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CHAPTER ELEVEN

(INVESTMENT)

OF THE

NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)

What is Chapter Eleven of the NAFTA and what does it do?

Who benefits from Chapter Eleven of the NAFTA?

How can Chapter Eleven of the NAFTA help my company?

Can the U.S. Government help me if I have a problem?

How can I get more information?

What is Chapter Eleven of the NAFTA and what does it do?

The objectives of Chapter Eleven (Investment) of the North American Free Trade Agreement (NAFTA) are to increase investment opportunities for companies and individuals in the NAFTA countries - Canada, Mexico and the United States -- and to protect their investments from certain unfair practices. Chapter Eleven eliminates certain investment barriers, ensures fair and non-discriminatory treatment of investors and their investments, and provides mechanisms for the resolution of investment disputes.

The NAFTA entered into force on January 1, 1994. It has no expiration date.

Who benefits from Chapter Eleven of the NAFTA?

Almost any company or individual in Canada, Mexico or the United States wishing to invest in another NAFTA country can benefit from the more open and secure investment environment that has been established by Chapter Eleven. (A NAFTA country can deny the benefits of Chapter Eleven to firms owned or controlled by nationals of a non-NAFTA country with which it does not have diplomatic relations, or to which it is applying economic sanctions. NAFTA governments can also deny benefits to "shell companies" that have no substantial business activities in the NAFTA country where they are established, if they are owned or controlled by non-Party investors.

How can Chapter Eleven of the NAFTA help my company?

Coverage

Chapter Eleven covers various types of investment including, for example: an enterprise, an equity security of an enterprise, a loan to an enterprise, or real estate or other property acquired for business purposes. For the most part, the financial services sector, is covered by the provisions of Chapter Fourteen of the NAFTA. However, where investments in the financial services sector are not covered by Chapter Fourteen, they may be covered by Chapter Eleven. In addition, the three NAFTA countries agreed to permit the maintenance of certain non-conforming measures on a limited basis, which are listed in the Annexes to the NAFTA Agreement. To determine whether a specific investment restriction may currently exist in a NAFTA country, you can contact that country's investment authority. In Mexico, you can e-mail the Mexican Ministry of Economy; in Canada, the Industry Canada (offsite link) web site; and in the United States, the appropriate federal regulatory agency (e.g., the U.S. Treasury Department) or the development agency of an individual state.

Nondiscrimination

Chapter Eleven obliges each NAFTA government to accord "national treatment" or "most favored nation (MFN) treatment", whichever is better, to investors of other NAFTA countries. "National treatment" means treatment no less favorable than that accorded to a country's own investors who are in like circumstances. "Most favored nation (MFN) treatment" means treatment no less favorable than that accorded to investors of any other country who are in like circumstances. The national treatment and MFN obligations are applicable to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of an investment.

Prohibited Performance Requirements

Chapter Eleven imposes disciplines on seven types of "performance requirements". A NAFTA government may not, as a condition for the establishment or operation of an investment in its territory, require a firm to:

limit its sales in the domestic market by conditioning such sales on exports or foreign exchange earnings;

buy or use components from a local supplier or accord a preference to domestic goods or services;

achieve a minimum level of "domestic content";

limit its imports to a certain percentage of exports or foreign exchange inflows associated with the investment;

transfer technology to any domestic entity, except to remedy an alleged violation of competition law;

export a specific level of goods or services; or

supply designated regional or world markets solely from local production.

A government generally may not use the first four of the requirements listed above as a condition for receiving an advantage, such as a tax holiday. NAFTA's treatment of taxation is addressed in Article 2103.

The rules prohibiting performance requirements apply to all investments, whether by non-NAFTA investors, domestic investors or investors from another NAFTA country. For example, under NAFTA, the Mexican Government may not require a Japanese-owned (or Mexican-owned) firm in its territory to export to the United States.

Transfers

Each NAFTA government must permit transfers relating to investments covered by Chapter Eleven to be made freely and without delay at the prevailing market rate of exchange. This obligation covers transfers of profits, royalties, sales proceeds and other remittances relating to the investment. Exceptions permit a government to prevent transfers under certain laws of general application, such as bankruptcy laws.

