Contract without Privity: Sovereign Offer and Investor Acceptance

In the case of an investment dispute, Chapter 11 of the North American Free Trade Agreement ("NAFTA") permits investors from one NAFTA Party to submit to arbitration a claim against the sovereign government of another NAFTA Party. This type of arrangement in which a sovereign entity sets forth terms to which any potential claimant must accede in order for an agreement to be made is sometimes termed "arbitration without privity." Yet despite a lack of privity in negotiating the agreement, the parties to an arbitration still have an "arbitral contract." Chapter 11 is best viewed as a NAFTA Party's unilateral offer to arbitrate a specified set of claims (Section A) according to specified procedures (Section B). Arbitral tribunals will best serve NAFTA Parties and their investors by strictly adhering to the requirements set forth in Chapter 11. Claimants frequently argue that enforcing the Chapter's terms literally is contrary to NAFTA's goal of investment expansion. Closer examination, however, reveals not only that such strict construction of the terms is required by international law, but also that such a construction would be more likely to achieve the goal of 11 increas(ing] substantially investment opportunities in the territories of the Parties."' First, the NAFTA Parties waived their sovereign immunity from suit on the conditions set forth in Chapter 11. NAFTA was the product of extensive negotiation among the three Parties; arbitral tribunals lack the authority to rewrite that agreement by modifying the Chapter's terms. Effectively, investors may not counter-offer but must accept the terms set forth by the State Parties. Second, the Chapter's guidelines ease and facilitate investment by being clearly workable and predictable for all interested parties. Enhancing investors' ability to recover for breaches of Chapter 11 is often treated as the unwritten subtext of the goals set forth in Article 102 of Chapter One. For example, the tribunal in Metalclad Corp v United Mexican States cited Article 102 as the source for an "underlying" objective of NAFTA "to promote and increase crossborder investment opportunities and ensure the successful implementation of investment initiatives."3 The italicized language is not in Article 102, and in fact, it is nowhere in NAFTA. Though it is possible to read the Preamble's exhortation to "ensure a predictable commercial framework for business planning and investment," in conjunction with the language that is in Article 102, to bolster what might be termed a "pro-investor" conclusion, this requires, as shown above, importing nonexistent language in the agreement. Accordingly, a more reasonable construction is that Chapter 11 is but one part of an overarching agreement that, as a whole, has helped to increase investment opportunities in the territories of the State Parties. Chapter 11's mere existence may allay the fears of some investors wary of relying on whatever redress is available in a foreign land. Furthermore, the predictable framework referred to by the Preamble should benefit both State Parties and NAFTA investors. An important additional consideration, however, is that the Parties did not agree to unfettered liability for investors' setbacks. As the tribunal noted in Azinian v United Mexican States,It is a fact of life everywhere that individuals may be disappointed in their dealings with public authorities. . . . NAFTA was not intended to provide foreign investors with blanket protection from this kind of disappointment, and nothing in its terms so provides."'5 Furthermore, each of the State Parties wore two hats when negotiating NAFTA. They negotiated the terms not only as potential defendants in Chapter 11 cases but also as representatives for their nationals who would be claimants in those cases against other State Parties. This construction reveals an inherent tension; investors may always want more access than State Parties are willing to provide in their notorious reluctance to give up their sovereign immunity. …