ICSID.
If the UNCITRAL Arbitration Rules have been invoked, the tribunal and the Parties must arrange for the arbitration’s administration. In some cases, the president of the tribunal has arranged for the arbitration’s administration through a law firm or chambers. In other cases, with the Parties’ agreement, the tribunal has called upon the ICSID to assist in the administration of the arbitration through, for example, providing hearing and interpretation facilities.
Regional presence
If the ICSID Additional Facility is invoked, the ICSID Secretariat will administer the proceeding and normally hearings will be held at the World Bank’s headquarters in Washington DC. Hearings in the UNCITRAL cases have been held throughout North America, primarily in Washington, Toronto and Montreal.
Arbitral panels
Unless the disputing Parties otherwise agree, a NAFTA tribunal comprises three arbitrators, one appointed by each of the disputing Parties and the presiding arbitrator appointed by agreement of the disputing Parties. In most instances, the disputing Parties have agreed on the president. If they cannot, art 1124 authorises the ICSID Secretary-General to act as the appointing authority.
If a tribunal has not been constituted within 90 days from the date that the claim is submitted to arbitration, the Secretary-General, on the request of a Party, shall appoint, in his or her discretion, the arbitrator or arbitrators not yet appointed. In so far as the respondent’s appointed arbitrator is concerned, the Secretary-General has not had to make any appointments. As for the presiding arbitrator, the Secretary-General consults with both disputing Parties as to the acceptability of a proposed president and generally will not appoint a proposed candidate if either disputing Party objects.
NAFTA contemplated that the three Parties would establish and maintain a roster of 45 presiding arbitrators who met the qualifications of the ICSID Convention, the ICSID Additional Facility Rules, and the UNCITRAL Arbitration Rules, and who were experienced in international law and investment matters. Article 1120(4) contemplated that the roster members would be appointed by consensus and without regard to nationality. However, the NAFTA Parties have not yet agreed such a roster.
This has rendered the first sentence of art 1124(3) as presently of no effect. That paragraph required the Secretary-General to appoint the presiding arbitrator from the roster. However, the second sentence of the paragraph remains applicable; that is, in the event of disagreement between the disputing Parties as to a president, the Secretary-General shall appoint, from the ICSID Panel of Arbitrators, a presiding arbitrator who is not a national of any of the Parties.
EDUCATIONAL OUTREACH PROGRAMMES
There is no official educational outreach programme administered by the NAFTA Parties with respect to the operation of Chapter 11. However, each November the ICSID Secretariat jointly hosts an annual colloquium on international investment arbitration with the American Arbitration Association and the International Chamber of Commerce. Developments in NAFTA arbitration are discussed in this forum.
ADMINISTRATIVE COSTS/ARBITRATOR FEES AND EXPENSES/LEGAL COSTS
Administrative costs
If the arbitration is being administered by the ICSID Secretariat, the ICSID’s administrative arrangements apply unless the disputing Parties otherwise agree.
If the arbitration is being administered by the president of an UNCITRAL tribunal, the administrative costs will be borne by the Parties as part of a charge by the tribunal.
Arbitrator fees and expenses
If the arbitration is being administered by the ICSID Secretariat, in the ordinary course of events, the ICSID fee and expenses schedule shall apply. At the time of writing, each arbitrator may charge US$3,000 per eight-hour day. The normal expenses for business class travel, hotel accommodations etc are stipulated in the ICSID Administrative Rules. A tribunal may request a higher fee from the disputing Parties. Consent of both Parties is required in order to vary the ICSID fee and expenses schedule.
If the arbitration is being conducted under the UNCITRAL Arbitration Rules, art 39(1) provides that: ‘[t]he fees of the arbitral tribunal shall be reasonable in amount, taking into account the amount in dispute, the complexity of the subject-matter, the time spent by the arbitrators and any other relevant circumstances of the case.’ Under subsection (2), if an appointing authority has been agreed upon by the Parties or designated by the Secretary-General, and if that authority has issued a schedule of fees for arbitrators, the arbitral tribunal in fixing its fees shall take that schedule of fees into account to the extent it considers it appropriate in the circumstances of the case. Generally, the arbitrators’ fees have been higher in the cases brought under the UNCITRAL Arbitration Rules than those brought under the ICSID Additional Facility Rules.
Article 1135 of the NAFTA permits a tribunal to make an award of costs including fees and expenses in accordance with the applicable arbitration rules.
Parties’ obligations
Since art 1120 of the NAFTA provides that the arbitration rules chosen by the claimant ‘shall govern the arbitration except to the extent modified by this Section B’, the disputing Parties’ obligations are initially determined by reference to the applicable arbitration rules.
