logo logo

NAFTA clause that allows companies to sue governments draws flak

Financial Post, Canada

The other Chapter 11

NAFTA clause that allows companies to sue governments draws flak

By Peter Brieger, Financial Post

22 March 2008

When agribusiness giant Archer Daniels Midland Co. quietly filed court documents this month to overturn — and increase — a multi-million-dollar trade penalty it won against the Mexican government, the move shone a light on Chapter 11, perhaps the most controversial clause in the North American Free Trade Agreement.

NAFTA itself has been under fire recently with Democratic presidential candidates Barack Obama and Hillary Clinton threatening to reopen the 14-year-old treaty if they end up in the Oval Office.

But Chapter 11, which lets companies sue national governments over lost profits, has been at the centre of critics’ ire for years.

The clause allows corporations to override national courts by suing governments in secret tribunals, critics said. They warned it would spark an avalanche of cases aimed at quashing public-policy decisions.

But data compiled by those critics suggest the avalanche is really a trickle. Moreoever, the vast amounts of money governments were going to lose are a fraction of the damages claimed.

"The record in Chapter 11 cases belies the negative publicity that Chapter 11 has received," says Larry Herman, an international trade lawyer at Cassels Brock in Toronto. "The record of awards is very modest."

In the decade between 1995 and 2005, at least 42 cases were launched against the Canadian, Mexican and U.S. governments by corporations that claimed US$28-billion in damages, according to statistics compiled by the Public Citizen, a Washington, D.C.-based consumer interest group.

By the end of that period, companies won five cases while governments won six. Many others were dismissed, abandoned altogether or are still pending, the data suggest.

NAFTA panels awarded a total of US$35-million in damages in cases in which corporations prevailed — less than 1% of the US$28-billion claimed.

Since then, the US$33.5-million penalty awarded to Archer Daniels Midland by a Toronto NAFTA panel almost doubles the total award figure.

Still, that is just 1.4% of the total even if two disproportionately high claims are excluded from the total damage figure. In fact, the award to Archer Daniels Midland last year, which marked a rare win, may be the highest single penalty handed out under Chapter 11.

The company is asking a Canadian court to send the case back to the Toronto panel to review and hike the award, saying it is entitled to another US$170-million. (The court can either revise its award or uphold the decision.)

Trade panels, which are staffed by legal experts, tend to dole out much lower awards than what companies are seeking, if there is a penalty at all.

"These are top-tier panelists," says Greg Somers, who leads the international trade group at law firm Ogilvy Renault. "Their decisions tend to show a lot of integrity and significant knowledge of the law. You don’t get cowboy or over-the-top decisions trying to push the bounds of the law."

In recent years, companies have suffered more high-profile losses than wins.

Vancouver-based Methanex Corp. lost its US$970-million case against the U.S. government over claims that its business suffered when California banned a gasoline additive that was contaminating drinking water. Methanex made a chemical used in the additive.

Last year, United Parcel Service of America Inc., the world’s biggest package-delivery company, also saw its US$160-million claim against the Canadian government dismissed. UPS alleged that Canada Post’s courier services were unfairly subsidized.

Still, Public Citizen has warned that Chapter 11 is an "extraordinary attack on governments’ ability to regulate in the public interest."

Indeed, critics hold up a US$90-million claim from Metalclad Corp. as proof that companies are targeting legitimate public policy. In 1997, the U.S. company was awarded only US$15.6-million — later reduced by US$1-million — over a Mexican municipality’s refusal to grant it a construction permit for a toxic waste dump.

Worse, critics say, is that Chapter 11 cases are heard in secret tribunals — anathema to an open courts system — and create a "policy chill," ensuring governments don’t enact certain policies over fears of being sued.

Repeated attempts to speak about Chapter 11 with Public Citizen and NAFTA critic the Council of Canadians were unsuccessful.

But it is possible governments have shied away from some policy decisions in light of the contentious clause, says Guy Holburn, an associate professor of strategy at the University of Western Ontario’s Ivey School of Business.

"It is difficult to get an actual sense of the impact," he says. "But governments don’t want to go to court. Firms don’t want to go to court either. I think you’re going to see both trying to avoid that situation."

Mr. Holburn argues Chapter 11 is necessary to ensure foreign companies get a fair shake when it comes to how they’re treated in relation to domestic rivals.

Archer Daniels Midland argued the Mexican government slapped a 20% tax on high-fructose corn-syrup makers, which are mainly foreign-owned, to benefit domestic sugarcane producers — the backbone of Mexico’s sweetener industry.

"Chapter 11 helps create a level playing field for firms operating on the international stage," Mr. Holburn says. "It is an additional check on government’s behaviour and the protectionist measures that they sometimes resort to."

The clause also lets foreign companies get a hearing in a third country not involved in the case, avoiding unfamiliar and sometimes biased local courts, advocates say.

But given the costs of launching and possibly losing a claim — companies usually pick the entire legal tab if they’re unsuccessful—few corporations launch these claims without seriously weighing their odds of success, says Ogilvy Renault’s Mr. Somers.

"Companies rarely do this without a lot of sober reflection," he says. "If the success ratio were fairly high — which it is not — then you might get a lot more frivolous cases."