NAFTA - Chapter 11 - Investment

Municipalities and NAFTA Chapter 11

Frequently Asked Questions

The following questions and answers have been prepared to respond to questions that municipalities have raised regarding the Investment Chapter (Chapter 11) of the North American Free Trade Agreement (NAFTA). We welcome your views; information on how to contact Canadian government officials is provided at the end of this document.

What is NAFTA Chapter 11?

Chapter 11 is the investment component of the North American Free Trade Agreement. It establishes a framework of rules and disciplines that provides investors from the NAFTA countries with a predictable rules-based investment climate, as well as dispute settlement procedures which are designed to provide timely recourse to an impartial tribunal.

The dispute settlement mechanism of Chapter 11 is intended to address alleged violations of the NAFTA. There have been only 4 arbitration cases involving Canada since the Agreement came into force in 1994. This number is small compared to the hundreds of billions of dollars of foreign investment that Canada has attracted from our NAFTA partners and the number of laws and regulations enacted by every level of government in Canada, the U.S. and Mexico over the past 8 years.

Chapter 11 does not restrict the normal activities of municipal governments. However, it is important that municipalities are aware of these rules. The obligations on investment ask that companies in all three countries be treated fairly and be treated equally, except to the extent that the Parties have made reservations and exceptions. This is no more than any reasonable municipal council normally does for any company in its jurisdiction.

Does Chapter 11 inhibit a municipality's ability to regulate in areas within their jurisdiction?

No. Chapter 11 does not enable companies to force national, provincial, territorial or municipal governments to lower non-discriminatory regulatory standards, including environmental standards. Nor does it prevent any level of government from legislating and regulating in the public interest.

How does Chapter 11 benefit our communities?

Foreign investors in Canada already enjoy a long tradition of regulatory fairness and the strong legal protections available in Canadian law. Canada's commitment to NAFTA Chapter 11 reassures investors, in an era of increased competition for foreign investment, that Canada offers a fair, secure and predictable environment.

Foreign investment leads to Canadian economic growth and Canadian jobs. An Industry Canada study found that on average each $1 billion increase in new inward investment to Canada can generate over 45,000 jobs and adds $4.5 billion to Canada's GDP.

Chapter 11 rules ensure that Canadian investors, companies in your communities, are treated fairly and have an equal chance to compete for business in the U.S. and Mexico. It's a fact that investment abroad is followed by exports. A study by the Organization for Economic Co-operation and Development found that, on average, every $1 of outgoing investment is followed by $2 of exports, which leads to more jobs and economic development in communities across Canada.

In 2000, firms from the U.S. and Mexico held $186 billion of investment in Canada. In the same year Canadian companies held $157 billion of investments in the U.S. and Mexico.

A clear set of rules for conducting international business is one of the key reasons for the NAFTA's success. Trade and investment rules that are clearly understood and mutually agreed upon protect the flow of trade and investment capital, for everyone's benefit.

How will NAFTA Chapter 11 affect municipalities ability to use public-private partnerships for government procurement?

Private-public partnerships where governments contract for goods or services are government procurement.

Certain provisions of Chapter 11 (Article 1102/National Treatment and Article 1106/ Performance Requirements) do not apply to government procurement. This means that all levels of Canadian government are not required to accord foreign investors national treatment in procurement nor are they prevented from requesting local preference requirements in the procurement of goods or services through a public-private partnership.

Contracts establishing a public-private partnership would normally specify the operational requirements and standards to be met by the contractor, including provision for termination. The NAFTA does not extend to protect investors from mere claims of breach of contract. For greater certainty, municipalities should seek competent and informed legal advice in to order address any questions concerning contracts with NAFTA investors.

It should also be noted that government procurement of goods and services by Canadian provinces and territories, regional governments and municipalities is not covered by or subject to international trade agreements.

What rights do companies actually have under the NAFTA Chapter 11?

NAFTA Chapter 11 obligations to the other two countries which are signatories of the Agreement include non-discriminatory treatment of their investors and their investments, compensation for expropriation, and transfer provisions that explicitly permit the transfer of profits, dividends and the proceeds when liquidating an investment.

Canada's exemptions from Chapter 11 obligations include foreign ownership restrictions on sensitive sectors in the Canadian economy, such as transportation, telecommunications, social services and cultural industries.

Chapter 11 protects NAFTA investors by prohibiting any expropriation or nationalization of their investment except for a public purpose, on a non-discriminatory basis, and in accordance with due process of law. It's important to note that Chapter 11 does not allow companies to sue successfully simply for diminished profits.