Chapter 11 modifies such rules with respect to certain important procedural and substantive matters.
Article 1116, which permits an investor of a Party to submit a claim on his or her own behalf, identifies the specific substantive obligations which may form the basis of an arbitral claim. An investor can allege a breach only of the investment protections listed in section A of Chapter 11 and two subparagraphs from Chapter 15 (Competition Policy, Monopolies and State Enterprises). A tribunal has no jurisdiction to entertain a claim based on any other provision of the NAFTA: United Parcel Service of America, Inc v Canada, Award on Jurisdiction, United Mexican States v Metalclad Corpn, judgment of the Supreme Court of British Columbia). (In the case of financial services investment disputes, art 1401 incorporates some section A obligations as well as the entirety of the section B arbitral mechanism. The subject matter jurisdiction of a Chapter 14 tribunal is accordingly narrower than that of the Chapter 11 tribunal. See Fireman’s Fund Insurance Company v United Mexican States, Decision on the Preliminary Question, where the tribunal struck three claims from the Notice of Arbitration on the ground that they fell outside of its jurisdiction.) Article 1116 also stipulates a three-year limitation period for the commencement of a proceeding.
Article 1117, which permits an investor of a Party that owns or controls an enterprise of another Party to submit a claim on behalf of the enterprise against that Party, prescribes the same subject matter of a proceeding as art 1116 and also stipulates a three-year limitation period.
Article 1118 encourages the disputing Parties first to attempt to settle a claim through consultation or negotiation.
Article 1119 requires the claimant to deliver to the disputing Party written notice of its intention to submit a claim to arbitration at least 90 days before the claim is submitted. Subparagraphs (a)–(d) specify the basic information pertaining to the claim.
Article 1120 permits a claimant, after six months have elapsed since the events giving rise to a claim, to submit a claim to arbitration under the applicable arbitration rules.
Article 1121 sets out certain conditions precedent to the submission of a claim. These include the requirement of issuing a consent to arbitration and waiver of certain other remedies. The precise requirements of this article are complex and warrant close attention. A disputing investor may submit a claim under art 1116 to arbitration only if it consents to arbitration in accordance with the procedures set out in the NAFTA. The investor must also waive certain remedies (which may or may not be local remedies). In addition, where the claim is for loss or damage to an interest in an enterprise of another Party that is a juridical person that the investor owns or controls directly or indirectly, the investor and the enterprise must waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in art 1116, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.
This densely drafted provision, which has caused considerable confusion, requires a consent and a waiver. The waiver of remedies encompasses more than simply local remedies. If, for example, the investor had the option of commencing an ICC arbitration for damages resulting from an alleged unlawful termination of a concession contract, such proceeding, if commenced, would have to be discontinued in order to maintain a NAFTA claim in respect of measures relating to the concession contract. On the other hand, an investor may initiate a NAFTA claim while simultaneously commencing and continuing proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.
Article 1121(2) contains a similar requirement where the investor submits a claim under art 1117 on behalf of an enterprise of the respondent Party. The investor and the enterprise must both consent to arbitration in accordance with the procedures set out in the NAFTA and both must waive their right to initiate or continue before any administrative tribunal or court under the law of any Party, or other dispute settlement procedures, any proceedings with respect to the measure of the disputing Party that is alleged to be a breach referred to in art 1117, except for proceedings for injunctive, declaratory or other extraordinary relief, not involving the payment of damages, before an administrative tribunal or court under the law of the disputing Party.
In one case, the claimant sought to provide a conditional waiver which it asserted permitted it to continue claims for damages in the domestic courts of the respondent Party while pursuing its NAFTA claim. Upon an application by the respondent for a declaration that the NAFTA tribunal lacked the jurisdiction to hear the claim due to the simultaneous pursuit of claims for damages in different fora, the NAFTA tribunal held that the claimant had failed to comply with the Agreement’s mandatory waiver requirements and dismissed the claim (Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/98/2, Decision of 2 June 2000, at para 30 and section IV at p 23 (Waste Management I)). The claimant subsequently re-filed the same claim and a new tribunal, after receiving submissions from both Parties, held that since the first tribunal had not expressly held that the claim could not be resubmitted, it could be so submitted. The respondent’s jurisdictional objection was therefore overruled (Waste Management, Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Mexico’s Preliminary Objection Concerning the Previous Proceedings, Decision of the Tribunal, 26 June 2002 (Waste Management II)). The claim therefore proceeded to the merits.
Limitation period issues
Claimants should be mindful of two potential obstacles to meeting the limitation period prescribed by arts 1116 and 1117, which both provide that an investor ‘may not make a claim more than three years from the date on which the investor [or its enterprise in the case of art 1117] first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor [or its enterprise] has suffered loss or damage’.
