| NAFTA and Environmental Protection: Falling Short of the Mark | | | 4/11/2011 | A Look at Some of the Lasting Consequences of Investor Protection Measures | | After the negotiation of the North American Free Trade Agreement in 1992, there has been an increase in the use of Chapter 11 to defend foreign investor rights. The poignant question remains whether these rights do and should take precedence over environmental considerations. This Paper looks at the treatment of investor protection measures and environmental protections contained within NAFTA with a view to their application within international arbitration cases. |

NAFTA and Environmental Protection: Falling Short of the Mark
A Look at some of the lasting consequences of investor protection Measures
Contents
Introduction 2
NAFTA Investor Protection Measures 3
Article 1102: National Treatment 3
Article 1103: Most-Favored-Nation Treatment 6
Article 1104 & 1105: Domestic & International Minimum Standards 7
Article 1110: Expropriation and Compensation 8
The Basis for Legal Challenges 11
NAFTA Environmental Protections 13
Article 104: Environmental and Conservative Agreements 14
Article 1114: Environmental Measures 16
Language across all Environmental Provisions 17
Enforcement of Environmental Protections 18
Cases of NAFTA Chapter 11 Arbitration 19
Ethyl Corporation v. Canada 20
S.D. Myers v. Canada 21
Concluding Remarks 22
Bibliography 26

Introduction
In Canada, we are proud of our resource driven prosperity and the standard of living it provides us through international trade. In 1992 the North American Free Trade Agreement (NAFTA) was negotiated between the leaders of Canada, the United States, and Mexico, with the intent of encouraging a new age of open trade and reductions in cross-border barriers. The agreement dealt with greater mobility of capital, labor, and goods across all three jurisdictions, in particular, supporting the flow of capital between states through provisions designed specifically to target and boost investor confidence (the now commonly known as chapter 11 investor protection measures). However, the agreement was also intended to target and promote environmental considerations across all three jurisdictions, ideally facilitating cooperation on environmental initiatives. However, since NAFTA has come into force, Canada has seen increase in investor driven disputes asking for compensation as a result of “indirect expropriation” or “tantamount to expropriation” (in particular a “regulatory taking” resulting from new environmental regulation). In practice (and as a direct result of the way articles in the agreement have been drafted) NAFTA clearly promotes the interests of international investors in foreign owned property over the environmental concerns of the domestic population of the host country. Successful arbitration awards to companies under chapter 11 for expropriation creates a real cost to governments who introduce new environmental regulatory regimes, and can provide a real disincentive in pursuing additional measures. Cases under NAFTA chapter 11 seem to indicate an investor bias and have opened the doors to arbitration as a standard means of resolving issues. However, the added effect is that simply the threat of arbitration is clearly potent enough to affect the behavior of governments on key public policy issues. This is the true strength of NAFTA chapter 11, its ability to act as a preventative measure for large multinational corporations at the bargaining table with host states. Left unchecked, the consequences for the future of environmental regulation and conservation measures becomes immediately apparent.
NAFTA Investor Protection Measures
NAFTA chapter 11 focuses on out-of-state investor and investment protection within the domestic borders of states party to the agreement. Each of the three jurisdictions are required to meet various standards of treatment with regard to investors from other party states operating within their borders in the form of (1) national treatment, (2) most-favored nation treatment, (3) and treatment according to international minimum standards. Additionally, the governments of all three jurisdictions are required to refrain from expropriation of investment property belonging to foreign investors unless they meet certain conditions. The most significant of these conditions is a requirement that compensation be paid to the investor in order for the expropriation to be legal. However, all four conditions must be met when dealing with expropriation by a NAFTA party state in order to have a legal expropriation. The relevant contents of NAFTA chapter 11 investor protections are set out in further detail below.