For example:

• A municipal government has the right to prohibit the establishment of a chemical plant within it's city limits. However, if only the establishment of a U.S. or Mexican owned chemical plant is prohibited, for no other reason than nationality, but that of a Canadian plant, in like circumstances, is approved, then the restriction would breach Chapter 11 non-discrimination (national treatment) obligations. If the establishment of a Mexican plant is prohibited, for no other reason than nationality, but that of an Australian plant, in like circumstances, is approved, the decision would breach the Chapter 11 most-favoured-nation treatment obligation.
• If a municipal government expropriates a small convenience store to make way for a school, Canadian law would require that the municipality pay reasonable compensation to the owner. NAFTA Chapter 11 also ensures reasonable compensation for expropriation of the investments of NAFTA investors in the free trade area.

Should municipalities worry about becoming the target of a NAFTA Chapter 11 foreign investor claim?

NAFTA Chapter 11 rules ask that companies be treated fairly and equally. Canadian municipalities already operate in this manner. The people working for firms in your jurisdiction - your constituents - expect that their employers will be treated fairly by their municipal regulators. They expect their firm to have an equal chance to compete for business, and to be treated like all other businesses.

In Canada, companies have long had the right to sue governments in domestic law. What the NAFTA does is set out an agreed procedure that is common to all three NAFTA Partners to ensure that investors from NAFTA countries are treated in accordance with international law.

The obligations under the NAFTA are assumed by the federal governments of Canada, the U.S. and Mexico. Therefore, these governments would be respondent in any dispute arising from alleged breaches of the Agreement. In such circumstances, the federal government would work closely with the relevant provincial, territorial or municipal officials.

NAFTA investor claims involve matters of broad public interest that may have an impact on our communities, environment and society. What safeguards are there to protect municipalities?

Clearly, the advantages of investing in Canada and protecting Canadian investors rights abroad have not been gained by compromising our overriding economic and social values. Foreign investors are subject to the same laws and regulations as Canadian investors are, including those aimed at protecting the environment and ensuring high labour standards.

As a Party to the Agreement, Canada has always taken the position that, before NAFTA tribunals, Canada represents not only the federal government but also affected provincial and municipal governments.

Initiating a Chapter 11 dispute settlement process is not something that is taken lightly. All of the procedural requirements must be met, the claimant may incur considerable expenses and, if the case is found to be without merit, may be required to cover the responding Government's costs of litigation.

What does the recent NAFTA Chapter 11 Metalclad v. Mexico decision mean to municipality's ability to implement zoning by-laws?

Neither the Tribunal Award nor the B.C. Supreme Court statutory review in Metalclad v. Mexico call into question the right of a local government to regulate on environmental and public health grounds.

The decision of the Tribunal in Metalclad found that changes to the rules by the state government, after Metalclad had been led to believe that it had all necessary authorisations and had invested a substantial amount in its operation, were tantamount to expropriation. That is not the same as denying the right of governments to regulate.

It should also be noted that each NAFTA Chapter 11 case is very fact specific and does not set a binding precedent for future cases. One should not draw general conclusions based on the outcome of a particular case.

The B.C. Supreme Court's decision on the Metalclad v. Mexico case can be found on: ARCHIVED - The United Mexican States v. Metalclad (PDF Document - 1.76 MB)

Isn't Canada out to change or get rid of Chapter 11?

No. Canada recognizes that some issues of concern regarding the interpretation of certain provisions have arisen in the course of the litigation of NAFTA Chapter 11 cases. As a result, we are working with our NAFTA partners on clarifying these provisions to reflect the original intent of the drafters.

As part of this process, during the July 31, 2001 meeting of the NAFTA Commission, NAFTA Ministers adopted interpretations in order to clarify and reaffirm the meaning of certain Chapter 11 provisions, in particular those concerning 'access to documents' and 'minimum standard of treatment'. Ministers also directed trade officials to continue their work examining the implementation and operation of Chapter 11, including developing recommendations as appropriate. Detailed information can be found on: NAFTA-Interpr

There are existing mechanisms built into the NAFTA to allow for this type of clarification without re-opening the agreement. This is an important priority for Canada, particularly with regard to increased transparency of the investor-state dispute settlement process.

Where can I find more information on NAFTA Chapter 11?

Further information on NAFTA Chapter 11 can be obtained through the Department of Foreign Affairs and International Trade web site or via the following address and facsimile number:

Investment Trade Policy Division (TBI)
Department of Foreign Affairs and International Trade
125 Sussex Drive
Ottawa, Ontario K1A 0G2
Fax: (613) 944-0679