Expropriation and Compensation

No NAFTA country may directly or indirectly nationalize or expropriate an investment of a NAFTA investor except for a public purpose, on a non-discriminatory basis, and in accordance with due process of law. Compensation must be paid to the investor without delay at the fair market value of the expropriated investment, plus any applicable interest.

Environmental Measures

The NAFTA provides that no country should waive or relax its environmental standards to attract an investment, and that the countries will consult on the observance of this provision. The Agreement also specifies that a country may take action to protect the environment as long as such measures are otherwise consistent with NAFTA Eleven.

Dispute Settlement

While Chapter Twenty of the NAFTA contains general dispute settlement provisions, Chapter Eleven establishes a mechanism for an investor to pursue a claim against a host government if the investor believes that the host government has breached its obligations under Chapter Eleven. This mechanism enables a NAFTA investor either to seek the settlement of an investment dispute directly with a host government, with minimal involvement from its own government, or through binding arbitration under internationally accepted rules. Chapter Eleven's dispute settlement provisions apply only to disputes between a foreign investor and a host country government. They do not address disputes between two private parties or government-to-government disputes.

The arbitration provisions of Chapter Eleven work as follows: Claims may be submitted on the basis of allegations of direct injury to an investor, or allegations of indirect injury caused by injury to a firm in the host country that is owned or controlled by the investor. All claims must be brought within three years of the date of the alleged violation or within three years of the time the investor became aware, or should have become aware, of the breach. (Government decisions to prohibit or limit investment on national security grounds are not subject to review or arbitration under NAFTA.)

An investor must provide the host government with a notice of its intention to submit a claim to arbitration at least 90 days before doing so. Once six months have elapsed from the events giving rise to a claim, the investor may submit the claim for arbitration to:

the World Bank's International Centre for the Settlement of Investment Disputes (ICSID), provided that both the home country of the investor and the host country are parties to the ICSID Convention (neither Canada nor Mexico currently is);

ICSID's "Additional Facility", in the event one such country is not a party to the Convention; or

an ad hoc arbitral tribunal established under the arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL).

The investor (and, in certain cases, the enterprise that is owned or controlled by the investor) is required to consent in writing to arbitration, and to waive the right to initiate or continue any actions in local courts or other fora relating to the disputed measure. The NAFTA itself constitutes advance consent by the three NAFTA governments to arbitration. The dispute will be heard by a three-member arbitral tribunal, one member to be appointed by each of the disputants and the presiding arbitrator to be appointed by agreement between the disputants.

Each country is required to provide for the enforcement of an award in its territory. Final awards are limited to monetary damages or restitution. Awards of restitution must offer the alternative of paying damages. No punitive damages may be awarded.

Can the U.S. Government help me if I have a problem?

Yes. If you believe, in the course of conducting business with Canada or Mexico, that the Canadian or Mexican government has failed to comply with the provisions of Chapter Eleven of the NAFTA, contact the Office of Trade Agreements Negotiations and Compliance's hotline at the U.S. Department of Commerce. The Center can help you understand your rights and the other NAFTA countries' obligations under Chapter Eleven, and it can alert the relevant U.S. Government officials to help you resolve your problem. The U.S. Government can, if appropriate, consult with the Canadian or Mexican authorities concerning your investment dispute. The dispute settlement provisions, however, were designed to give an investor the opportunity to resolve its differences directly with the government of the host country and limit the role of the home country government once formal arbitration proceedings begin.

How can I get more information?

The complete text of Chapter Eleven (Investment) of the NAFTA is available on the Office of Trade Agreements Negotiations and Compliance's web site.

If you have questions about Chapter Eleven or how to use it, you can e-mail the Office of Trade Agreements Negotiations and Compliance, which will forward your message to the Commerce Department's Designated Monitoring Officer for this NAFTA Chapter. You can also contact the Designated Monitoring Officer at the following address:

Designated Monitoring Officer -

NAFTA Chapter 11 (Investment)

Office of North America

U.S. Department of Commerce

14th Street & Constitution Avenue, N.W.

Washington, D.C. 20230

Phone: (202)-482-5405

Fax: (202) 482 - 5865

The Designated Monitoring Officer can also provide you with useful trade and investment leads and contacts.

Other useful information is available on:

The NAFTA Web Site of the Office of NAFTA and Inter-American Affairs at the U.S. Department of Commerce, which contains documents and background information on the NAFTA and on doing business in Canada and Mexico.