Article 1102: National Treatment
Chapter 11 of NAFTA offers international investors a number of protections should they choose to invest outside the borders of their jurisdiction (and within another jurisdiction covered under the agreement). Article 1102(1) and 1102(2) of NAFTA Chapter 11 touches on the concept of national treatment – stating that each state shall treat investors or investments of another state party to NAFTA “no less favorable” that it would its own domestic investors “in like circumstances” with respect to establishment, acquisition, management, conduct, operation, and sale or other disposition of investments. Article 1102(3) clarifies that treatment must be no less favorable that the most favorable treatment accorded to domestic investors in like circumstances (for the situation where there are many domestic investors in similar circumstances with differing treatments – treatment accorded a foreign investor must be equal to the most favorable of these). Article 1102(4) specifies that no party state can force on investors within its jurisdiction any requirement with regard to holding a minimum level of equity (other than as a threshold for determining what basic amount is necessary for the purposes of holding a director position within a corporation) or a forced disposition of investments based on nationality. The section essentially can be formulated as according equal treatment between domestic and foreign investors (“as favorable as” formulation), or as treatment equal to the best possible treatment accorded to any investor based on international minimum standards on the subject (which may result in better treatment for foreign investors compared to domestic investors – the “no less favorable” formulation). Generally the application of national treatment can yield differing results that are highly dependent on the facts of a dispute, but are also intimately linked to the interpretation of two specific components: (1) whether domestic and foreign investors can be accurately placed in a comparable setting (are they in a like situation or circumstance such that the treatment of each is justifiably comparable), and (2) whether the treatment accorded comparable domestic investors does in fact differ (and whether the differing treatment is justifiable under police powers of the state). The interpretation of these two elements by arbitrators can lead to an investigation of many components such as: (1) host country policies that may justify such differing treatment, (2) stated intention of the host government in contrast with the facts (does one logically connect to the other based on the parties’ actions, or is there a discernable ulterior motive), (3) existence of de facto or de jure discrimination, (4) rational considerations (on the part of the state) that surpass mere national distinctions, (5) and definitions of “in the same business or sector” important to making comparisons possible (in interpreting whether domestic and foreign investors are in like circumstances). Arbitrators can use a narrow definition of discrimination (de jure discrimination) or a more broad one (de facto discrimination), and depending on their predisposition, place greater weight on one or the other. De jure discrimination implies that the quantifiable effects or actual substantive discrimination must occur, AND that there should be an intention to discriminate on the part of the host government (although it may be unlikely to find a stated policy from any host government to that effect, it would be acceptable to decipher such intention through a series or pattern of actions by the host state that have an adverse effect on the foreign investor or class of investors). De Facto discrimination can be much broader, such that pointing to any practical effects that give the appearance of less favorable treatment experienced by the foreign investor (even if only a single instance) can be sufficient grounds for a finding of discrimination in the particular circumstances (intent is generally not a necessary component). It becomes plain that predicting outcomes on the basis of national treatment becomes difficult as there is ample room for differing interpretations and approaches; however, the protection afforded investors through the use of national treatment within NAFTA is good starting point to laying out the standards of behavior required of party states.
Article 1103: Most-Favored-Nation Treatment
Article 1103(1) and 1103(2) of Chapter 11 essentially provide that treatment of foreign investors or investments within the domestic state should be “no less favorable” that treatment accorded to any investor or investment from any jurisdiction provided both can be reasonably considered “in like circumstances.” This again is extended to establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments. Similar to national-treatment, the article can be formulated as “no less favorable” than treatment afforded other foreign investors or “as favorable as” treatment under international minimum standards on investor protection. The section is subject to similar qualifications and interpretation issues as national treatment as once again, the standard applies to investors and investments in like circumstances. Both national treatment and most-favored-nation treatment rely on the ejusdem generis principle, which provides that in interpreting the applicable standards of treatment for foreign investors, the subject should only be compared to others of the same category in order to articulate a valid actionable benchmark. However, interpretation of the same “subject matter,” “category of matter,” or “class of matter” has become a widespread issue and application is generally inconsistent across tribunals. However, most-favored-nation treatment is the second component of the overall standard that is applicable to treatment of foreign investors and investments.
Article 1104 & 1105: Domestic & International Minimum Standards
Article 1104 provides that article 1103 can be read together will article 1102 to require a host country to accord the best possible treatment to investors of a party state equal to treatment afforded any other investor within its borders (be they foreign or domestic). Article 1105 provides that each party accord international investors with treatment in accordance with international standards, including providing “fair and equitable treatment” and “full protection and security.” Determining exactly what these international minimum standards include has proven somewhat difficult, however generally speaking, they have been formulated at follows: (1) Fair and equitable treatment (still somewhat subjective in its interpretation by international bodies) includes consistent behavior on the part of the host country, free from arbitrariness and ambiguity, and performed in good faith. This also implies adherence to due process within the domestic system without discrimination (against the foreign investor), the creation of favorable investment conditions, and the observance of legitimate commercial expectations. (2) Full protection and security usually required the host state to employ “due diligence” in their attempts to protect foreign investors from harm. The practical consequences of the “fair and equitable treatment” standard is a strong basis for forcing domestic governments to act in a consistent manner regardless of policy changes or new international commitments when there is a preexisting investor operating within the borders of the domestic state. If they fail to do so, they can become liable to foreign investors for damages in the millions of dollars. This is highly relevant to changes in environmental regulation over time as they can usually be the subject of an investor challenge based on domestic and foreign treatment standards.
