Ethyl Corp. sues Canada under NAFTA, illustrating what could happen later under OECD-MAI rules

GENEVA: As negotiators and delegates to the UN Conference on Trade and Development (UNCTAD) and the World Trade Organization (WTO) begin their consideration of "trade and investment" issues, the case filed by the US Ethyl Corporation against the Canadian government under the North American Free Trade Agreement (NAFTA) has aroused some serious concerns over investors' rights and their ability to bring international suits against governments.

According to a public policy briefing paper, published in the "Environmental News" about the $251 million lawsuit by Ethyl Corporation against the Canadian government, the Ethyl Corporation brought the suit against the Canadian government, using a provision in NAFTA that enables an investor to sue a government before an international tribunal, in this case, the NAFTA tribunal.

The OECD's proposed Multilateral Agreement on Investment (MAI) has provisions to enable an investor to sue a government in independent settlement mechanisms. If the moves for a WTO agreement also succeed, there are suggestions that the WTO dispute settlement system (which only enables governments to bring complaints) might need to be modified to enable private parties to use it.

Some Northern NGOs, at the WTO's Trade and Environment symposium in May, raised the question about governments pursuing at the WTO, the interests of their corporations, and thus distorting the multilateral system, and whether it would not be better to create a different machinery to enable any aggrieved corporation to pursue its case.

Ethyl brought the case against Canada for the ban imposed on use of an Ethyl product, MMT, as a gasoline additive, which was toxic and harmful to public health.

The case is viewed by NGOs as a test whether investor rights in agreements like NAFTA and MAI can be used to overturn environment regulations or other safeguards in national laws.

In early April, the Canadian Parliament acted to ban the import and inter-provincial transport of an Ethyl product, the gasoline additive MMT, which Canada considers to be a dangerous toxin.

Ethyl's lawsuit

Ethyl, the company that invented leaded gasoline (which is now being phased out or outlawed in many countries and communities for their toxic effects on public) responded on April 14 by filing a lawsuit against the Canadian government under NAFTA.

Ethyl claimed that the Canadian ban on MMT violated various provisions of NAFTA and sought restitution of $251 million to cover losses resulting from the "expropriation" of both its MMT production plant and its "good reputation."

MMT is a manganese-based compound that is added to gasoline to enhance octane and reduce engine "knocking." Canadian legislators are concerned that the manganese in MMT emissions poses a significant public health risk.

Automobile manufacturers have long argued that MMT damages emissions diagnostics and control equipment in cars, thus increasing fuel emissions in general. But their objections are more related to the fact that the car manufacturers have to bear the costs of repairing the car's pollution control systems caused by Ethyl, which is the only manufacturer of the MMT.

The US-based, Environmental Defense Fund (EDF), which tracks the use of MMT, reports that the additive is used only in Canada. The United States Environmental Protection Agency (EPA) has banned its use in the formulated gasoline, which includes approximately 1/3 of the US gasoline market. An EDF survey of the remaining producers reports that none use the additive. And the State of California has imposed a total ban on MMT.

Canadian legislators wanted to ban the use of MMT in order to protect the Canadian public health. But they could not do so under Canadian Environmental Protection Act (CEPA) provisions; so they chose the best available alternative: banning MMT's import and transport.

[The reason Canada could not act under CEPA was that adequate data on the health risks of long-term exposure to lower-level manganese emissions was not available, and Health Canada could not consider MMT a health risk under CEPA provisions. In addition, the fuel standards established in CEPA are not sufficiently broad to cover a ban on substances that may damage pollution control systems in cars, even if such damage leads to increased emissions. Canada's Minister of the Environment has been quoted in the briefing paper as saying that certain key provisions of CEPA are now being rewritten, and may allow a future ban on the use of MMT.]

NAFTA requires member countries to compensate investors when their property is "expropriated" or when governments take measures "tantamount to expropriation."

Ethyl claims that the MMT ban constitutes such an expropriation. The company argues that the ban will reduce the value of Ethyl's MMT manufacturing plant, hurt its future sales and harm its corporate reputation.

NAFTA's dispute resolution mechanism

The NGO briefing paper says the case will be an important test of how expropriation is to be defined in NAFTA and future agreements.

A key provision of NAFTA makes the lawsuit possible. Under NAFTA's investment chapter, for the first time in a multilateral trade or investment agreement, corporations are granted "private legal standing" or ability to sue governments directly and to seek monetary damages.

This "investor-to-state" dispute resolution mechanism diverges from dispute resolution systems in previous international economic agreements in two ways: first, previous agreements allow only national governments to bring suits; second, these agreements do not allow for monetary compensation. The most a government can do if it is successful in a suit is impose tariffs (retaliatory trade measures to compensate for trade losses) on the violating nation.

