NAFTA Chapter 11 Investor-to-State Dispute Resolution: A Shield to Be Embraced or a Sword to Be Feared?

I. INTRODUCTION When the North American Free Trade Agreement ("NAFTA" or "Agreement") celebrated its five-year anniversary in 1999, all of the trade statistics compiled at the time suggested that the NAFTA was an unparalleled success. For example, from 1994 to 1999, Canada's trade with the United States rose 80%, while its trade with Mexico doubled.1 By 1998, "the total three-way trade among Canada, Mexico, and the United States reached approximately $752 billion, with Canada-U.S. and Canada-Mexico trade accounting for $484 billion."2 Also, from 1993 to 1999, foreign direct investment in Canada rose 54% to $218 billion, of which about 68% came from NAFTA countries.3 Despite the glowing reviews about the increase in trade and investment among NAFTA countries, the Agreement has come under rising criticism, in particular for the Chapter 11 investor-to-state dispute resolution regime. In fact, Chapter 11 proceedings have resulted in broader interpretations and far wider applications of the statutory framework than many of the NAFTA's drafters envisioned.4 However, given NAFTA's lofty objectives and purposes, it is not surprising that Chapter 11 has been interpreted broadly.5 IMAGE FORMULA3 The strongest critics of Chapter 11 claim that the NAFTA countries have risked their national sovereignty and their ability to freely engage in democratic law-making processes without the fear of having to compensate foreign investors for every regulation that negatively affects them. These critics claim that Chapter 11 has become a "sword" for investors, allowing them to attack the NAFTA countries, rather than the "shield" it was intended to be. This Comment will show that the Chapter 11 dispute resolution regime is indeed a "shield" necessary to protect foreign investors, while at the same time containing the potential to become an offensive "sword" to be used against the NAFTA countries. This Comment will also recommend possible solutions and demonstrate that by making appropriate amendments to Chapter 11, foreign investors will still be afforded a viable forum in which to address grievances with their host nations, and the NAFTA countries will be able to better protect their vital interests. Part II reviews the historical background of Chapter 11 dispute resolution as well as its substantive and procedural structures. Part III considers key case studies forming the foundation of many of the various issues and points of contention among NAFTA's critics and proponents. Part IV specifically outlines some of the most contentious points regarding Chapter 11 dispute resolution and considers whether the most common criticisms of Chapter 11 are warranted. For the sake of brevity, this discussion focuses only on issues related to sovereignty, constitutional questions, statutory definitions and the environment. Part IV also recommends several ways to improve upon the Chapter 11 dispute resolution regime. Finally, Part V concludes that the Chapter 11 regime can be improved by providing more openness in the arbitral process, clearer statutory definitions, and improved procedural safeguards. IMAGE FORMULA5 II. FOUNDATIONS OF CHAPTER 11 INVESTOR-TO-STATE DISPUTE RESOLUTION A. Historical Underpinnings Throughout the eighteenth and nineteenth centuries, colonial powers usually resolved disputes in foreign investment matters by imposing their will upon their subjected colonies either by implied or actual force. This inequitable method of resolving foreign investment problems has been referred to as "gun-boat diplomacy."6 Surprisingly, it was not until the 1950s that the United Nations ("UN") Charter outlawed the use of force in settling foreign investment disputes.7 Prior to the enactment of the UN Charter, disputes were commonly waged between states because private investors lacked standing under international law. …