Article 1110: Expropriation and Compensation
Article 1110(1) prohibits any state party from directly or indirectly nationalizing or expropriating the investment of an investor from a party state, or taking measures tantamount to nationalization or expropriation unless (a) these exists a public purpose, (b) it is done on a non-discriminatory basis, (c) it meets the international minimum standards of treatment articulated in article 1105(1) (fair and equitable treatment and full protection and security), (d) compensation is paid. Compensation must be for fair market value of investment as a going concern, be paid without delay, and include interest from the date of expropriation to the date of payment. The provisions of this section are generally the basis of the claims for damages made by foreign investors under NAFTA chapter 11. Of real importance in this section is the interpretation of what amounts to “indirect expropriation” or “tantamount to expropriation.” This concept seems to revolve around measures that result in (1) a foreign investor’s effective loss of management, use, or control of the investment (rights that flow from ownership of the investment property), or (2) a significant depreciation of the value of their investment. If focus is placed solely on the effect of the government measure on the investment rather than its form or purpose, the interpretation can be expansive and may include any number of possible regulatory options regardless of the policy rationale behind them. Thus compensation may be awarded in any situation where a domestic government can be connected to an action, omission, or measure that interferes with the rights associated with foreign owned property (to the extent that functionally the investment has effectively been expropriated). Indirect expropriation can take the form of (1) a “creeping expropriation,” where government gradually encroaches on ownership rights of the property eventually devaluing it, or (2) a “regulatory takings,” where the enactment of state measures for purposes such as environment or health regulation have the effect of expropriating property. Drawing the line between acceptable and unacceptable regulation is complicated to say the least, and a universal international standard has yet to present itself. Arbitrators in interpreting whether a regulatory taking has occurred either (1) look solely at the effect of the new regulation on the investment or interests of the investor, or (2) look both at the effect and the purpose of the legislation, additionally assessing whether that purpose falls within the policing powers of the domestic state. In looking at the effect, arbitrators will inquire into the economic impact of the regulation and the legitimate expectations of the investor. In inquiring into the reasonableness of investor expectations, arbitrators will determine (1) whether the investor actually held a belief that there would be no effect on their investment from regulation, and (2) if this expectation existed, was it reasonable given the surrounding circumstances. In addition, it is generally a requirement that an expropriation if it occurs be a “legal taking,” meaning that it must meet the four requirements referred to in article 1110 of NAFTA (a public purpose, non-discriminatory basis, fair and equitable treatment & full protection and security, and compensation paid).
The Basis for Legal Challenges
The basis of a NAFTA chapter 11 dispute over domestic environmental regulation arises from the integration of a number of specific elements referred to within this section of the agreement: (1) NAFTA state parties must treat all investors within their jurisdiction equally, but also according to minimum international standards. (2) International standards specify that foreign investors be treated “fairly and equitably,” interpreted to mean that domestic governments must act consistently, in good faith, create favorable investment conditions, and observe the legitimate commercial expectations of foreign investors in their jurisdiction. This implies that changing a regulatory climate can become the target of a challenge under this standard. (3) If party states do not meet this standard of treatment and introduces a new regulation (for our purposes directed at addressing some environmental issue), then there could be a finding of indirect expropriation through a regulatory taking. (4) In determining if a regulatory taking has occurred, the true purpose of the regulation is not always considered, but the legitimate belief of the investor on whether any regulation would affect their investment is. (5) Compensation must be paid if an expropriation has occurred. Thus the chain of requirements within chapter 11 and their interpretation by international arbitrators has created a framework and an incentive for foreign investors to challenge any and every environmental initiative that seriously affects their business (regardless of the legitimacy of the piece of domestic regulation behind it). Environmental regulation is a relatively new concept on the international scene, and only in the last twenty five to thirty years has the global community recognized the importance of addressing some of the emerging environmental issues associated with an unabated capitalist lifestyle. Thus as we learn more about the effect of pollution on global warming (as an example of a particular category of environmental issues), and introduce new international standards such as the Kyoto protocol (as an example of a recent global initiative), we have to introduce more initiatives domestically. These introductions by domestic governments are predisposed to being framed as inconsistent market behavior as the initiatives themselves will be relatively new. With the addition of financial penalties for this type of behavior, NAFTA investor protections essentially penalize environmental regulation by domestic governments. The eventual consequence is “regulatory chill,” where governments choose to drop new regulation on the threat of a NAFTA chapter 11 dispute. The disincentive is based more so on the transaction costs associated with defending a position rather than losing the dispute (not that this element does not factor into the decision as well), which is multiplied by the increasing numbers of these types of dispute filings. This is clearly not an outcome we want to encourage, but is one that is promoted by the ambiguity in predicting the outcome of international arbitration (linked to the ambiguity in determining the appropriate interpretation of investor protection clauses within NAFTA). International arbitrators have a hand in this outcome as they are often the bodies responsible for the interpretations blatantly impartial in their weighing of competing investor and environmental interests. However, at the end of the day it is the language of NAFTA and the framework created by chapter 11 that makes investor challenges of this type possible.
