Resolving Disputes

The liberalization of trade in North America in the last 20 years has given rise to some trade disputes with the birth of a North American Economic Zone. The intensity of North American trade and the deregulation of certain industrial sectors have created a significant volume of disputes.

NAFTA is equipped with a trade dispute settlement mechanism. The agreement also establishes an arbitration panel authorizing private businesses to sue governments where NAFTA protected rights are alleged to have been violated. This provision enacted in Chapter 11 of the agreement has been invoked on several occasions against Canada and Mexico and more recently against the United States. It has given rise to several protests.

The United States, Canada and Mexico have opted for the establishment of a Free Trade Commision rather than a permanent supranational organ. The Commission brings together the Trade Ministers of the three countries on a regular basis. The Ministers are backed by NAFTA Secretariats based in each country. Depending on the type of dispute, the Commission negotiates a satisfactory compromise for the parties pursuant to the dispute settlement mechanisms entrenched in the Agreement.

To settle trade disputes in the matter of antidumping and countervailing duties, the NAFTA parties have set up special arbitral panels. This complex system is based on the principle that each country keeps its own trade dispute remedy laws.

Towards an North American Economic Zone

In the 1980s, the smallness of domestic markets restricted the international competitive advantage of large businesses. In a context of rapid technological change, businesses had neither the venture capital nor the infrastructures required for research and developement activities. Transnational production and innovation agreements made possible by the opening of markets and the deregulation of certain industrial sectors mushroomed in North America. A North American Economic Zone interlinked with global markets, was progressively set up. The creation of dispute settlement rules and mechanisms in the matter of trade, investments and property has become a necessity.

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Chapter 11 - On Investments

The greatest number of disputes – 76 cases between 1994 and 2000 – were dealt with under Chapter 19 (antidumping and countervailing duties). However, it is the provisions of Chapter 11 (investments) which have been the subject of various controversies regarding their scope and interpretation. None of the parties had forseen how Chapter 11 would be used in NAFTA countries, usage dealing not with expropriation cases but with public standards considered discriminatory.

Following are the main disputes arising from Chapter 11 of NAFTA :

• Ethyl Corp. filed a $US 250 million lawsuit against the government of Canada following the adoption of bill C-29 banning interprovincial import and transport of MMT considered by Canada as a dangerous toxin.


• MMT is a magnesium-based chemical compound that is added to gasoline to enhance octane and reduce engine knocking. An out-of-court settlement was reached following the withdrawal of the bill in July 1998.


• S.D. Myers Inc. contested the 1995 law banning Canadian exports of PCBs to the US and the bill had to be withdrawn. The complainant asked for $US 20 million as financial compensation for the injury it suffered during the period the law was in force (1995-1997).


• Sun Belt Inc., California, wanted $US 468 million because British Columbia withdrew its Water export licence.


• Pope & Talbot also wanted compensation for failing to obtain wood export quotas pursuant to the Canada-US Agreement on softwood lumber. A decision was handed down on April 10th 2001, but the amount of compensation to be paid has not yet been determined.


• United Parcel Service Inc. (UPS) has also expressed its intention to file a $CAN 230 million lawsuit against the Canadian government alleging discriminatory treatment by Canada Post which owns 96% of Purolator.


• Loewen Group Inc., a Canadian funeral services company wanted $US 500 million from the US government following a court decision handed out in 1995 by the Mississipi State courts which found in favour of a local business. Loewen considers that the jurisdiction of the State of Mississipi and the jury system were prejudicial to its interests.


• Methanex Corp. of Vancouver filed a $US 970 million lawsuit following the adoption of a California regulation banning methanol use in gasoline.


• The Montreal firm Mondev International Ltd. also filed a multimillion dollar lawsuit because the Municipal authorities of Boston rejected its application for the licence required to increase the size of its shopping center.


• The Groupe ADF, a Terrebonne firm specializing in the engineering, manufacture and assembly of metallic structures informed the US government in June 2000 that it will file a significant claim against it following the completion in Virginia of road, rail and waterways work financed by the Federal Highway Administration.

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Types of disputes and the mechanisms entrenched in NAFTA

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Resolving Trade Disputes

Where a trade dispute arises between the parties and cannot be resolved amicably through consultation, the dispute must be settled pursuant to certain previously established rules. In the absence of dispute settlement mechanisms, dispute settlement may be long and costly. The solutions reached are often temporary. Dispute settlement mechanisms help to manage trade problems and to reduce the politization of trade disputes.

The government of Canada considers that the NAFTA dispute settlement mechanisms have been used in an abusive manner and has called for the review of Chapter 11 on investments. The number of trade disputes opposing Canada and its American partner is however minimal considering the great volume of disputes that arose prior to the coming into force of the FTA and NAFTA. Still, there are some persistent disputes, notably relating to soft wood lumber, steel, pork, wheat, sugar and other commodities, petition (at times of a multilateral nature), sometimes a multilateral one, filed with the World Trade Organization (WTO) as was the case with the Helms-Burton Act and the recent Byrd amendment.

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Special Arbitral Panels

Special Arbitral Panels set up to resolve disputes opposing two or three parties are made up of five members selected normally from a roster drawn up by each party. The members are nominated by consensus for a renewable three year term.

The roster members drawn up by the parties have a deep knowledge of or reasonable experience with law, international trade, the other aspects of NAFTA or the settlement of disputes arising from international agreements. These people are selected for their neutrality and must be independent of each party, must not have ties with any party nor receive instructions from a party. Furthermore, an expert may not be a member of a special panel hearing a dispute of which the person had been part.

The members of the Special Arbitral Panel must abide by the Commission Code of Conduct.

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Possible Review of Chapter 11

The Canadian government (the target of five complaints) considers that the investors of the other parties are currently abusing the Chapter 11 dispute settlement mechanism. Canada asked for a review of the working and implementation of Chapter 11 at the last meeting of the Free Trade Commission held at Puerto Vallarta, Mexico, May 2002. A panel of experts will file a report with recommendations at a minimum from now till the next meeting of Deputy Trade Ministers in Fall 2002. The chances that the Canadian initiative will succeed are limited by the fact that the Mexican government wants to maintain the current provisions of Chapter 11. Two recent decisions of the Arbitral Panel appear to support the Mexican position. In one case (USA Waste Management), the Arbitral Panel rejected the investor’s complaint; in the other case (Metalclad), the amount claimed by the US complainant was considerably reduced.

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