Arbitration with Two Twists: Loewen V. United States and Free Trade Commission Intervention in Nafta Chapter 11 Disputes

ARBITRATION WITH TWO TWISTS: LOEWEN V. UNITED STATES AND FREE TRADE COMMISSION INTERVENTION IN NAFTA CHAPTER 11 DISPUTES STEFAN MATIATION* 1. INTRODUCTION O'Keefe v. Loewen Group, Inc.,' the Mississippi jury trial that re- sulted in a $500 million damage award against a Vancouver-based funeral home company, could well be the inspiration for a movie like South Park,2 the American adult cartoon film that is filled with many quirky references to Canada. One can imagine a satirical scenario depicting the arrival of a wealthy Canadian funeral home consolidator in a small town in Mississippi to take over a local funeral home operation and add it to its expanding "death industry" empire. The locals fight back, meting out local justice in the court- room, causing the Canadian consolidator to scurry northward, his reputation and business in tatters. The episode closes with the cheery chanting of "Blame Canada," the theme song from the South Park movie. In this case, however, the story is neither satire, nor has it reached its conclusion. The Loewen Group Inc. ("Loewen"), with the doors of Mississippi justice firmly closed behind it, has made its case again, thanks to the North American Free Trade Agreement ("NAFTA").3 This time, Loewen did so before three arbitrators appointed pursuant to NAFTA Chapter 11 in a claim in which the United States is the respondent. Not unexpectedly, Loewen v. * B.A. University of Manitoba, 1992; LL.B. University of Toronto, 1995; LL.M. Columbia University, 2002. The Article was first prepared in partial fulfillment of the course requirements for the Author's Master of Laws program. I0'Keefe v. Loewen Group, Inc., No. 91-67-423 (Miss. Circ. Ct. 1st Jud. Dist., Hinds County 1995). 2 SOUTH PARK: BIGGER, LONGER AND UNCUT (Paramount Pictures 1999). 3 North American Free Trade Agreement, Dec. 17, 1992, 32 I.L.M. 289, 289- 605 (1993) [hereinafter NAFTA]. Published by Penn Law: Legal Scholarship Repository, 2014 U. Pa. J. Int'l Econ. L. [24:2 United States4 ("the Loewen Claim") has become one of a handful of NAFTA investor claims derided by opponents of NAFTA and of its intended successor, the proposed Free Trade Agreement of the Americas ("FTAA").5 Loewen's central allegation is that the Mississippi proceedings amount to a denial of procedural and substantive justice contrary to the minimum standard of treatment under NAFTA and international law. A decision respecting the issue of denial of justice in Loewen was expected in Spring 2002. The matter was delayed, however, when the United States filed a submission dated March 1, 2002, arguing that Loewen cannot continue its Chapter 11 claim because it was taken over by an American company.6 A NAFTA Chapter 11 claim only permits an investor of one NAFTA Party to bring a claim against another NAFTA Party.7 An American investor cannot avail himself of Chapter 11 to seek redress against the U.S. government. A decision respecting this jurisdictional issue is expected at any time. Although the issue of denial of justice in Loewen will be moot if the arbitration panel concludes that the company is no longer "an investor of another party,"8 the claim still provides a useful entry 4 NAFTA Arbitration: Loewen Group, Inc. v. United States, ICSID Case No. ARB[AF]/98/3 [hereinafter Loewen Group, Inc.]. The final award has not been issued in this case. However, all of the parties' submissions are available at http://www.state.gov/s/l/c3755.htm (last visited May 2, 2003). 5 For the draft of FTAA, see THE CANADIAN DEPARTMENT OF FOREIGN AFFAIRS AND INTERNATIONAL TRADE, FREE TRADE AREA OF THE AMERICAS (commenting on various provisions being considered and discussing the Department's position with respect to those provisions), available at http://www.dfait-maeci.gc.ca/tna- nac/ftaa-neg-en.asp (last visited May 2, 2003). 6 For progress of Loewen Group, Inc. v. United States, see Memorial of the United States on Matters of Jurisdiction and Competence, Loewen Group, Inc. v. United States (Mar. 1, 2002), at http://www.state.gov/documents/organization/ 8744.pdf; Counter-Memorial of the Loewen Group, Inc. on Matters of Jurisdiction and Competence, Loewen Group, Inc. v. United States (Mar. 29, 2002), at http://www.state.gov/documents/organization/9360.pdf; Reply of the United States to the Counter-Memorial, Loewen Group, Inc. v. United States (Apr. 26, 2002), at http://www.state.gov/documents/organization/9947.pdf; Rejoinder of the Loewen Group, Inc., Loewen Group, Inc. v. United States (May 24, 2002), at http://www.state.gov/documents/organization/10611.pdf. 7 NAFTA Chapter 11 applies to measures adopted or maintained by a party (i.e., Canada, the United States, or Mexico) relating to: (a) investors of another party; and (b) investments made by investors of another party in the territory of the party. See NAFTA, supra note 3, art. 1101(1). 