To date, only one Chapter 11 tribunal has considered whether the running of time ceases upon issuance of the notice of intent to submit a claim to arbitration required by art 1119, or upon the submission to arbitration itself, which cannot occur until the expiry of the ensuing 90-day waiting period. The Feldman tribunal ruled that it is the latter date, the actual submission to arbitration, which determines whether the three-year limitation period has been met. Article 1137 provides that a claim is submitted to arbitration, in the case of claims under the ICSID Convention and the ICSID Additional Facility Rules, when the required notice of arbitration is received by the Secretary-General of the ICSID; and in the case of claims submitted under the UNCITRAL Arbitration Rules, when the notice of arbitration is received by the respondent.
The first potential obstacle is self-evident. As 90 days’ notice must be given before the claim can be submitted to arbitration, the effective limitation to begin the process (ie issuance of the required notice of intent) is three years less 90 days.
The second potential obstacle is less obvious. Article 2103 prescribes a special procedure in the event of claims alleging a violation of art 1110 (Expropriation and Compensation) that are based on taxation measures. The claimant must first ‘refer the issue of whether the measure is not an expropriation to the appropriate competent authorities’ when it gives its notice of intent to submit a claim to arbitration. As the competent authorities (the fiscal authorities of the host state and the investor’s state) have six months to make a determination on whether there has been no expropriation (the effect of which is to bar such a claim) before the claimant can submit its claim, the effective limitation to begin the process is three years less six months.
In cases where domestic or other arbitral proceedings seeking the recovery of damages are extant, claimant’s counsel will also have to decide when to initiate a Chapter 11 claim, particularly if the proceedings are nearing completion at the same time that expiry of the three-year limitation is drawing near. In such case the decision will have to be made whether to discontinue such proceedings (this must occur if they concern a claim for damages; other proceedings for injunctive or other extraordinary relief not involving the payment of damages can continue in parallel with the NAFTA claim). This is due to the fact that the claimant must, when it consents to a NAFTA claim, provide both a consent to arbitration and a waiver of the right to initiate or continue claims for damages in domestic or other dispute settlement procedures.
The two Waste Management claims exemplify what can go wrong. The first arbitration was dismissed on jurisdictional grounds, the tribunal holding that a proper unconditional waiver was not given because the claimant was continuing domestic court and arbitral proceedings against the same alleged conduct on the part of the municipality and other government entities whose measures were at issue in the NAFTA claim. The second arbitration, initiated upon the giving of a proper waiver, was dismissed on the merits, the tribunal holding that the conduct complained of was in part properly the subject of the domestic arbitration which had been abandoned.
Default
In the event that a NAFTA Party refuses to appoint an arbitrator, art 1124 requires the ICSID Secretary-General to appoint the arbitrator. Both the Additional Facility and UNCITRAL Arbitration Rules contain provisions allowing for the administration of the proceeding in the absence of the defaulting respondent state. In every case, the respondent state has appeared and participated in the proceeding.
Awards as to costs
The applicable arbitration rules permit a tribunal to make an award of costs. To date, NAFTA tribunals have been slow to award costs to the prevailing Party. In an award made against Canada, where the claimant prevailed on one of seven claims and obtained a modest award of damages (US$465,000 out of an initial claim for US$508 million), the tribunal made a small award of costs (US$120,200) (Pope & Talbot, Inc v Government of Canada, Award in Respect of Costs, 26 November 2002). In SD Myers, Inc v Government of Canada, the tribunal held that Canada should pay the claimant a total of Cdn$850,000 plus interest (SD Myers, Inc v Canada, Final Award (concerning the apportionment of costs between the disputing Parties)).
In one case where Mexico objected successfully to the tribunal’s jurisdiction (Waste Management I), the tribunal awarded Mexico US$100,000 in legal costs. In some cases, tribunals have refused to award costs. In Metalclad, although the tribunal awarded the claimant US$16,685,000 inclusive of pre-award interest, it found that on the facts of that case it would not be equitable to award costs. In Azinian, where the respondent successfully defended the claim, the tribunal declined to award costs. Similarly, in the ADF, Mondev, Loewen and GAMI cases, the respective tribunals declined to award costs to the successful disputing Party, instead ordering each Party to bear its own costs. The most recent award, however, Methanex Corpn v United States of America, awarded the United States the costs of the arbitration and its legal fees.
