Ruling in Canada Strikes at Companies’ NAFTA Trade Suits

Companies may find it much tougher to seek damages from governments for alleged trade violations under the North American Free Trade Agreement, thanks to a little-noticed Canadian court decision this week.

The complex ruling in a case involving Newport Beach-based Metalclad Corp. may in effect blunt legal challenges by corporations to the three NAFTA governments’ power to implement and enforce health and safety regulations. In recent years, at least nine firms have filed multimillion-dollar damage claims accusing the United States, Canada and Mexico of trade-restrictive practices, many involving environmental restrictions.

Those include Methanex Corp.’s claim that it has incurred nearly $1 billion in losses because of California’s ban on the gasoline additive MTBE, and S.D. Myers’ $20-million challenge of a Canadian ban in the 1990s on the export of the chemical PCB. In 1998, Canada agreed to pay $13 million in damages and lift a ban on the import and inter-provincial trade of MMT, a gasoline additive, after it was hit with a $251-million NAFTA challenge by Virginia-based Ethyl Corp.

The growth of such lawsuits has boosted government worries that NAFTA was being abused by private companies seeking personal gain, and had created an attractive target for anti-globalization foes. Companies and investors, however, contend that the ruling will discourage private investment and company expansions in NAFTA countries.

Globalization critics argue that trade agreements give too much power to private companies and undermine the ability of governments to protect their citizens’ health and safety. They are fighting the expansion of NAFTA’s Chapter 11 provision, which gives corporations the ability to sue governments for trade violations, to the rest of the Western Hemisphere through the proposed Free Trade Area of the Americas.

Steven Shrybman, an Ottawa attorney who has filed a constitutional challenge of the Chapter 11 provision in Canada, said Wednesday’s ruling by the Supreme Court of British Columbia “should narrow the extent to which this particular rule is going to be used to open a Pandora’s box of all kinds of suits.” The Metalclad case, which involved a U.S. firm and the Mexican government, was heard in Canada because it was viewed as a neutral site.

In his 48-page ruling, British Columbia Justice David Tysoe supported a NAFTA trade tribunal’s finding in August that the Mexican government wrongly expropriated Metalclad’s hazardous waste facility in San Luis Potosi by refusing to issue a construction permit and declaring the site an ecological reserve. Local residents had opposed the project on environmental grounds.

However, Mexico won a major victory when the judge overturned several key sections of the tribunal’s decision, arguing that it had interpreted the rights of private investors under NAFTA too broadly.

NAFTA requires regulatory decisions to be transparent, and governments can sue each other if laws affecting foreign trade are not made in an open, public fashion. But Tysoe said those transparency obligations do not apply to private investment disputes under NAFTA. He reduced Metalclad’s damages award from $16.7 million to about $15 million.

Although pleased that his company emerged the financial victor in Wednesday’s decision, Metalclad President Grant Keseler said the ruling on the transparency issue was a Pyrrhic victory for Mexico, violated the spirit of NAFTA and would discourage foreign investors fearful of secretive and arbitrary government actions. The firm has not yet decided whether to appeal the decision to a higher court.

“This is an outrage from the standpoint of any intelligent interpretation of NAFTA,” he said.

Keseler, whose company once operated the largest waste collection operation in Mexico with sites in 11 states, said he has liquidated all his Mexican holdings and would not invest in that country until the legal protections for foreigners improve.

The Mexican government also is considering whether to appeal the Canadian court ruling, said Salvador Musalem, a spokesman for the Ministry of Economy in Mexico City. He said the government is pleased that the judge set limitations on the rights of private investors under NAFTA and hopes it will set a good precedent for future Chapter 11 cases.

“This ruling is a mixed ruling,” he said. “There are some benefits for Mexico, but we are also compelled to pay.”