NAFTA Chapter 11
The modern model for protecting foreign investments is embodied in NAFTA Chapter 11. The model had its origins in the 1970s when the United States concluded bilateral investment treaties (BITs) with several developing countries. Among the distinguishing features of these BITS and NAFTA Chapter 11 on investment are:
- Sweeping scope: Broad and largely undefined provisions for protecting the property rights of foreign investors, such as “indirect expropriation”;
- An investor-to-state dispute resolution mechanism, which provides standing for an individual foreign investor to invoke international arbitration against a nation-state, based on allegations that a governmental measure violates treaty provisions protecting foreign property rights; and
- Enforcement of international tribunal decisions with awards of money damages to foreign investors in compensation for such treaty violations.
Definition of investment.
NAFTA’s chapter 11 on investment covers a much broader range of economic interests than does the “takings” clause of the Fifth Amendment to the U.S. Constitution.
In the United States, the courts generally uphold takings claims only with respect to physical or intellectual property. Challenges to regulations of economic activity that do not affect a specific property interest, but rather only affect the profitability of an economic enterprise generally, are reviewed under the deferential standard of substantive due process.
By contrast, NAFTA’s definition of investment is very broad. It can include:
- an enterprise;
- debt or equity (stock) of an enterprise;
- business loans;
- real estate or other property, tangible or intangible; or
- any other interests arising from the commitment of capital.
Definition of investor rights
National Treatment: This is a 'non-discrimination' test. NAFTA’s national treatment article requires the United States and individual U.S. states to treat foreign investments and investors “no less favorably” than they treat American investors. National treatment covers not only intentional discrimination, but also neutral laws that have the effect of changing the conditions of competition in favor of domestic firms. So not just the 'purpose' of a law may be challenged for discriminatory content--but also the effect of the law itself, it if changes conditions of competition. This “effects test” for national treatment could be significantly more stringent than limits imposed on states by the commerce clause of the U.S. constitution.
Compensation for expropriation. NAFTA’s investment chapter requires member nations to compensate investors if national or subnational governments “directly or indirectly nationalize or expropriate” an investment. Tribunals decide not only the scope of expropriation, but also what NAFTA treaty language on “indirect” expropriation really means.
Minimum treatment under international law. NAFTA’s investment chapter requires member nations to provide other members' investors with “treatment in accordance with international law, including fair and equitable treatment and full protection and security.” This is codified into a doctrine known as the "minimum standard of treatment" (MST).
The official interpretation of MST. NAFTA’s Minimum Standard of Treatment (MST) article has been officially interpreted by the NAFTA Free Trade Commission (the foreign ministers of the U.S., Canada, and Mexico): MST refers only to customary international law. The breach of another provision of NAFTA or any other international agreement does not establish that there has been a breach of NAFTA article 1105 (1) on MST.
The NAFTA commission’s official interpretation further provides that the concepts of “fair and equitable treatment” and “full protection and security” in article 1105(1) do not expand the investor protections for minimum treatment of aliens under customary international law. This limits the ability of investors to offer creative investor rights arguments based on these two open-ended concepts.
Still, the standard for minimum treatment remains largely undefined under customary international law. International investor-tribunal case law abounds with contradictory interpretations of the scope of investor protections under MST. There are few bright line standards.
Increasingly, tribunals have shied away from findings of "expropriation," but they have been much less reticent to create and argue new standards of 'minimum treatment.'
In an attempt to fix NAFTA's problems, USTR proposed new model language in its negotiations with Chile and Singapore. Read about the Chile-Singapore model, the basis for the investment chapters in all FTAs since 2002.