AGREEMENTS TO ARBITRATE
Indispensable elements
One principal difference between private international commercial arbitration and investor-state arbitration under the NAFTA is that in the latter the agreement to arbitrate is found not in a contract or specific compromis but rather in an agreement formed by the investor’s acceptance of the state’s treaty-based offer to arbitrate a defined class of disputes in accordance with the procedures set out in the treaty. An agreement to arbitrate is formed when the investor accepts the offer and issues its own consent to arbitration and waiver of remedies. Relevant provisions of the NAFTA establish the content of the arbitration agreement. Like other consensual arbitrations, the agreement to arbitrate formed by section B circumscribes the subject matter of disputes, who has standing to bring a claim, and otherwise defines the process.
On 7 October 2003, the NAFTA Free Trade Commission (the Commission), a ministerial-level body that oversees the administration of the NAFTA, issued a recommendation on the information that should be included in a Notice of Intent to Submit a Claim to Arbitration. Annexed to the recommendation is a model form that the NAFTA Parties recommend be completed by claimants. The recommendation and form can be found at www.dfait-maeci.gc.ca/tnanac/nafta-commission-en.asp. The recommendation is not binding on claimants but does represent the Commission’s view on ‘best practices’ and is likely to be viewed by tribunals as influential.
Recommended model clauses
Due to the treaty-based offer set out in section B and the specific subject-matter jurisdiction of the tribunal, it is unnecessary for an investor to provide for NAFTA arbitration in a contract. Rather, if the investor meets the treaty’s standing requirements and can articulate a claim of a breach of section A (or the two subparagraphs of Chapter 15), the agreement to arbitrate is established by the investor’s granting a consent and waiver.
Recommended additional elements
In addition to the consent and waiver, art 1119 requires the disputing investor to provide certain other additional information in the Notice of Intent to Submit a Claim to Arbitration (the first document issued by the would-be claimant). That notice shall specify: (a) the name and address of the disputing investor; and, where a claim is made under art 1117, the name and address of the enterprise; (b) the provisions of the NAFTA alleged to have been breached and any other relevant provisions; (c) the issues and the factual basis for the claim; and (d) the relief sought and the approximate amount of damages claimed.
The Notice of Intent is an important document that will shape the scope of the subsequent claim. It is supplemented by the formal Notice of Arbitration which shall be filed after at least six months have elapsed since the events giving rise to the claim. Both should be drafted with care. See the comments above on the Commission’s recommendation of 7 October 2003.
ADMINISTRATION OF AD HOC ARBITRATIONS
Subject to the mandatory rule set out in section B and the jurisdictional limitations, the NAFTA permits the disputing Parties to agree on how the arbitration will proceed. They may employ such flexibility as is afforded by the governing arbitral rules, subject only to the tribunal’s compliance with the NAFTA’s mandatory rules. NAFTA does not contemplate any other form of ad hoc investor-state arbitration.
INITIATING PROCEEDINGS
Required documents/preconditions
As noted, a claimant must first deliver a Notice of Intent to Submit a Claim, followed at least six months later by a Notice of Arbitration accompanied by the necessary consent(s) and waiver(s).
Service requirements
Each Party has identified its address for service in the Agreement. (See Annex 1137.2 which provides that ‘[e]ach Party shall set out in this Annex and publish in its official journal by January 1, 1994, the place for delivery of notice and other documents under this Section’.) The most current addresses for service of the Parties can be found in the Statement of the Free Trade Commission on Notices of Intent to Submit a Claim to Arbitration of 7 October 2003 (www.dfait-maeci.gc.ca/tna-nac/nafta_commission-en.asp). The address for service in Canada is:
Office of the Deputy Attorney-General of Canada
284 Wellington Street
Ottawa
Ontario K1A 0H8
Canada
The address for service for the United Mexican States is:
Dirección General de Inversión Extranjera Secretaría de Economía
Insurgentes Sur 1940
piso 8 Col Florida México, DF 01030
Mexico
The address for service for the United States of America is:
Executive Director (L/EX) Office of the Legal Adviser
US Department of State
Washington, DC 20520
USA
Service on the respondent state’s embassy or any other governmental office is ineffective.
SELECTION/APPOINTMENT CHALLENGE OF ARBITRATORS
Make-up of tribunal
Except in respect of a tribunal which is consolidated under art 1126, and unless the disputing Parties otherwise agree, the tribunal shall comprise three arbitrators, one appointed by each of the disputing Parties, and the third, the presiding arbitrator, appointed by agreement of the disputing Parties.
Claims brought by different investors may in some cases be consolidated. To date, two applications for consolidation of different claims have been considered. The United States successfully requested the consolidation of three claims brought by Canadian softwood lumber producers who have complained about certain aspects of US trade policy and law that they contend violate US investment obligations under the NAFTA (Canfor Corpn v United States of America, Tembec et al v United States of America, and Terminal Forest Products, Ltd v United States of America, Order of the Consolidation Tribunal, 7 September 2005) and Mexico’s application to consolidate two claims brought by three US high-fructose corn syrup producers against the same measure was rejected by the consolidating tribunal (Corn Products International, Inc v United Mexican States and Archer Daniel Midland Company and Tate & Lyle Ingredients Americas Inc v United Mexican States, Order of the Consolidating Tribunal, 20 May 2005.)
