Trade & the Environment

Background

With little public debate and even less public understanding, the North American Free Trade Agreement, approved by Congress in 1994, ushered in a revolutionary change in the structure of U.S. legal institutions. NAFTA created a new and effective mechanisms for foreign investors from Canada or Mexico operating in the United States to sue the United States for money damages based on government actions that adversely affect the value of their investments. Chapter 11 of NAFTA permits foreign investors to sue for alleged expropriations, or for violations of international law standards of "fair and equitable treatment" and "national treatment; roughly speaking, these are the international-law equivalents to the Takings Clause, the Due Process Clause, and the Equal Protection Clause in the U.S. Constitution. While the United States had previously entered into investment agreements authorizing these types investor suits, most of those agreements were with lesser-developed countries with few investors in the United States. Other bilateral and regional trade agreements the U.S. has entered into following approval of NAFTA contain similar investor-protection provisions.

The investor-state litigation process raises both substantive and procedural issues. On the substantive side, the issue is whether and to what extent international law grants investors greater legal rights than domestic constitutional protections afford. The obvious concern is that it would be inequitable to grant foreign investors operating in the U.S. greater legal rights than U.S.. citizens and U.S. firms possess in their own country. The procedural issues arise from the fact that the Chapter 11process substitutes an arbitration model for a litigation model. The "judges" handling investor-state arbitrations are not judges in a conventional sense; they do not serve for any specific term, much less have lifetime appointments , like U.S. federal judges. In addition, investor-state arbitration decisions theoretically do not establish precedent, but it seems clear in practice that international investment decisions are contributing to a growing "body of law" on investor protection. The growth of this body of law raises in turn the challenging question of whether some type of appellate tribunal is necessary to lend coherence to this emerging body of law, and how such an international appellate tribunal might relate to the U.S. judicial system.


Top of Page