What happened under Chapter 11 of NAFTA??

On Friday, May 17th, 2013 in Householders

Chapter 11 of the North American Free Trade Agreement (NAFTA) was the first investor-state agreement in the world. There is much to learn from analysis of this new type of agreement, but insufficient analysis has been completed of the arbitrations under Chapter 11 of NAFTA. Far from being of benefit to governments and their citizens, Chapter 11 has proven to fundamentally erode a government’s ability to enact laws, regulations and policies that protect its environment or the health of its citizens.

What is now so sanguinely defended as a “typical FIPA provision” was not the intent of the NAFTA negotiators.  I have spoken to a number of them who believed that the Chapter 11 language was only to codify what was clear in international law: that if a nation-state nationalized and expropriated the assets of a foreign corporation, then compensation was owed.

NAFTA Chapter 11: The Ethyl Corporation Example

The first of the Chapter 11 suits was in 1997, when Ethyl Corporation of Richmond, Virginia, challenged a Canadian statute that had been democratically enacted to protect Canadians from Methylcyclopentadienyl Manganese Tricarbonyl (MMT).  Ethyl said its investor rights had been violated, and even claimed damages for the debate in the House of Commons, which it claimed had hurt its reputation.

MMT is a neuro-toxic gasoline additive that posed both health and environmental problems. It was compromising the catalytic converters on Canadian cars, alarming car makers about the potential for voiding their warranties, while also increasing air pollution. As well, its impact in the atmosphere raised concerns it could have neuro-toxic effects on particularly vulnerable populations – children, pregnant women and the elderly.  The same company had manufactured leaded gasoline since the 1920s.

The public health experience with leaded gas demonstrated conclusively that if one wanted to increase absorption to the brain of a toxic heavy metal, adding it to gasoline was an effective delivery method.  The public health toll of Ethyl Corporation’s core business has never been fully calculated, but certainly includes a multi-generational impact of lowered IQ, particularly in urban centres.  A recent study on the phenomenon of a widespread drop in violent crimes suggests it was due to finally banning leaded gasoline.  In other words, a likely side-effect of the use of leaded gasoline was violent urban crime.

First Use of Chapter 11

Ethyl Corporation’s creative use of the “tantamount to expropriation” language of Chapter 11 was a surprise to the trade and investment community.    At the same time that Ethyl Corporation issued its Chapter 11 challenge, there was an effort through the Organization for Economic Cooperation and Development (OECD) to adopt an international version of Chapter 11 under the name “Multilateral Agreement on Investment.” The OECD chose to consult with global civil society and, as Executive Director of Sierra Club of Canada, I attended a 1997 session with OECD negotiators in the palatial Paris headquarters of the OECD.

The session was under “Chatham House Rules,” meaning what was said can be repeated, but not who said it.  It was clear that the negotiators within the OECD working on the MAI were shocked that a US-based corporation could use Chapter 11 “tantamount to expropriation” language to claim damages from Canada for the decision to remove a toxic product from trade.  The collapse of the MAI negotiations was proximately related to concern of the French government for protection of its culture, as well as a massive international citizen mobilization, but the Ethyl MMT complaint was a warning of the way the language had morphed into something with the potential to undermine democratic decision-making.

Sensing a defeat in arbitration, and, in my view making a serious mistake, former Prime Minister Jean Chretien ordered Canadian negotiators to organize a settlement.  Canada repealed the law we had passed, issued a public apology to Ethyl Corporation and paid out $13 million (US) to Ethyl Corporation.  The monies were taken from the base core budget of Environment Canada.  And that certainly delivered a message to the civil servants responsible for banning the toxic additive.

As a result, where the US Environmental Protection Agency (EPA) had refused to permit its use based on health concerns, Ethyl Corporation won a court case on a technicality calling for its registration. The head of the US EPA announced she was allowing its use “under protest.”  US law makers continued to fight against use of MMT there, and US refineries pledged to reject its use.  But Canada had apologized for doing what the US government had also done.

Barry Appleton, Canadian lawyer for Ethyl Corp, said at the time, “It wouldn’t matter if a substance was liquid plutonium destined for a child’s breakfast cereal.  If the government bans a product and a U.S.-based company loses profits, the company can claim damages under NAFTA.”

S.D. Myers

Following the decision of former Prime Minister Jean Chretien to push the MMT matter to a settlement prior to the arbitrators’ ruling, a second Chapter 11 case was brought by S.D. Myers of Ohio, complaining of the impact of the ban on export of PCB contaminated waste from Canada.  S.D. Myers, also represented by Barry Appleton, had hazardous waste incinerators in the US. It had none in Canada, so the term “investor” was a stretch. This matter went to arbitration and Canada lost.