Requirements of independence
Where the arbitration is being administered under the ICSID Additional Facility Rules, art 8 of the Rules provides further that arbitrators shall be persons of high moral character and recognised competence in the fields of law, commerce, industry or finance, who may be relied upon to exercise independent judgment.
In so far as the president of the tribunal is concerned, art 7(2) of the ICSID Arbitration Additional Facility Rules provides that arbitrators appointed by the Chairman of the Administrative Council of ICSID ‘shall not be nationals of the State Party to the dispute or of the State whose nation is Party to the dispute’.
If the arbitration is taking place under the UNCITRAL Arbitration Rules, art 6(4) requires the appointing authority to have regard to such considerations as are likely to secure the appointment of an independent and impartial arbitrator and shall take into account as well the advisability of appointing an arbitrator of a nationality other than the nationalities of the Parties.
Where the arbitration is taking place pursuant to the UNCITRAL Arbitration Rules, art 7 provides that where: ‘three arbitrators are to be appointed, each Party shall appoint one arbitrator. The two arbitrators appointed shall then choose the third arbitrator who will act as the presiding arbitrator of the tribunal.’ Article 7(3) provides that: ‘[i]f within 30 days after the appointment of the second arbitrator the two arbitrators have not agreed on the choice of the presiding arbitrator, the presiding arbitrator shall be appointed by an appointing authority in the same way as a sole arbitrator would be appointed under Article 6.’
NAFTA, art 1124 further confirms that the president must be a national of a state other than the states of the disputing Parties.
Role of the Parties in selection
In the arbitrations held to date, while most Party-appointed arbitrators have been nationals of the Party or state appointing them, this has not been an inflexible practice. In the Mondev case, the Canadian claimant appointed Professor James Crawford, an Australian national. In the Loewen case, after L Yves Fortier resigned, the Canadian claimant appointed Lord Michael Mustill, a British national. In the GAMI Investments, Inc claim, Mexico appointed Julio LaCarte, a Uruguayan national.
Role of the institution in selection
As previously noted, the ICSID plays a role in the selection of arbitrators if either Party fails to appoint an arbitrator.
Where it is necessary to appoint the presiding arbitrator, the Secretary-General is supposed to appoint that arbitrator from the roster of presiding arbitrators that the NAFTA Parties were to create. As no roster has yet been settled, the Secretary-General has more freedom of choice in appointing a presiding arbitrator. As noted, in practice, the Secretary-General consults the disputing Parties before exercising this power.
Timing/handling of challenges
If the arbitration is being administered under the ICSID Additional Facility Rules, a disputing Party may propose to a tribunal the disqualification of any of its members on account of any fact indicating a manifest lack of the qualities required by art 8 of the Rules, or on the ground that he or she was ineligible for appointment to the tribunal under art 7 of the Rules.
Where the arbitration is being conducted pursuant to the UNCITRAL Arbitration Rules, art 10(1) provides that any arbitrator may be challenged if circumstances exist that give rise to justifiable doubts as to the arbitrator’s impartiality or independence. Article 10(2) allows a Party to challenge its own appointed arbitrator only if it becomes aware of reasons after the appointment has been made.
Challenges have been mounted in the initial stages of NAFTA arbitrations in SD Myers (where the claimant alleged that the Hon Bob Rae had an appearance of conflict of interest) and in Canfor (where the United States objected to the claimant’s proposed arbitrator, the Hon Frank McKenna, on grounds of conflict of interest). They have also been mounted after formal proceedings have commenced in Waste Management I (when Mexico objected to the continued participation of Guillermo Aguilar Alvarez on grounds of an issue conflict), in Methanex (where the claimant objected to the continued involvement of Warren Christopher since his law firm did work for the State of California whose measures were at issue in the arbitration), and in Loewen (where the United States objected to the continued involvement of L Yves Fortier after his law firm merged with another firm that had acted for the corporate claimant in bankruptcy proceedings).
RESOLUTION OF JURISDICTIONAL ISSUES
Role of institution
In general, jurisdictional issues are not addressed by the ICSID Secretariat. The ICSID Secretary-General performs a minor screening role under the ICSID Additional Facility Rules to ensure that that the minimum requirements for the initiation of a NAFTA claim are met. For example, the Secretariat must be satisfied that the would-be claimant has provided the necessary documents needed to register the claim.
