Fw: Business Week on NAFTA's Chapter 11

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From: " Margrete Strand Rangnes " <MSTRAND@...>

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Sent: Tuesday, March 26, 2002 4:56 PM

Subject: Business Week on NAFTA's Chapter 11

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Business Week

APRIL 1, 2002

LEGAL AFFAIRS

The Highest Court You've Never Heard Of

Do NAFTA judges have too much authority?

When a Mississippi jury slapped a $500 million judgment on Loewen Group, a

Canadian funeral-home chain, in 1995 for breaching a contract with a

hometown rival, the company quickly settled the case for $129 million but

then decided to appeal. But instead of going to a U.S. court, the Canadians

took their case to an obscure three-judge panel that stands distinctly apart

from the U.S. legal system. And that panel's decision cannot be appealed.

Thanks to some fine print in the 1994 North American Free Trade Agreement,

the case of Loewen Group vs. the U.S. is just one of two dozen wending their

way through a little-known and highly secretive process. The panels, using

arbitration procedures established by the World Bank, were supposed to

ensure that governments in the U.S., Mexico, and Canada would pay

compensation to any foreign investor whose property they might seize. U.S.

business groups originally demanded the investor-protection mechanism,

noting that the Mexican government had a history of nationalizing its oil,

electricity, and banking industries, including many U.S. assets.

But even some of NAFTA's strongest supporters say that clever and creative

lawyers in all three countries are rapidly expanding the anti-expropriation

clause in unanticipated ways. " The question in a lot of these pending cases

is, will the panels produce a pattern of decisions that the negotiators

never envisioned? " says E. Roh Jr., deputy chief U.S. negotiator for

NAFTA, now a partner at Weil, Gotshal & Manges LLC. Some of the early

indications, he says, " are troubling. "

In one case, a NAFTA panel issued an interpretation of the Mexican

Constitution, an authority the NAFTA negotiators hadn't intended to give the

panel. In the dispute, a California waste disposal company, Metalclad Corp.,

was awarded $16.7 million by a NAFTA tribunal after the governor of the

state of San Potosi and a town council refused the company a permit to

open a toxic waste site. The company had asked for $90 million in damages,

insisting that the state and local governments had overstepped their

authority.

The majority of the cases are yet to be decided, but the NAFTA panels are

controversial nonetheless. For one thing, they are already pitting

environmentalists and federal, state, and local government regulators in all

three countries against multinationals. The basic disagreement: Business

groups want to include NAFTA'S strongest investor-protection provisions in

all future free-trade agreements, while many environmentalists would like to

scrap the entire procedure as an impediment to government regulatory action.

The cases are also complicating efforts to negotiate free-trade agreements

with Chile and the hemispheric, 34-nation Free Trade Area of the Americas.

Washington's problem: While such panels may favor U.S. businesses abroad,

foreign plaintiffs would enjoy the same such privileges in the U.S. And that

could end up giving them protections against regulations far beyond those

domestic companies enjoy in their own courts. What's more, states and

municipalities have also warned that their ability to govern is being

compromised by " a new set of foreign investor rights. "

In some cases, the NAFTA suits seek damages for government decisions that

are clearly legal but can be questioned under vague notions of international

law. For example, a Canadian chemical company, Methanex Corp., bypassed U.S.

courts to challenge California's ban on a health-threatening gasoline

additive, MTBE, that has been polluting municipal wells and reservoirs. In

its $970 million claim, the Canadian company said California Governor Gray

had been influenced in his decision by a $150,000 campaign

contribution from U.S.-based Archer s Midland Co., the maker of a

rival gasoline additive. The campaign contribution was legal, but Methanex'

lawyers argued that the decision was " palpably unfair and inequitable "

because of ADM's influence. Such an argument wouldn't likely work in a U.S.

court.

No laws can be overturned by the panel, but the cost of defending against a

NAFTA lawsuit may run so high that it could still deter agencies from

imposing strict regulations on foreign companies, critics charge. They point

to a decision by Canada not to restrict cigarette marketing after Ottawa was

threatened with a NAFTA case by U.S. tobacco companies. In another

potentially intimidating move, United Parcel Service Inc. is seeking $160

million in damages from Canada, arguing that the state-owned Canadian postal

system, Canada Post, maintains a monopoly on first-class mail and delivers

parcels with private Canadian partners.

But right now, the Loewen case is the one in the spotlight. The Mississippi

trial was so theatrical that Warner Bros. Inc. and film director Ron

have acquired the movie rights, according to attorneys in the case. Canadian

funeral chain founder Ray Loewen was vilified as a foreigner, a " gouger of

grieving families, " an owner of a large yacht, a racist, a customer of

foreign banks, and greedy besides, according to the transcript. Yet the

State Supreme Court refused to waive the appeal bond, which had been set at

$625 million--to be posted in 10 days. (The largest previous verdict in the

state had been $18 million.) Loewen filed for bankruptcy protection in 1999

but is hopeful that the imminent NAFTA ruling will revive the company.

Although many of the current cases raise questions, business groups insist

that NAFTA-like panels are needed in all trade deals because so many

developing nations have poor judicial systems. But they allow that the

process may still need some tweaking. " Of course, if I look at the filed

cases so far, I could write a pretty scary story, " says , a

Washington lobbyist for Procter & Gamble Co. And Biehl, a former top

Commerce Dept. official, who supports NAFTA, wonders, " how does some

mechanism on a trade agreement that no one ever thought much about suddenly

get used to open up a whole new appellate process around the U.S. judicial

system? " That's a question a lot more people may soon be asking.

By Magnusson in Washington

Copyright 2000-2001, by The McGraw-Hill Companies Inc. All rights reserved..

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In accordance with Title 17 U.S.C. Section 107, this material is distributed

without profit to those who have expressed a prior interest in receiving the

included information for research and educational purposes.

Margrete Strand Rangnes

Field Director

Public Citizen's Global Trade Watch

215 Pennsylvania Ave, SE, Washington DC, 20003 USA

mstrand@... & www.tradewatch.org

Ph: + 202-454-5106, Fax: + 202-547 7392

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