NAFTA Environmental Protections
NAFTA, at the time of its negotiation, was regarded as one of the most environmentally friendly trade agreements on the international scene, according “sweeping protections” of environmental initiatives within the three jurisdictions party to the agreement. The preamble to NAFTA indicates that among its many purposes, the agreements intends to (1) strengthen the development and enforcement of environmental laws and regulations, (2) preserve the ability of parties to safeguard public welfare, (3) promote sustainable development (closely linked with most environmentally friendly initiatives), (4) and undertake all of the stated objectives of NAFTA in a manner consistent with environmental protection and conservation. However, since inception of the agreement, multiple investor driven disputes have emerged (based on NAFTA Chapter 11) directed at challenging domestic environmental protection measures, the very same measures NAFTA was supposedly designed to protect. Scattered throughout the text of NAFTA are multiple articles that deal with domestic environmental regulation, ideally creating exceptions, or at the very least allowances, for environmental considerations in relation to the normal operation of the overall trade agreement. However, given the construction and wording of these articles, they operate subject to the requirements of other sections of NAFTA. This has become the backbone of a recurring argument alleging that domestic regulation with an environmental focal point is fundamentally inconsistent with treatment standards enumerated within NAFTA chapter 11, and constitute expropriation deserving of compensation. Thus, whether or not the stated purpose of a piece of regulation is valid or alternatively, required under another international agreement, compensation must be paid to a foreign investor if their investment has been expropriated as an effect of that regulation. Environmental initiatives, rather than holding any particular prominence under NAFTA, compete with other objectives and considerations, and often play a second fiddle to foreign investor interests. Therefore in practice we see the effectiveness of NAFTA articles dealing with the environment to be muted through limited use and application, and ineffectual at accomplishing the stated aims of the agreement.
Article 104: Environmental and Conservative Agreements
Article 104(1) provides that where there is inconsistency between the provisions of NAFTA and (a) the Convention on International Trade in Endangered Species of Wild Fauna and Flora, (b) the Montreal Protocol on Substances the Deplete the Ozone Layer, (c) the Basel Convention on the Control of Transboundary Movements of Hazardous Wastes and Their Disposal, (d) or any other environmental or conservation agreements set out by the parties at the time of signing (a list that can be added to subsequently so long as parties agree in writing - expressly allowed in article 104(2)), the trade obligations under any of these agreements take precedence to the extent of any inconsistency. However the precedence is subject to one qualification, that the state party in question is required to choose an option least inconsistent with NAFTA obligations (where there is a choice between equally effective or reasonably available means of compliance) in fulfilling their environmental obligations under the agreements referred to in this section. The effect of this qualification is to open the door to the argument that there always exists another possible measure that would be equally effective in achieving the desired aims of the domestic state, but at the same time far less invasive to interests of the foreign investor. The following hypothetical scenario illustrates the point being made here. There is a species of fish adversely affected by a specific substance generated through some industrial process. The Canadian government as a result of an obligation under an international environmental treaty is required to address the issue, and chooses to ban the use of the substance domestically. Suppose that there are only one or two players in the market that produces the substance in question, if they are domestic players they are required to comply. However if they are international players, they are potentially entitled to rely on the provisions of NAFTA chapter 11 provided then can establish the necessary components of their case. The natural defense of the Canadian government would be to rely on the provision of article 104 in their justification of the measures taken (provided the international treaty is on the list). The company in their attack on this defense needs only to establish some other equally effective method of addressing the issue (such as cleaning up the ecosystem or habitat of the fish after the substance has entered it or enacting measures to boost the population of the fish) in order to rebut the argument. The reality is the in establishing what is “reasonably available” or “equally effective,” arbitrators are free to interpret these terms as liberally or as narrow as they see fit. It is arguably the case that often than not, the interest of the foreign investor takes precedence over the environmental considerations at stake. Thus where one measure is more desirable than another because it addresses a source of a problem rather than the symptoms, both could nevertheless be equally effective in achieving the stated purpose of a domestic government. If this is the case, based on the language of article 104, the less desirable option must be taken so that the rights of the investor are not infringed.