Role of arbitrators
Under both the ICSID Additional Facility Rules and the UNCITRAL Arbitration Rules, the tribunal, once constituted, resolves jurisdictional issues. Both sets of arbitral rules provide a disputing Party the opportunity to object to the competence of the tribunal (ICSID Additional Facility Rules, art 45 and UNCITRAL Arbitration Rules, art 21).
Jurisdictional objections have been frequent. Canada objected to the competence of the Ethyl, Myers, and Pope & Talbot tribunals with little success. Its jurisdictional objection in UPS resulted in a significant narrowing of the claim, the tribunal holding that certain allegations must be struck either because they could not fall within the scope of art 1105, the Minimum Standard of Treatment, or because they depended upon the claimant establishing breaches of NAFTA obligations that fell outside the tribunal’s jurisdiction under art 1117 (United Parcel Service of America, Inc v Canada, Award on Jurisdiction, 22 November 2002).
The United States made jurisdictional objections in the Mondev, Methanex and Loewen cases. In Mondev, its objections were rejected. In Methanex, it succeeded in having the claim narrowed (Methanex Corpn v United States of America, Preliminary Award on Jurisdiction and Admissibility of 7 August 2002). In Loewen, the claim was dismissed in its entirety (The Loewen Group, Inc and Raymond L Loewen v United States of America, ICSID Case No ARB(AF)/98/3, Award of 26 June 2003). A subsequent argument by Mr Raymond Loewen that he was entitled to a supplementary award in respect of his personal claim was also rejected and his application for vacatur in the District Court of the District of Columbia was dismissed (Raymond L Loewen v United States of America, Civil Action No 04–2151 (RWR) 31 October 2005).
Mexico has made jurisdictional objections in the Azinian, Waste Management I and II, Fireman’s Fund, and GAMI cases. Its objections in Azinian were joined to the merits, Waste Management I resulted in a dismissal of the claim, Waste Management II resulted in the tribunal’s acceptance of the claim, Fireman’s Fund led to a substantial narrowing of the claim, and in GAMI, the tribunal joined the objections to the merits.
TYPICAL AND/OR REQUIRED PROCEDURES
Pleadings
The ICSID Additional Facility and UNCITRAL Arbitration Rules require different forms of pleadings. The former require a Memorial and Counter-Memorial. They also permit a second round of pleadings (Reply and Rejoinder) if the Parties agree or the tribunal deems it necessary (art 38(1)).
The UNCITRAL Rules require a Statement of Claim and a Statement of Defence and further written statements may be filed (this has occurred in practice where tribunals considered that reply and rejoinder would assist). Broadly speaking, the Additional Facility pleading style is more typical of an international law pleading. It is typically more detailed than an UNCITRAL pleading.
Under the UNCITRAL Arbitration Rules, arts 18 and 19 contemplate a Statement of Claim and a Statement of Defence. Article 20 allows either Party to amend or supplement its claim or defence unless the arbitral tribunal considers it inappropriate to allow such an amendment because it would cause delay or prejudice to the other Party. Article 21 allows for objections as to jurisdiction provided that they are raised no later than the statement of defence, or with respect to a counterclaim, in the reply to the counterclaim. Article 22 gives the tribunal discretion to decide whether further written statements shall be required from the Parties or may be presented by them.
Documents and discovery
The approach to discovery taken by NAFTA tribunals has varied. As a generalisation, while discovery has been of the more limited type typical of international arbitration, tribunals considering claims against Canada and the United States have permitted broader discovery than those considering claims against Mexico. This reflects the different attitudes towards discovery in the common law and civil law traditions. Under both sets of rules (art 41(2) of the ICSID Additional Facility Rules and art 24(3) of the UNCITRAL Arbitration Rules) the tribunal may require the Parties to produce documents, witnesses and experts at any stage of the proceedings.
NAFTA, art 2105 modifies the arbitral rules with respect to discovery of specific classes of information. It provides that:
‘ … [n]othing in this Agreement shall be construed to require a [NAFTA] Party to furnish or allow access to information the disclosure of which would impede law enforcement or would be contrary to the Party’s law protecting personal privacy or the financial affairs and accounts of individual customers of financial institutions.’
Evidence (oral and written; fact and experts)
In both instances, the pleadings are accompanied by written witness statements, documents, and expert reports on which the Party relies. The witness statements are tendered in lieu of direct examination and frequently witnesses (both expert and lay) who have tendered statements will not be called to testify.
Time limits and calculation
Article 33(1) of the ICSID Additional Facility Rules provides that all time limits shall be fixed by the tribunal and this power may be delegated to the president. The tribunal may extend any time limit it has fixed.
