Canada: Softwood Lumber Falls Onto NAFTA Investor-State Disputes

Article by Cliff Sosnow, ©2006 Blake, Cassels & Graydon LLP

A recent ruling related to the softwood lumber dispute shows that while NAFTA, including the investor-state rules in Chapter 11, has an inherently political dimension, it is first and foremost a legal document – one whose terms will be interpreted according to the precisely-worded formulations negotiated by the Parties.

Perhaps fittingly, given how it has exposed important structural weaknesses in the countervailing and dumping duty dispute settlement provisions set out in Chapter 19 of NAFTA, the softwood lumber dispute now focuses its spotlight to expose the limits of investor-state dispute settlement and the relationship of Chapter 11 to other NAFTA disciplines, in particular, the countervailing and antidumping provisions of NAFTA.

The dispute involves Canfor Corporation and Terminal Forest Products Ltd. against the United States of America in a consolidated Chapter 11 arbitration. The heart of the dispute is the reach of Article 1901(3), a provision which reads as follows:

"Except for Article 2203 (Entry into Force), no provision of any other Chapter of this Agreement shall be construed as imposing obligations on a Party with respect to the Party’s antidumping law or countervailing duty law."

Canadian petitioners argued that in rendering decisions respecting the softwood lumber dispute, a dispute that is focused on whether Canada unfairly subsidizes Canadian lumber and whether Canadian lumber companies are "dumping" product into the U.S., officials at the Department of Commerce and the United States International Trade Commission have misapplied their governing laws, abused their discretion and, more broadly, have made decisions that were motivated by political bias. They alleged that in so doing, such misconduct violates the National Treatment, Most-Favoured Nations, Minimum Standard of Treatment and Expropriation provisions set out in NAFTA Chapter 11.

The United States Government argued that Chapter 11 investment tribunals lack jurisdiction in such matters because NAFTA Article 1901(3) excludes, by its terms, the use of Chapter 11 investor-state dispute settlement for disputes respecting countervailing or antidumping duties. According to this view, if there is a dispute regarding countervailing or antidumping duties, even if it is in relation to the behaviour of officials and not the substance of the law giving rise to the dispute, then still, the correct avenue of redress and remedy is Chapter 19, not Chapter 11.

Canadian petitioners countered that the challenge is not respecting U.S. countervailing and antidumping duties per se, but rather the conduct of various U.S. officials and agencies in making and applying determinations falling under their respective jurisdictions. Petitioners said that its claims focus on conduct in breach of NAFTA Chapter 11 obligations, not on allegations of reviewable error respecting determinations under U.S. countervailing duty or antidumping law.

In a "Decision on Preliminary Question", issued on June 6th, an arbitral panel responded to petitioners’ complaint in the negative, at least in part. In particular, the panel agreed with the U.S. that Article 1901(3) precludes Chapter 11 investor-state arbitration to apply to the countervailing or antidumping law of a State Party to NAFTA. Significant to petitioners’ case was the clear rejection by the tribunal that claims alleging misconduct by government officials in relation to determinations and applications of U.S. countervailing and anti-dumping law are not justiciable under NAFTA Chapter 11.

An additional dimension of petitioners’ case was that the Byrd Amendment, U.S. legislation that specifies that countervailing or antidumping duties imposed on imports can be collected and redistributed to those U.S. companies that complain of being affected by unfairly subsidized or dumped imports, is a proper subject of Chapter 11 jurisdiction. Petitioners allege this is so because its terms result in the differential treatment of U.S. and Canadian companies in violation of the national treatment provisions set out in Chapter 11 Article 1102.

In what might be called judicial "sleight of hand" or more properly a faithful reading of text, the panel ruled that it could examine alleged breaches of the Amendment under the provisions of Chapter 11. This, even though the subject matter of the Amendment is by its nature in relation to the countervailing duty and antidumping law that the panel said is not a fit subject of Chapter 11 review.

It came to this conclusion by noting that the U.S. Government failed to notify the Parties to NAFTA that would be affected by that Amendment that it was amending its countervailing or antidumping duty law, as required by NAFTA Chapter 19 Article 1902(2). By not so notifying the other NAFTA Parties, the U.S. Government could not now claim that the Byrd Amendment is U.S. countervailing or antidumping duty law subject to the sheltering provisions of Article 1901(3).

Canada and the U.S. are lumbering towards the negotiation of a settlement to the softwood lumber dispute. One of the terms of the settlement, if successfully concluded, will terminate all related litigation. It remains to be seen whether this Chapter 11 claim respecting the Byrd Amendment, not being in relation to countervailing or antidumping duty law or exclusively applicable to the softwood lumber dispute, will also be terminated.

Perhaps more importantly at the institutional level, this panel decision makes clear that while treaties like NAFTA and, in particular, the investment provisions of Chapter 11, have an inherently political dimension that is troublesome to some, NAFTA – including Chapter 11 – is first and foremost a legal document; one whose terms will be interpreted according to the precisely-worded formulations negotiated by the Parties.