Article 1114: Environmental Measures
Article 1114(1) asserts that the contents of chapter 11 should not be taken as a prohibition against adopting, maintaining, or enforcing measures the host state considers appropriate in order to ensure that investment activity is undertaken in a manner sensitive to environmental concerns. This is subject to the requirement that the measures must first comply with the requirements of NAFTA chapter 11 to be considered valid regulation within the domestic state (i.e. without recourse). Thus basically the sections states that environmental regulation of investment activity is allowed so long as it complies with NAFTA requirements. Article 1114(2) specifies that the relaxation of domestic environmental policy as a means of attracting foreign investors is an inappropriate strategy for host states to employ. If a party state is found to be engaging in this type of regulatory behavior, either of the other two party states can request a consultation with the offending state. Article 1114(1) once again has an open door to chapter 11 assertions in favor of the foreign investor. The argument is still valid that new regulatory requirements are evidence of inconsistent behavior by the domestic state, and a violation of international standards of treatment (if they can establish that their belief was reasonable held – i.e. that their preferred method of operation would not be regulated). Thus the regulation is a form of expropriation warranting compensation. The overall effect of this supposed deference to environmental regulation or concerns is that in reality it is still subject to the other interests embodies within NAFTA, and with reference to chapter 11, the interests of foreign investors. Thus between the two sections of article 1114, we have a lower threshold for environmental standards and an allowance for increased regulation, but subject to a gaping loophole. It in effect invalidates any preference given to environmental concerns and makes statements to that effect irrelevant. This is the theme across the language within virtually all sections of NAFTA focused on promoting environmental interests.
Language across all Environmental Provisions
Throughout NAFTA, the general construction on any article dealing with provisions for environmental objectives and considerations are that they are subject to the requirements of the overall agreement. Thus any domestic initiative is prefaced by the application of foreign investor rights under chapter 11 of NAFTA. For instance, article 904(1) gives states party to NAFTA the ability to adopt, maintain, or apply any environmental standard-related measures and ensure their enforcement and implementation. However any adoption, enforcement, or implementation of an environmental standard must be in accordance with NAFTA provisions. Similarly, article 1106(2) allows for host states to require investors to invest in certain types of technology that may be necessary to accomplish some environmental purpose; however any measure of this nature must be consistent with national and most-favored-nation treatment under chapter 11. Essentially, all environmental protections are subject to investor rights in this manner, and it becomes obvious that this is the general approach taken by arbitrators in articulating that those rights entail. Arbitrators take their cue from the treatment of competing interests within NAFTA when interpreting the application to real scenarios. If the agreement they are referring to clearly shows that one interest is more important than the other, they will reflect the same sentiments in their decision making process.
Enforcement of Environmental Protections
The enforcement of a lower threshold for environmental regulation (from article 1114(2) of NAFTA) is done through a parallel agreement negotiated in 1993 called the North American Agreement on Environmental Cooperation. The agreement contemplates the creation of an enforcing body called the Commission for Environmental Cooperation who promotes increased cooperation between the three jurisdictions and helps with the enforcement of minimum regulatory standards. Regardless of whether or not this agreement and the commission are effective in their mandate, what is relevant is that their existence denotes a preference for consistency (the preference of most multinational business entities necessary for risk planning). The parties are willing to create an enforcement body that will ensure environmental regulation stays at the status quo for business interests to flourish, and similarly this implies upward movement in regulation is difficult to accomplish. There is no real infrastructure in place for elevating environmental standards, but there is an obvious and well established one for challenging their potency.
Cases of NAFTA Chapter 11 Arbitration
It is becoming more and more obvious that governments are finding they are unable to meet the best interests of their constituents because the business interests of large multinational corporations take precedence. As of October 2010, 43 of the 66 claims under NAFTA chapter 11 have been brought against Canadian authorities. By this date, Canada had paid out damages of $157 million CAD in additional to the legal fees incurred in defending these claims. A big part of the reason for the growing trend is the asymmetry in terms of the obligations and rights placed on state actors and foreign investors. Foreign investors obtain rights through the protections afforded by NAFTA chapter 11 but have no similarly enforceable obligations, and states are obliged to behave in accordance with these protections, but are not protected from the inappropriate behavior of foreign investors. Multinational corporations usually have enough clout and expertise that they often rarely need to use arbitration as a solution (unless they are willing to cut ties with the government in question); however the consequences of arbitration are so heavily in their favor that it can become far more useful as a threat, a bargaining chip in challenging unfavorable policies before they are ever on the books (as in the case of Ethyl). Additionally, governments are required to be more cautious in disputes under NAFTA as their international reputations are often at stake. Foreign investors do not hold the same concerns and can afford to be more aggressive in their interpretation and enforcement of their rights under NAFTA. Approximately 40% of all legal challenges directed at Canadian domestic policy by foreign investors are directed at environmental regulation. Some of the more important cases to date exhibit a weighing of investor interests against domestic environmental policy in the manner described in this paper (in favor of investor protection).
