Chemtura v. Canada: The Federal Government Successfully Defends NAFTA Claim Resulting from Pesticide Ban

by Cris Best · September 8, 2010

The Canadian government has had mixed results lately in defending itself against NAFTA claims. Recently, Canada agreed to provide compensation in the amount of $130 million to settle the claim of AbitibiBowater Inc. (“Abitibi”). TheCourt.ca commented on this settlement, and given that the actions of the Government of Newfoundland were so clearly in contravention of NAFTA, it most likely came about as a result of realizing the weakness of the case.

In contrast, the Canadian government was successful in fighting off a Chapter 11 claim by the United States chemical manufacture Chemtura Corporation. The company contended that Canada’s ban on the use of the chemical lindane as a pesticide damaged its related investments.

The decision of the NAFTA tribunal in Chemtura v. Canada, Award of the Arbitral Tribunal (Aug 2, 2010) [Chemtura] is notable for demonstrating that foreign corporations may be held to a relatively high burden when attempting to demonstrate a contravention of Chapter 11. And even though Canada triumphed in this instance, significant resources were expended to protect a government decision taken for a public purpose.

Background and Facts

Lindane was first introduced into Canada in the late 1930’s. Since then, it has been designated as a possible carcinogen, an environmental contaminant, and identified as the cause of various additional negative health consequences in humans and animals, including death. The chemical has been banned or had its use restricted in numerous countries. For instance, Japan banned lindane in 1971, Germany in 1988, and New Zealand, Austria, Brazil and Norway have done the same. However, Canada has merely restricted it use. For example, while it is no longer permitted to be used in pesticides in this country, it is still an active ingredient in shampoos used to treat head lice.

Chemtura manufactured a lindane-based pesticide used to treat canola seeds. By the time Canada was considering banning lindane the US had already prohibited its use. As a result, two Canadian national canola industry groups grew concerned with the sale of lindane treated canola products to the US. Voluntary measures were put in place, in collaboration with Canada’s Pest Management Regulatory Agency (“PRMA”) (the federal regulator of pest control products), to phase out the use of lindane for canola seed treatment in Canada.

Every manufacturer affected by the measure in Canada agreed to this voluntary phase out except Chemtura. In 2001, a lindane review was completed and the PRMA decided that regulatory action banning its use on canola seeds was necessary. Chemtura attacked the ban in various forums by challenging the decision process utilized by the PRMA. Unsuccessful, the company sought arbitration before a NAFTA tribunal.

The Seeds of a NAFTA Dispute

NAFTA arbitrations are guided by the United Nations Commission on International Trade Law (“UNCITRAL”) arbitration rules. Tribunal members are temporarily appointed on agreement by the parties to the dispute. Relevant international law and NAFTA are relied upon by the tribunal in making its determinations and the tribunal is not bound by precedent set by it and other international dispute resolution bodies.

Chemtura alleged that Canada violated numerous NAFTA provisions when it banned lindane for use as a pesticide. I will briefly outline the most significant allegations for the purposes of this article and later will focus on the expropriation claim under article 1110.

First, pursuant to articles 1105 (minimum standard of treatment), 1103 (most favoured nation) and 1110 (expropriation), the company claimed compensation for the losses attributed to the ban. Per article 1105, Chemtura contented that it did not receive, as the provisions states, “treatment in accordance with international law, including fair and equitable treatment and full protection and security.” As well, pursuant to article 1103, the company alleged that it received less favourable treatment than similar investors.

The chemical manufacturer demanded approximately $79 million in damages and costs associated with the arbitration—expert and legal fees, and related taxes and interest. In short, the NAFTA tribunal found that the lengthy regulatory process and related decision were acceptable; and considering the worldwide treatment of Lindane, Canada was well within reason to ban its use as a pesticide.

The tribunal’s decision regarding articles 1105 and 1103 was reasonable. The review process conducted by the PRMA was thorough, fact intensive, and inclusive of Chemtura’s concerns. The decision to ban lindane was neither hasty nor arbitrary and was based on widely accepted data recognizing lindane as the dangerous chemical it is.

