Chapter 11 and CAFTA

As the US Congress prepares to debate CAFTA, this is another of my occasional posts on the provisions of the treaty.

One provision of CAFTA which gets little mention is its investor protection sections. These provisions give foreign investors the right to sue the governments of CAFTA countries if government action threatens the investor's ability to make a return on its money. Such suits are brought in international arbitration tribunals, not subject to the jurisdiction of national courts.

This provision in CAFTA is based on a parallel provision in NAFTA. Public Citizen has now published an extensive summary of cases brought under Chapter 11 of NAFTA. The study finds that Chapter 11 has provided a significant tool for multinational corporations fighting government action.

To date, foreign investors have been granted monetary compensation in five cases and in six cases, investors’ claims have been rejected. Although the number of concluded cases is small it is notable that already $35 million has been awarded to foreign investors by NAFTA tribunals or governments as part of a settlement agreement – often over claims that would not have been allowed under domestic law or in domestic courts. Another $28 billion has been claimed by NAFTA investors.

In addition, the U.S. government has spent millions in legal fees fighting foreign investors’ claims under NAFTA. Our findings demonstrate that NAFTA’s model of extensive foreign investor privileges and their private enforcement outside of the domestic court system should not be replicated in future agreements. Over the past several years, as news of some of the more controversial cases has hit the papers, members of Congress, state Supreme Court chief justices, state attorneys general, mayors, other state and local officials and taxpayers have raised an array of serious concerns about the legitimacy of private dispute resolution for matters of public concern.

The course under Chapter 11 raises doubts of the wisdom of extending its scheme under CAFTA.

For certain developing nations, the purported public policy concern is the readiness of the domestic judiciary to promptly and fairly adjudicate property rights. However, if developed nations truly have an interest in spreading the rule of law around the globe, some would argue that the best way to achieve this would be to assist nations in the establishment of functioning political and judicial institutions – not by locking them into a set of specialized investor protections adjudicated by tribunals that do not provide basic due process protection and that serve only a very narrow set of interests. Indeed, the creation of such a specialized investor model may remove the incentive of developed nations to give aid to further the development of judicial institutions. Certainly for the United States, the costs of maintaining a parallel “court” system that exposes U.S. federal, state and local governments to enormous liability as well as double jeopardy on litigated cases and threatens basic government functions and public interest safeguards on which we all rely clearly outweigh whatever benefits the investor-state system might provide some specific investor operating overseas.

CAFTA nations appear to be getting an even worse bargain. There is no evidence that greater FDI flows will follow the application of these extreme investor rules. Plus, the risk of a multimillion-dollar damage award and the cost of simply defending these suits is even more burdensome to nations with smaller economies.