Ethyl Corporation v. Canada
In this case the Canadian government banned the trade of a gasoline additive within its borders and across international lines (import and cross-provincial trade). They could not place an outright ban of the use of the substance as MMT does not meet the requirements for prohibition under the Canadian Environmental Protection Act. The additive Methylcyclopentadientyl Manganese Tricarbonyl (MMT) interferes with automobile emission control and monitoring systems and releases respirable manganese and unburned MMT into the atmosphere. The substance is suspected to be a neurotoxin. The company challenged the ban arguing that it was an expropriation of their investment (both the enterprise and the goodwill attached) by (1) invalidating their ability to do business and (2) making harmful unsubstantiated public statements about their product. Ethyl also argued that the prohibition on trade was a performance requirement forcing them to open facilities in each province in order to sell their product (ignoring the fact that a ban was not possible under domestic regulation but the preferred course of action). Ethyl lastly argued that they were in “like circumstances” as other producers of gasoline additives and the ban on trade of their product was a violation of national treatment standards (as opposed to other producers of MMT that operate in the Canadian market). The tribunal found against the Canadian government and Canada settled with Ethyl outside of arbitration for $13 million US. The Canadian government also reversed the ban and made a public apology, stating that current scientific information on MMT did not support the proposition that the substance was harmful to automobile systems or the health of the public.
S.D. Myers v. Canada
The Canadian government is a party to the Basel Convention which required party states to (1) reduce production of hazardous waste, (2) ensure adequate hazardous waste disposal facilities (preferably located domestically), (3) minimize transboundary transportation of hazardous waste and ensure it is handled in a responsible manner (with regard to public health), and (4) cease export of hazardous waste to countries not party to the convention unless an equally stringent agreement exists with that government. Polychlorinated biohenyls (PCB’s) were a material contemplated by the Basel Convention as a hazardous waste and the United States was not a party to the agreement. S.D. Myers, a waste treatment company, successfully lobbied the U.S. government to allow the importation of PCB’s from Canada (however, this contravened Canadian commitments under the Basel Convention). In response Canada placed a temporary ban on the export of PCB’s to the U.S. that lasted from 1995 to 1997, after which S.D. Myers was allowed to begin importing PCB’s from Canada. The lifting of the ban was a result of the Canadian government finding other ways of complying with their commitments under the Basel Convention without imposing a ban on export. S.D. Myers claimed breach of national treatment, minimum standards of treatment, imposition of performance requirements, and expropriation during the period of the ban. The tribunal felt the Canadian government was guilty of protectionist motives and colored their judgment accordingly, awarding S.D. Myers $6.9 million CDN in damages and costs.
Concluding Remarks
The Ethyl and S.D. Myers cases are classic often cited examples of findings so clearly biased towards a foreign investor that it is natural for questions to arise as to whether Canadian governments can effectively manage domestic concerns in light of NAFTA chapter 11 investor protections. Arbitrators seem bent on invalidating any other international commitment or a legitimate environmental policy or concern in favor of investor protections under NAFTA. These decisions are only the precursor to the flood of legal challenges directed at environmental regulation after 1994. To date, cases are still open and increasing in occurrence, for example: (1) in 1998, U.S. company Sun Belt Water Inc. (imports bulk water) initiated a challenge of British Columbia water protection and conservation legislation on the basis of expropriation, (2) In 2006, U.S. investor V.G. Gallo challenged the government of Ontario’s decision to abandon plans for a new garbage dump to be situated on an abandoned mine due to large environmental risks, (3) in 2008, U.S. company Bilcon filed for damages in relation to the White Point Quarry Project scrapped as a result of an unfavorable environmental assessment, (4) in 2008 U.S. company DowAgrosciences filed damages resultant of expropriation in response to Quebec’s cosmetic pesticide law, (5) in 2009, U.S. pulp and paper company AbitibiBowater filed a chapter 11 dispute for the expropriation of their water and timber rights in Newfoundland Labrador and the federal government settled the claim for $130 million CAD without any attempt to defend against the claim, The AbitibiBowater case seems to be the most ominous as it seems that the federal government is beginning to lose interest in defending these claims internationally, as on more than one occasion the Canadian government has lost what was clearly a strong case in their favor. In this case in particular the company had already filed for bankruptcy, and the Canadian Constitution specifically states that rights to resources on crown owned lands are not compensable rights. The issue is commented on by Tienhaara, where the Ethyl and S.D. Myers decisions have taken us from a ‘polluter pays’ system to an infrastructure that encourages ‘paying the polluter’ under NAFTA chapter 11. It is only natural that foreign investors would be more than happy to take an advantage of such a clearly skewed system favoring their interests over all others. Tienhaara indicates that the consequences to domestic governments of a system of this sort is that (1) they have less democratic accountability to their domestic constituency as regulatory decisions are made with deference to the authority of international tribunals, (2) domestic governments are faced with less certainty on how to act on different policy issues as the risks of investing abroad have been shifted from the investor to the host state, and (3) environmental regulation becomes less effective as a result of governments choosing less than ideal measures in pursuing domestic policies so as to not run astray of NAFTA chapter 11 requirements. Ultimately, Tienhaara recommends that the natural solution to these issues is for states to (1) omit investor access to investor-state arbitration, (2) omit reference to international minimum treatment standards (fair and equitable treatment in particular as this is clearly the source of the issue), and (3) add reference to principles of environmental law within NAFTA. These solutions are fairly effective in that (1) by limiting the ability of multinational entities to address disputes to either negotiation or domestic legal systems, the costs of effective and necessary regulation are better managed and more equitable (balancing the responsibilities and rights of both parties), (2) the national treatment and most favored nation treatment standards are more than sufficient to encourage non-discriminatory treatment of foreign investors, and (3) inclusion of principles of environmental regulation in relevant articles of NAFTA could potentially aid in the interpretation of investor rights in relation to environmental considerations, bringing a more balanced approach to managing these competing interests. These are clearly preferable solutions that the three states party to NAFTA should consider incorporating into the agreement moving forward.