The Tribunal Denies Chemtura’s Expropriation Claim under Article 1110

In addition to the dubious assertion that Canada’s decision to ban lindane was not in accordance with due process of law, Chemtura argued that its related investments were indirectly expropriated contrary to article 1110(1). The provision states:

No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except:

(a) for a public purpose;

(b) on a non-discriminatory basis;

(d) on payment of compensation…

A three step test must be employed to evaluate an expropriation claim. The tribunal must determine:

(i) whether there is an investment capable of being expropriated, (ii) whether that investment has in fact been expropriated, and (iii) whether the conditions set in Article 1110(1)(a)-(d) have been satisfied…”

Furthermore, according to the NAFTA tribunal decision in Pope v. Talbot, Decision and Order By the Arbitral Tribunal (Mar 11, 2002) [Pope], an indirect expropriation must involve the “substantial deprivation” of an investment. (In Pope A US based operator of softwood lumber mills in British Columbia claimed that the implementation of the Softwood Lumber Agreement between the US and Canada violated Chapter 11.)

In this case, Chemtura argued that the ban on lindane represented an indirect expropriation of its related investment. The tribunal agreed on this point, stating that the dispute did involve an “investment capable of being expropriated.” According to article 1139, an investment is defined in part as an “enterprise…” The tribunal and both parties agreed that the enterprise was not solely the lindane product, but Chemtura as a whole, including related elements such as “goodwill, customers or market share…”

To fall within the scope of expropriation, Chemtura had to be substantially deprived of the investment. According to the tribunal, the “substantial deprivation test” is a fact-based assessment unique to the individual circumstances at hand. Factors such as the share of business represented by the investment are taken into consideration, as well as the degree of control over the operations, and which party exhibited control.

In this case, the lindane business was only a small part of Chemtura’s operations. In addition, its yearly sales based on its additional business lines grew during the period the ban was instituted. Finally, the Canadian government did not interfere into the business of Chemtura other than to institute the ban. Thus, Canada did not control Chemtura to the point of expropriation. According to the tribunal “the evidence shows that the measures did not amount to a substantial deprivation of the Claimant’s investment.”

In the end, the tribunal ruled that an expropriation did not take place. This seems just, as the contrary decision would have seen the Canadian government having to provide compensation to a private company over an action that was non-discriminatory, for a public purpose, and in accordance with due process of law.

Questions Regarding the Definition of Enterprise

I’m inclined to agree with the tribunal’s determination, for the most part. Based on the facts presented, the actions taken by the Canadian government, and the applicable law, the test of expropriation was clearly not met. Most significantly, Canada did not take control of the Chemtura enterprise, thereby failing to meet one element of the “substantial deprivation” test.

I only take issue with the meaning of “enterprise.” As mentioned, per article 1139, an “investment” is defined in part as an “enterprise…” The eventual definition agreed upon by both parties was that the Chemtura Corporation as a whole was the “enterprise” or “investment” allegedly expropriated.

However, in previous tribunal decisions the definition of “investment” has been given a much greater scope. For instance, in Feldman v. Mexico, Final Award (Dec 16, 2002), the NAFTA tribunal defined an investment as “almost every type of financial interest, direct or indirect…” Furthermore, according to article 1139 of NAFTA, an investment is also defined, in part, as:

(h) interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory…

(i) contracts involving the presence of an investor’s property in the territory of the Party…

(ii) contracts where remuneration depends substantially on the production, revenues or profits of an enterprise;

It is not immediately clear how the lindane product line could not fall somewhere within the above definition. However, the control element of the “substantial deprivation” test would not have been met even if the tribunal accepted a broader definition.

Ultimately, if the definition of an “enterprise” remains as narrow before future tribunals not bound by precedent, this is likely a plus for NAFTA opponents, as it would presumably be more difficult to establish expropriation where only a fraction of a corporation’s business interests have been affected.

Conclusion

In this case, a corporation was able to challenge a Canadian regulatory decision before a tribunal comprised of foreign nationals, merely because their investment was negatively impacted. The NAFTA tribunal in Chemtura included Prof. Gabrielle Kaufman-Kohler, a practicing lawyer and law professor at the University of Geneva; Charles N. Brower, an American Judge of international disputes; and Prof. James R. Crawford of the University of Cambridge in the UK.

Even though Canada was successful, a significant amount of resources had to be expended to defend against the claim. In the end, the total costs associated with the arbitration, (including a $4000 per day fee for each tribunal member) amounted to almost $9 million US, with Canada’s outlay at just under $6 million.

Chemtura was ordered to cover the entire cost of the arbitration, however it was found responsible for only one-half of Canada’s associated legal costs not related to the direct operation of the tribunal. Ultimately, the Canadian taxpayer spent $3 million to defend a challenge to a decision with a significant public purpose taken by a democratically elected government.