The S.D. Myers ruling is notable for several reasons:

  1. It was a law of general application, i.e. PCB exports were banned. There was no way in which the move was discriminatory towards the United States in general, nor to S.D. Myers in particular.
  2. It was a move taken consistent with Canada’s obligations under the Basel Convention on Hazardous and Toxic Materials.  Further, the Basel Convention is specifically referenced in NAFTA as a pre-existing multi-lateral obligation of Canada, exempt from NAFTA requirements.
  3. At all material times when Canada banned the export of PCB contaminated waste, it would have violated US law to import the PCB waste to the United States.

I always felt that last point suggested that required reading for understanding these investment deals was Lewis Carroll.  How could Canada lose for banning PCB exports to the US when importing PCBs to the US was illegal?  However, lose we did.

Lessons Learned?

The S.D. Myers case should be a clear warning to anyone looking at the Canada-China Investment Treaty that international arbitration can come to bizarre conclusions. Chapter 11 of NAFTA has had a higher proportion of environmental law challenges than in other areas of public policy.  Mexico lost to Metalclad, a US-based hazardous waste disposal company that wished to locate a large toxic facility in San Luis Potosi. The state level government rejected the application and the federal government of Mexico was successfully sued.

It must be stressed that the nature of the full environmental impacts of Chapter 11 of NAFTA has never been assessed.  The chilling effect of the Ethyl Corporations and S.D. Myers was profound.  I am aware of a letter warning Alan Rock when he was Health Minister that removing the registration of  pesticides for use in lawns for cosmetic purposes could give rise to Chapter 11 suits, so the move was not made.  We have no way of assessing the “chilling effect” of the Chapter 11 cases that Canada has lost. In my opinion, there is a compelling case that the Ethyl and S.D. Myers case have resulted in failures of the Canadian government to regulate and/or ban toxic substances that they would have in the pre-Chapter 11 era.

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  • CreativePerson

    This is disturbing — but what is the solution?

  • Dave Vogel

    shouldn’t we be amending NAFTA to remove these travesties under Chapter 11…bad laws should be repealed…

  • Malloonkai

    Extraordinary that this page has no comments. I imagine that this issue is considered too complex for the ordinary mortals that we are, to comprehend. Yet Elizabeth may has outlined the pertinent details succinctly in plain English. What I, as a person unpracticed in the law, take from this is that the law may be manipulated and abused and outrageous decisions handed down without anyone (more or less) blinking an eye.

  • Mike MacKinnon

    Agree w/Malloonkai, most of this stuff is actually public knowledge but isn’t sexy enough to be considered newsworthy. Consider that most news anchors and producers are part of the one percent and don’t want to jeopardiize their careers by engaging in real journalism. Even the CBC ignores this stuff. Corruption comes in many forms and self-censorship is just one more

  • Lorenzo

    This is absolutely disgusting that such rulings have been made. Really makes me want Canada to stay the hell out of any further such trade deals.

  • Grouchy

    Is this the part of Chapter 11 that is so subject to abuse: “tantamount to expropriation”? Then, consistent with Mr. Vogel’s question, what is the procedure for amending? And if the China-Canada Investment Treaty has the same offensive loophole, is there no opportunity to snip it before passage?

  • June Pitcher

    Perhaps the reason that there are few comments is that the topic is so horrible that people have a hard time getting their heads around it. I believe what Elizabeth is telling me, but I’m stunned at the magnitude of it. I agree that we should be trying to amend NAFTA and should avoid any other of these agreements!

  • Jane

    Very disturbing and thank-you for your part in helping to protect us against any other trade agreements.

  • Mark O’Neill

    When are the citizens of the world going to charge these corporate leaders with crimes against humanity for blatantly putting profits from poisons ahead of human health?

  • Marilyn

    I am not surprised that the US has done this. And unfortunately, I am also not surprised at the response from the Canadian Government. Basically, the US designed the NAFTA Agreement to suit their needs only. But isn’t that what the majority of Canadians were saying when it was signed??

  • Patrick M.

    I’m a long way from being an insider,but I’ve been aware of these details for many years, starting with Ethyl Corp. My sources were CBC and other MSM at the time( which was before personal computers sat in every house)

    This disturbing info has been readily available to any one with eyes and ears.

    Blame yourselves for not paying attention!

    • Deborah Brady

      and what have you done about it sir?
      …. surely when you see children being beaten senseless you are compelled by decency to act
      … similarly, when you are aware of the toxicity, prevalence, and danger to us all, and aware of the misappropriation of legal process, are you not somehow compelled to act?

  • colandpet

    If the screwy results of NAFTA’s chapter 11 is any example then Canada should not sign a FIPA with anyone. Take Australia as an example of a country that has not signed a FIPA with China. It would appear that a FIPA is not necessary for successful trade with China!

  • Brianne Stremel

    Wow. Just…wow. I understand logically that stuff like this happens, and of course I’ve heard about it in the past (agreed to the person who mentioned not paying attention), but to read it in detail is sickening. Given the recent (BC) provincial election, my hope for Canada continues to sink. Our governments should indeed be charged with crimes against humanity, and not only that but be held accountable for the lies and whitewashing they use in their platforms.