Article 23 of the UNCITRAL Arbitration Rules provides that the periods of time fixed by the arbitral tribunal for the communication of written statements should not exceed 45 days. The arbitral tribunal may extend the time limits if it considers it justified.
HEARINGS
Need for oral hearing
Under art 36 of the ICSID Additional Facility Rules, unless the Parties otherwise agree, the proceeding will comprise of two distinct phases: the written procedure and an oral one. Article 39(1) notes that the oral procedure shall consist of the hearing by the tribunal of the Parties, their agents, counsel and advocates, and of witnesses and experts. Article 39(3) allows the tribunal to put questions to the Parties, their agents, counsel and advocates during the hearings and ask them for explanations.
Under art 25 of the UNCITRAL Arbitration Rules, ‘[i]n the event of an oral hearing’, the tribunal shall give the Parties adequate notice of the details. Notification of witnesses needs to be provided at least 15 days before the hearing, and arrangements for the translation of oral statements must be made by the tribunal.
In every claim heard to date, an oral hearing has been held. In some cases, such as Loewen, content with written witness statements and documents, the disputing Parties have dispensed with oral testimony, and have proceeded to argument.
Rights of audience
Article 39(2) of the ICSID Additional Facility Rules allows the tribunal to decide, with the consent of the Parties, which other persons besides the Parties, their agents, counsel and advocates, witnesses and experts during their testimony, and officers of the tribunal may attend the hearings.
Article 15(1) of the UNCITRAL Arbitration Rules allows the tribunal the discretion to ‘conduct the arbitration in such manner as it considers appropriate, provided that the Parties are treated with equality and that at any stage of the proceedings each Party is given full opportunity of presenting his case’. Article 25(4) states that ‘[h]earings shall be held in camera unless the Parties agree otherwise’. Further, the tribunal may require the retirement of witnesses during the testimony of other witnesses.
NAFTA’s art 1128 allows a non-disputing NAFTA Party to make submissions to a tribunal on a question of interpretation of the NAFTA. This is frequently employed by non-disputing NAFTA Parties when they wish to express their position on a particular interpretative issue.
Due to the public interest that NAFTA Chapter 11 arbitrations attract, there have been requests from third Parties such as unions and non-governmental organisations to either be joined as Parties or to appear as amicus curiae. The issue of the possibility of amicus curiae participation was recently addressed in both the Methanex and UPS cases. The Methanex tribunal ruled that art 15(1) of the UNCITRAL Arbitration Rules gave the power to tribunals to accept amicus submissions (in writing) from each of the petitioners, but it had no power to grant requests from petitioners to receive documents related to the case or to allow them to attend oral hearings. While deciding it had the power in theory, it deferred a final decision on whether or not to receive amicus submissions until a later stage of the proceeding. Similarly, the UPS tribunal decided it had the power to accept written amicus briefs from petitioners and deferred consideration of receiving them to the merits stage of the arbitration following consultation with the Parties and exercising its discretion in accordance with relevant international judicial practice. Applications to submit amicus submissions have been filed by the Canadian Union of Postal Workers and Council of Canadians and the Chamber of Commerce of the United States of America.
On 7 October 2003, a ‘Statement of the Free Trade Commission on Non-Disputing Party Participation’ (the Statement) was released. The Commission noted that nothing in the NAFTA limited a tribunal’s discretion to accept written submissions from a person or entity that is not a disputing Party. Part B(1) of the Statement allowed for: ‘[a]ny non-disputing Party that is a person of a Party or that has a significant presence in the territory of a Party that wishes to file a written submission with the tribunal (the “applicant”) … [to] … apply for leave from the tribunal to file such a submission.’ In considering whether to grant leave to file a non-disputing Party submission, part 6 of the Statement provided for a tribunal to take account of, inter alia, whether the submission would assist the tribunal in determining a factual or legal issue by bringing a perspective, particular knowledge or insight that is different from that of the disputing Parties, whether the non-disputing Party has a significant interest in the arbitration and whether there is a public interest in the subject matter of the arbitration. Part 7 recommended that tribunals ensure that the non-party submissions avoid disrupting the proceedings and that neither disputing Party be unduly burdened or unfairly prejudiced by such submissions. Part 9 noted that a tribunal is not bound to address the submission at any point in the arbitration nor does the submission entitle a non-party to make further submissions to the tribunal.
Timing/duration
The NAFTA does not prescribe a maximum time within which a claim must be heard and disposed of. It is not unusual for awards to be issued more than a year after the oral hearing was held.
AWARDS
Prior approval/scrutiny
The NAFTA does not expressly contemplate prior approval or scrutiny of awards.
