North American Free Trade Agreement

One of the more controversial provisions in NAFTA (Chapter 11) involves the "investor-to-state" dispute resolution process. This provision provides a vehicle and a forum for corporations and other companies to sue governments directly for what is called "regulatory expropriation", which is similar to EMINENT DOMAIN under domestic law. A company may allege regulatory EXPROPRIATION in such instances as the actual taking of property by a country through condemnation, or constructive taking by way of laws or regulations that negatively affect the commercial value of a property. In order for a company to bring suit under this provision, it need only show that it is an "investor party."

In Metalclad Corp. v. Mexico, a special NAFTA dispute resolutions panel awarded U.S. corporation Metalclad $16.7 million in damages under this provision. In response, Mexico filed an appeal. The decision was then reviewed by a neutral Canadian court, the Supreme Court of the Province of British Columbia, which upheld the decision, but slightly reduced the damages to $15 million. Both parties withdrew their appeals in 2001.

Metalclad, a U.S. waste-disposal company, requested the creation of the special NAFTA tribunal in 1997, after a local Mexican government condemned property that Metalclad owned. The property in question was a closed toxic-waste dumping site, which Metalclad had purchased, and which the company intended to clean up and reopen. After it purchased the site, Metalclad successfully secured permits for the $20 million project from Mexican federal authorities, including federal environmental agencies, but it had not coordinated with local authorities. Local and state authorities refused to issue permits to Metalclad, claiming that the site was part of a 600,000-acre protected environmental reserve.

Metalclad complained to NAFTA officials, charging that the Mexican government's actions constituted expropriation. Mexico countered that Metalclad had started construction without waiting for all levels of approval. In particular, what angered Mexican authorities was that Metalclad had bypassed local jurisdictional forums and gone directly to NAFTA, claiming $90 million in damages and lost profits. The Canadian court that reviewed the appeal found that the original NAFTA panel, meeting behind closed doors in Washington, had interpreted the NAFTA Chapter 11 investor protection clause too broadly. It disagreed with the panel's decision that federal, state, and local governments in Mexico had issued a series of contradictory declarations to Metalclad, which violated NAFTA's guarantee of clear and transparent rules to protect investors.

By 2001, at least nine companies had invoked NAFTA's investor protection clause to file multimillion-dollar damage claims against the three member countries of NAFTA. Many of them alleged trade-restrictive practices involving environmental regulations. Canada's Methanex Corporation filed a claim against the state of California, charging that the state's ban on the gasoline additive MTBE resulted in company losses of more than $1 billion. Conversely, the U.S.-based Ethyl Corporation was reimbursed $13 million in damages for Canada's restrictions on the importation of the gasoline additive MMT. Another U.S. company, S. D. Myers, sought $20 million in damages against Canada for its ban on importing PCB chemicals.