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Kyla Susanne Tienhaara, The Expropriation of Environmental Governance (Doctorial dissertation presented at University of Amsterdam, 4 September 2008), online: <http://dare.ubvu.vu.nl/bitstream/1871/15766/5/8306.pdf>.
Max Gutbrod and Steffen Hidelang, “Externalization of Effective Legal Protection against Indirect Expropriation,” (2006) 7:1 Journal of World Investment and Trade 59.
Michael Muse-Fisher, “CAFTA-DR and the Iterative Process of Bilateral Investment Treaty Making: Towards a United States Takings Framework for Analyzing International Expropriation Claims,” (2006) 19 Pac. McGeorge Global Bus. & Dev. L.J. 495, online < http://heinonline.org/HOL/LandingPage?collection=journals&handle=hein.journals/tranl19&div=30&id=&page=>.
Richard G. Lipsey, Daniel Schwanen & Ronald J. Wonnacott, The NAFTA: What’s In, What’s Out, What’s Next (Ottawa: Renouf Publishing Company Limited, 1994).
Rudolf Dolzer, Symposium co-organized by ICSID, OECD and UNCTAD, Making the Most of International Investment Agreements: A Common Agenda – National Treatment: New Developments (Paris, 2005), online: <http://www.oecd.org/dataoecd/5/53/ 36055356.pdf>.
Scott Sinclair, “NAFTA Chapter 11 Investor-State Disputes” Trade and Investment Research Project, Canadian Centre for Policy Alternatives, online: <http://www. policyalternatives.ca/sites/default/files/uploads/publications/National%20Office/2010/11/NAFTA%20Dispute%20Table.pdf>.
United Nations Conference on Trade and Development, “Taking of Property: UNCTAD Series on issues in international investment agreements” (Presented at UNCTAD in Geneva, UNCTAD/ITE/IIT/15, 2000).

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[ 2 ]. North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can. T.S. 1994 No. 2, 32 I.L.M. 289 (entered into force 1 January 1994), Chapter 11.
[ 3 ]. Ibid.
[ 4 ]. Ibid.
[ 5 ]. Kyla Susanne Tienhaara, The Expropriation of Environmental Governance (Doctorial dissertation presented at University of Amsterdam, 4 September 2008), online: at 114.
[ 6 ]. Rudolf Dolzer, Symposium co-organized by ICSID, OECD and UNCTAD, Making the Most of International Investment Agreements: A Common Agenda – National Treatment: New Developments (Paris, 2005), online: < http://www.oecd.org/dataoecd/5/53/36055356.pdf> at 1-2.
[ 7 ]. Ibid. at 2.
[ 8 ]. Supra note 4 at 115.
[ 9 ]. Ibid.
[ 10 ]. Ibid.
[ 11 ]. Supra note 1.
[ 12 ]. Ibid.
[ 13 ]. Supra note 4 at 117.
[ 14 ]. Directorate for Financial and Enterprise Affairs, “Most-Favoured-Nation Treatment in International Investment Law” (September 2004) Working Papers on International Investment Number 2004/2, online: < http://www.oecd.org/dataoecd/21/37/33773085.pdf> at 9.
[ 15 ]. Ibid. at 16.
[ 16 ]. Supra note 1.
[ 17 ]. Ibid.
[ 18 ]. International Law Association, International Law on Foreign Investment: First Report of the International Law Association (Technical Report delivered at the ILA Toronto Conference, 2006) at 16.
[ 19 ]. Ibid.
[ 20 ]. Joshua Robbins, “The Emergence of Positive Obligations in Bilateral Investment Treaties” (2006) 13 U. Miami Int'l & Comp. L. Rev. at 427.
[ 21 ]. Supra note 1.