The Ethyl lawsuit is the third, and largest, under NAFTA's investor-to-state dispute mechanism.

According to an official at the International Centre for the Settlement of Investment Disputes (ICSID), the institution that arbitrates most of the world's investment complaints, the $251 million that Ethyl seeks is higher than any amount requested in an ICSID investor-to-state proceeding.

Issues of concern to policymakers

The Ethyl suit raises a host of issues that should be of concern to policymakers, particularly since the US is negotiating the expansion of NAFTA, as well as a new multilateral agreement on investment (MAI) that would apply NAFTA-like standards worldwide. The case could set a precedent where, under NAFTA and similar agreements, a government would have to compensate investors when it wishes to regulate them or their products for public health or environmental reasons.

If Ethyl wins its case, a precedent will be set whereby the legal right of corporations to be compensated when public health regulations affect a company's bottom line is given the same weight as the public's right not to be harmed by industrial toxins.

This could send the message to investors that seeking compensation from the public for the cost of complying with environmental regulations constitutes a legitimate business strategy.

Thus, in pacts like NAFTA, groups opposed to strong environmental regulation may find an effective mechanism for advancing the radical "takings" agenda for which they have not been able to build public or legislative support.

Effective limitations on the frequency and impact of lawsuits are removed when investors are granted the right to sue national governments on their own behalf.

When governments are the only entities that have legal standing to bring a case against a regulation or other law under an international agreement, political and diplomatic pressures reduce the likelihood that frivolous lawsuits will be initiated.

The investor-to-state dispute resolution clause in NAFTA (and in the proposed MAI) removes this limitation, allowing corporations and individual investors to sue directly and to seek monetary compensation.

The Ethyl suit is an example of this new dispute resolution mechanism in operation. If claims like Ethyl's are successful and proliferate, the costs to governments could be burdensome.

Under investor-to-state dispute resolution, corporations can request compensation for actual and future earnings losses, as well as for the cost of repairing their "tarnished images." Damage claims can therefore be very high, as in the Ethyl case. In addition, multiple investors can consolidate their suits, thereby multiplying a government's potential liability.

If such cases were to become commonplace, governments would have to give due consideration to the potential fiscal costs before passing needed regulations.

The threat of lawsuits

The threat of suits like Ethyl's could be used to pressure lawmakers who are considering new regulations. Ethyl submitted an intent to file suit six months before the MMT ban was passed in the Canadian legislature.

Ethyl hoped that the threat of a lawsuit would deter policymakers from passing the bill. While Ethyl failed in this instance, the ability of investors to use their private legal standing to credibly threaten major suits could lead to successful efforts in the future to intervene in the democratic decision-making process and alter the outcome of legislative debate.

Ethyl also claims that the legislative debate itself constituted an expropriation of its assets because public criticism of MMT damaged the company's reputation. Thus, Ethyl is using NAFTA to file what is, in effect, a SLAP-suit against the Canadian Parliament.

Far from worrying about the implications of such actions, US trade officials have argued that the ability of investors to use legal threats to influence legislative debates is a healthy innovation that will prevent governments from passing laws that violate international agreements.

In cases like Ethyl's, international panels, not domestic courts, will have ultimate legal authority. No Canadian court will rule on whether the MMT ban violated NAFTA. Under NAFTA, Ethyl can pursue its case before an international tribunal where the proceedings are conducted in secret, the records are not publicly accessible and the decision is legally binding.

The panel will be comprised of one person chosen by Ethyl, one by the Canadian government, and the third jointly by the first two appointees. If it loses, the Canadian government will have no recourse to appeal in domestic courts. Claims that go to international arbitration are often expedited; lawyers for Ethyl predict that the case will be settled by the end of the year.

The Ethyl case suggests that critics of NAFTA and GATT/WTO may have been correct in arguing that these agreements could pose a threat to national sovereignty.

The likelihood that NAFTA, and other agreements like it, could restrict the ability of democratically elected governments to legislate on such matters as public health and safety and environmental protection was down-played by many advocates of the agreement.

Yet the Ethyl case suggests that critics' concerns were not misplaced.

Indeed, as Ethyl's attorneys recently argued: "The potential for lawsuits under this [investor-to state dispute resolution] process is far-reaching since it could be used by more than 350 million individuals and corporations throughout the NAFTA countries."

Under the proposed MAI, which will cover investment rights of investors in 29 of the world's industrial countries in the OECD, the numbers would of course be higher. (TWE No. 163, 16-30 June 1997)