By Luke Eric Peterson
Victory for Foreign Affairs over Chemtura may scare Dow off.
The lawyers at the Department of Foreign Affairs and International Trade are not bragging about it—at least not to date—but they’ve just won an impressive victory in an $80 million-plus NAFTA lawsuit. Earlier this month, a panel of three arbitrators dismissed claims filed by the US chemical company Chemtura under Chapter 11 of the North American Free Trade Agreement.
Chemtura had sought to hold Canada liable for financial losses related to the government’s phase-out of lindane, a hazardous agricultural chemical. However, the company failed to persuade arbitrators that government regulators acted without regard for scientific evidence or due process.
In addition to kicking Chemtura’s claim to the curb, arbitrators also ordered the company to reimburse Canada for $3 million in legal costs and expenses.
While the feds will still be out of pocket for time devoted to defending the NAFTA lawsuit, the outcome is about as good as a government could hope for. In fact, the victory could signal a set-back for another NAFTA claim which has been looming in the shadows.
In early 2009, a subsidiary of the Dow Chemical Company set in motion a similar NAFTA Chapter 11 claim. As was first revealed in these pages, Dow wants Canadian taxpayers to compensate them for losses arising out of provincial bans on cosmetic lawn pesticides.
After filing its papers in 2009, Dow ostentatiously sat on its hands—perhaps to see how arbitrators chose to resolve the earlier-launched Chemtura case.
However, with arbitrators refusing to compensate Chemtura for the loss of its lindane business, Dow may now think twice before attempting to recoup its own pesticide sales losses.
One can never be sure in the topsy-turvy world of international arbitration, where arbitrators often disagree with each other—and are under no obligation to follow the lead of earlier arbitration tribunals.
Yet the big picture suggests that some of the more excessive claims filed under the controversial NAFTA Chapter 11 mechanism are being beaten back.
This is certainly a good thing.
The NAFTA and other international investment treaties grease the wheels of international commerce by providing protection in cases where governments expropriate or nationalize foreign-owned businesses, or subject them to other forms of egregious treatment.
However, few bargained for such treaties to be used in an effort to immunize foreign businesses from the financial impact of legitimate public health, safety or environmental regulation.
Readers may recall that alarms about NAFTA Chapter 11 were raised more than a decade ago when the Canadian government caved in to another US chemical producer, Ethyl Corp., and agreed to roll back its plans to crack down on the gasoline additive MMT.
But in the years since, both Canada and the United States have stiffened their resolve and decided that they will not be pushed around on the legal playing field.
Over the last decade, the two governments have taken a few lumps, but they have been broadly successful in beating back efforts by claimants seeking to force taxpayers to bear the cost of strengthened government regulation.
Mind you, it’s not all clear sailing for Canada.
The government may struggle to defend some of the dozen or more active NAFTA Chapter 11 cases pending at the moment. Indeed, where authorities have acted capriciously or in a discriminatory fashion against foreign investors, the government will still find itself on the wrong side of the NAFTA’s strictures.
For instance, it would have been tough for the feds to duck liability for the outright expropriation by the province of Newfoundland of timber and water rights owned by Abitibi-Bowater.
The government might have argued that Abitibi was entitled to less than full compensation for its assets due to the environmental mess allegedly created by the financially-stricken company’s closure of several pulp and paper operations.
No surprise then that as Embassy was on the verge of going to press, the government announced that it was settling the Abitibi claim for US$130 million, rather than permitting it to be arbitrated. As DFAIT lawyers know all too well: the rules of the global economy dictate that governments must pay when they seize foreign-owned property from its owners.
Nevertheless, the recent ruling in the Chemtura case may give pause to those considering copycat lawsuits. Slowly, but surely, international arbitrators are offering reassurances that NAFTA governments need not take out their chequebooks every time they introduce a new health or environmental regulation.
Luke Eric Peterson is the editor of InvestmentArbitrationReporter.com, an electronic news service dedicated to foreign investment and political risk disputes.