[ 22 ]. Ibid. at Article 1110(2)-(4).
[ 23 ]. United Nations Conference on Trade and Development, “Taking of Property: UNCTAD Series on issues in international investment agreements” (Presented at UNCTAD in Geneva, UNCTAD/ITE/IIT/15, 2000) at 4.
[ 24 ]. Julie Soloway, “Environmental expropriation under NAFTA chapter 11: The phantom menace,” in John J. Kirton & Virginia W. Maclaren, eds., Lining Trade, Environment and Social Cohesion: NAFTA Experiences, Global Challenges (Aldershot: Ashgate, 2002) 131 at 133.
[ 25 ]. Ibid.
[ 26 ]. Supra note 22 at 11-12.
[ 27 ]. Andrew Newcombe, “The Boundaries of Regulatory Expropriation in International Law,” in P. Kahn and T. Walde, eds., New Aspects of International Investment Law, (Leiden: Martinus Nijhof Publishers, 2007) 391 at 417.
[ 28 ]. Max Gutbrod and Steffen Hidelang, “Externalization of Effective Legal Protection against Indirect Expropriation,” (2006) 7:1 Journal of World Investment and Trade 59 at 65.
[ 29 ]. Michael Muse-Fisher, “CAFTA-DR and the Iterative Process of Bilateral Investment Treaty Making: Towards a United States Takings Framework for Analyzing International Expropriation Claims,” (2006) 19 Pac. McGeorge Global Bus. & Dev. L.J. 495 at 518-9, online: .
[ 30 ]. Jeffrey Turk, “Compensation for ‘Measures Tantamount to Expropriation’ Under NAFTA: What it Means and Why it Matters,” (2005) 1International Law and Management Review 41 at 69.
[ 31 ]. Bronwyn Pavey & Tim Williams, “The North American Free Trade Agreement; Chapter 11,” (26 February 2003) Paper released by the Policy Research Branch PRB 02-54E, online: at 2.
[ 32 ]. Claire Vines, “Commentary: ‘It’s Not Easy Being Green’ – The Illusion of ‘Green’ and Environmentally Protective Provisions within the North America Free Trade Agreement (NAFTA)” (2004) 1:2 MqJICEL at 269.
[ 33 ]. Supra note 1 in Preamble.
[ 34 ]. Supra note 1.
[ 35 ]. Ibid.
[ 36 ]. Ibid.
[ 37 ]. Ibid.
[ 38 ]. Ibid.
[ 39 ]. Ibid.
[ 40 ]. Ibid. at Chapter 9.
[ 41 ]. Ibid.
[ 42 ]. Ibid. at Chapter 11.
[ 43 ]. Richard G. Lipsey, Daniel Schwanen & Ronald J. Wonnacott, The NAFTA: What’s In, What’s Out, What’s Next (Ottawa: Renouf Publishing Company Limited, 1994) at 97.
[ 44 ]. Ibid.
[ 45 ]. Scott Sinclair, “NAFTA Chapter 11 Investor-State Disputes” Trade and Investment Research Project, Canadian Centre for Policy Alternatives, online: at 23.
[ 46 ]. Ibid.
[ 47 ]. Supra note 4 at 375.
[ 48 ]. Ibid.
[ 49 ]. Ibid.
[ 50 ]. Supra note 44.
[ 51 ]. Ibid.
[ 52 ]. CUPE Ontario & The Council of Canadians, Say Bye to Buy Local, online: CUPE Ontario at 10.
[ 53 ]. Supra note 44 at 1.
[ 54 ]. David Gantz, “Potential Conflicts Between Investor Rights and Environmental Regulation Under NAFTA’s Chapter 11,” (2001) 33 The George Washington International Law Review 651, online: at 665.
[ 55 ]. Ethyl Corporation v. Government of Canada, Statement of Defence (Ethyl Statement of Defence), 27 November 1997, online: .
[ 56 ]. Supra note 44 at 1.
[ 57 ]. Supra note 4 at 176.
[ 58 ]. Ibid.
[ 59 ]. Ibid. at 177.
[ 60 ]. Ibid. at 180.
[ 61 ]. Ibid.
[ 62 ]. Ibid. at 210.
[ 63 ]. Ibid. at 211.
[ 64 ]. Ibid. at 212.
[ 65 ]. Ibid. at 213.
[ 66 ]. Ibid. at 220.
[ 67 ]. Supra note 50.
[ 68 ]. Ibid.
[ 69 ]. Ibid.
[ 70 ]. Ibid.
[ 71 ]. Supra note 44 at 8.
[ 72 ]. Ibid.
[ 73 ]. Supra note 4 at 255.
[ 74 ]. Ibid. at 369-73.
[ 75 ]. Ibid. at 381.