Essential requirements
Article 52 of the ICSID Additional Facility Rules requires that the award is to be made in writing, include a statement of the facts as found by the tribunal, the submissions of the Parties and deal with every question submitted to the tribunal together with the reasons upon which the decision is based. It must be signed and dated by the members of the tribunal and an individual opinion of a member of the tribunal may be attached whether he or she dissents from the majority or not. Article 52(4) notes that the award is final and binding on the Parties. The UNCITRAL Arbitration Rules require that where there are three arbitrators, an award or other decision is made by the majority of the arbitrators of that tribunal (art 31(1)). Like the ICSID Additional Facility Rules, art 32(2) of the UNCITRAL Arbitration Rules requires the award to be made in writing and it shall be final and binding on the Parties. Subsection (3) requires the tribunal to state the reasons upon which the award is based unless otherwise agreed by the Parties and subsection (4) requires the award to be signed and dated by the arbitrators.
Subsection (5) allows for the award to be made public only with the consent of both the Parties.
NAFTA, art 1135
(1) requires that the final award shall separately or in combination include: (a) monetary damages and any applicable interest; and (b) restitution of property, in which case the award shall provide that the disputing Party may pay monetary damages and any applicable interest in lieu of restitution. Article 1135
(2) requires that where a claim is made under art 1117(1) (ie by an investor of a Party on behalf of an enterprise of another Party that the investor owns or controls directly or indirectly), the award of restitution of property or monetary damages shall be made to the enterprise. Article 1135
(3) prohibits a tribunal from ordering punitive damages against a Party. Article 1136(1) states ‘an award made by a tribunal shall have no binding force except between the disputing Parties and in respect of the particular case’.
Dissenting opinion
Both sets of rules permit arbitrators to issue a dissenting opinion. Dissents in whole or in part have occurred in the SD Myers, Waste Management I, and Feldman cases.
Correction of errors
An application to review and correct an award or for supplementary reasons may be made pursuant to the UNCITRAL Arbitration Rules under arts 35, 36 and 37 and under the ICSID Additional Facility Rules, arts 55, 56 and 57.
This was employed in Feldman to correct the person to whom damages were to be paid and in Loewen to request the issuance of a further award with respect to a claim not expressly addressed by the tribunal. Requests for supplementary reasons were refused in the Feldman award and the Waste Management II jurisdictional decision. To date, no application has been made under the UNCITRAL Arbitration Rules.
Review and appeals
NAFTA, art 1136 provides that no award shall be enforceable until 90 days after its issuance to the disputing Parties and no Party has applied to have the award reviewed, annulled or set aside and in such circumstances until final court action has occurred.
Judicial review occurred in United Mexican States v Metalclad Corpn, where the British Columbia Supreme Court set aside the award in part. Canada has petitioned the Federal Court of Canada for statutory review in Attorney-General of Canada v SD Myers, Inc. Mexico’s application to the Ontario Superior Court for judicial review of one part of the award in Marvin Roy Feldman v United Mexican States was dismissed.
INSTITUTIONAL PROS AND CONS
The NAFTA’s investor-state arbitral mechanism can offer an attractive means to an investor seeking to resolve a dispute with a Party. However, it must be recognised that there are important limits on the process. The investor will be limited to alleging a breach of one or more of the obligations listed in section A and in two subparagraphs of Chapter 15 (Competition Policy, Monopolies and State Enterprises). Unlike some BITs, there is no provision in section A that would permit an investor to allege a breach of an investment agreement with a Party (that is, a mere breach independent of an alleged breach of a section A obligation such as the prohibition against uncompensated expropriation).
It may also find that on questions of interpretation it faces not only the respondent Party’s defence, but one or more interventions by the other NAFTA Parties. With amicus interventions blessed by two tribunals and by the Free Trade Commission, the claimant may also face other challenges to its claim. Finally, the NAFTA Parties have reserved the power to agree, through the Free Trade Commission, on binding interpretations of the NAFTA. According to art 1131(2), such interpretations bind tribunals as part of the governing law. An interpretation of art 1105, the Minimum Standard of Treatment, was issued on 31 July 2001 and immediately raised issues for the tribunals which had claims based on that article before them. Although one tribunal reluctantly applied the interpretation (the Pope & Talbot tribunal), subsequent tribunals have duly applied it. Loewen held that to the extent that three of the early awards (Myers, Pope & Talbot and Metalclad) expressed views that were inconsistent with the Commission’s interpretation, those views must be disregarded. All other tribunals have applied the Commission’s interpretation without objection (ADF, UPS, Waste Management and Methanex).
In summary, while the investor-state mechanism represents an important development in North American investment relations and offers important substantive protections to investors, it is complex and may be challenging to employ.