8 Id. https://scholarship.law.upenn.edu/jil/vol24/iss2/3 2003] ARBITRATION WITH TWO TWISTS point for a discussion of the minimum standard of treatment in NAFTA and the role of the NAFTA Free Trade Commission. The arbitrators have been asked to determine what constitutes denial of justice under NAFTA, and whether the Mississippi proceedings failed to live up to the requisite standard. The United States has generally been an advocate for a high minimum standard of treatment in proceedings in which it has pursued international claims on behalf of its nationals and in negotiations respecting investment agreements. In this case, however, it seeks the application of a lower standard. The U.S. position is that it is difficult for claimants to successfully meet the requirements for such claims and that denial of justice should give rise to remedies only in extreme circum- stances.9 On July 31, 2001, the NAFTA Free Trade Commission, which is composed of the trade ministers for each of the NAFTA Parties, issued its first interpretation of NAFTA provisions pursuant to Arti- cle 1131(2).10 By issuing this interpretation part way through the proceedings, the NAFTA Parties may have undercut one founda- tion for Loewen's argument. Ironically, in light of the central issue in Loewen, it has been suggested that the Commission's action is it- self contrary to principles of fairmess and justice. This Article is not intended to determine whether or not the Loewen Claim should succeed (regardless of the outcome of the jurisdictional issue). Instead, it uses the Loewen Claim as a basis from which to discuss the Commission interpretation of July 31, 2001 and the minimum standard established by NAFTA Chapter 11 for the treatment of NAFTA Party investors, along with some implica- tions arising from these matters. Although the Loewen Claim is used as a point of entry for this discussion, many of the issues addressed below have broad impli- cations. The minimum standard of treatment has been called the alpha and omega of investor-to-State arbitration under Chapter 11 of NAFTA, with every award rendered against a NAFTA Party to 9 See Counter-Memorial of the United States, Loewen Group, Inc. v. United States (Mar. 30, 2001), at 130-31 [hereinafter U.S. Counter-Memorial] (discussing the difficulties in making a denial of justice claim in international law), availableat http://www.state.gov/documents/organization/7387.pdf. 10 See NAFTA Free Trade Commission, Notes of Interpretationof Certain Chap- ter 11 Provisions(July 31, 2001) [hereinafter Commission Interpretationon Chapter 11], available at http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-Interpr-e.asp. Published by Penn Law: Legal Scholarship Repository, 2014 U. Pa.J. Int'l Econ. L. [24:2 date resting at least in part on a failure to uphold it." As set out in NAFTA Chapter 11, the standard poses vexing challenges to its in- terpreters. Despite its recent intervention, the Commission may not have markedly reduced this feature. The manner in which the Commission interpretation is applied by the arbitrators in Loewen and in other pending cases may have an impact on the future of NAFTA. Further, States involved in FTAA negotiations or that have entered into bilateral investment treaties ("BITs") with the United States, on which Chapter 11 is largely based, have an inter- est in reviewing the U.S. arguments in Loewen respecting the minimum standard, along with the views expressed by the NAFTA Parties in relation to the Commission interpretation, and may wonder whether they amount to a retreat. The fact that the Com- mission has found it necessary to weigh in on the issue of the minimum standard suggests that the investor-to-State dispute resolution system is anything but a simple mechanism for international commercial arbitration and raises important questions about the nature of that system. 2. OVERVIEW OF THE LOEWEN CLAIM 2.1. O'Keefe v. Loewen Group, Inc.12 Raymond Loewen took his father's small town funeral home operation and expanded it into the second largest in North Amer- ica, prior to the Mississippi fiasco. Loewen's expansion in that state led to a commercial contract dispute with Jeremiah O'Keefe, 11 Charles H. Brower II, Fair and Equitable Treatment Under NAFTA's Invest- ment Chapter, 96 AM. SOC'Y INT'L L. PRoc. 9, 9 (2002) [hereinafter Brower, Fair and Equitable Treatment] (setting out concerns with the Commission's interpretation issued on July 31, 2001). 12 O'Keefe v. Loewen Group, Inc., No. 91-67423 (Miss. Circ. Ct. 1st Jud. Dist., Hinds County 1995). See generally Notice of Claim, Loewen Group, Inc. v. United States (Oct. 30, 1998) [hereinafter Notice of Claim] (setting out Loewen's claims against the United States), at http://www.state.gov/documents/organization/ 3922.pdf; U.S.

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