  • George Sweeney

    NAFTA was the first international trade agreement. Canada-US trade across the border increased 10x or more. This began the move of industry away from Canada with loss of Canadian manufacturing jobs. The wealthy got wealthier and the poorer tended to lose income. For those with money, some products could be bought more cheaply. The nation tended more towards being hewers of wood and drawers of oil. Every international trade agreement diminishes sovereignty.

    • David

      Right you are, George.
      The problem is the nuances of language and discourse. When THEY say “better for Canada” they don’t mean better for Canadians, but better for large corporations, wealthy investors (top families) and some corporate executives. The middle class continues disappearing.

  • Donna W.

    Thank goodness the Green Party and Elizabeth May can face these issues, understand them and not go mad in the process. I feel increasingly helpless when faced with the short-sightedness and incompetence of governments in dealing with corporations’ power. Signing petitions isnt enough.

  • David

    What I conclude from this great information, and confirm in my conviccion from previous information, is that potentially we are dealing with the Criminal Element in the role of arbitrators. Under no circumstance an honest negotiator would allow such clause as Chapter 11. Unvetted, anonymous arbitrators are an ABERRATION of logical compromise.

  • Jrtokin

    Barry Appleton, Canadian lawyer for Ethyl Corp, said at the time, “It
    wouldn’t matter if a substance was liquid plutonium destined for a
    child’s breakfast cereal. If the government bans a product and a
    U.S.-based company loses profits, the company can claim damages under

    My concern is that, under NAFTA, companies ARE selling us inferior products and that potential for abuse is rampant (legal jargon manipulation aside), banned is banned, and there should be no loop-holes for any company to (1) sue for not being able to profit off banned and/or scientifically proven hazardous materials that are regulated or may become regulated (2) be able to trade in those things at a level that affects Canadians and their health (ie: plutonium in cereal as so crassly put by Appleton) (3) the audacity of our government to ALLOW this gross abuse and manipulation of the legal system by ensuring that Canadians, through their taxes, are paying for companies to keep polluting, keep poisoning and destroying the land we have to live on, with impunity or, even worse, paying them to do so under law-suits that say we’re depriving them of their profit?
    What about them depriving us of our lives, subjecting us to disease and illnesses and putting us citizens at risk for their profit?
    Where is the provision(s) to PROTECT us from profit-orientated business that blatantly ignores both science and the will of the people of this country? Where are the rights of Canadians here? To say a foreign company looking to exploit banned and controversial products has more right than a citizen of this country is ludicrous, and when/where does it stop?

    Who do we, as citizens, turn to? Our politicians? They were what got us into this position in the first place. The “official opposition”? Where are they in a stacked senate, a favor-owing GG to the PM office and a manipulated and (minority) majority-owned parliament that ignores direct questions or answers them with declarations that are irrelevant to the questions asked?

  • Armin Weber

    NAFTA, FIPA and CETA all have provisions which will reduce the sovereignty of democratically elected governments and increase the power, infallibility of international corporations. Our grandchildren and great grand children will reap what our governments are negotiating for short term gain and long term loss. Under Harper his populace base of support is completely unaware that Harper is giving away the sovereign independence of this nation. The second half of the 21st century will see social and environmental degeneration on a scale never seen in the history of man, the suffering and violence that will be driven by greed and survival impulses will make the suffering experienced by mankind in the first half of the 20th century look like child’s play.

  • Eddie Gardner

    We are living in a “corptocracy” now, the new world order. Governments are no longer governing, they are servants to corporate interests. The Liberal government under former Prime Minister Jean Chretien had to cave into Chapter 11 used by Ehyl Corporation, resulting in our taxes being used to pay a very high price for the loss of Canadian sovereignty. We need to ask Justin Trudeau and Mr. Muclair what they would do to either get out of NAFTA or have Chapter 11 of this trade agreement changed. The global economy depends upon finite fossil fuels and international trade agreements that take all risk away from corporations making profits, at great expense to tax payers and the environment. We need to be making this the biggest issue of the up coming 2015 election and forget about Trudeau’s position on drugs and the senate scandal. These are such petty small issues compared to what trade agreements pose to Canadian sovereignty, the environment and best the interests of Canadians. Time to wake up from our comforts and rock the boat!

  • GreenHearted

    There is one — just one — very slight silver lining in any of this. NAFTA’s Chapter 11 has given us a precedent of rights being granted to future generations. Because corporations are allowed to sue governments for lost *future* profits — which would have been destined for *future* shareholders — we have an example of legal and economic rights being given to future generations of humans (if we consider those who would invest in corporations like this “human”). See http://www.greenhearted.org/future-generations.html for more info on the need to grant rights today to those whose future we are stealing.

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