Since the Donald Trump White House announced its intent to renegotiate the North American Free Trade Agreement (NAFTA) on May 18, speculation has swirled. What might change if NAFTA is renegotiated? It might be difficult to discern what this mercurial White House administration sought to achieve with a renegotiation, but there is no doubt room for NAFTA to be modernized.
The negotiation process is still at an early stage; September 24 marked the second day of Round 3 talks between the parties (Canada, the United States and Mexico).
Concerns about the future of NAFTA’s dispute resolution mechanism have featured prominently in the rhetoric of all parties. Prime Minister Justin Trudeau has said retaining a dispute resolution system is essential. This system is likely unfamiliar to most small and medium-sized enterprises (SMEs) in Canada, but there are potential changes that could make dispute resolution under NAFTA much more palatable to these businesses.
First, it is important to distinguish between the two types of NAFTA dispute resolution: Chapter 19 and Chapter 11.
Chapter 19 deals with resolving disputes between NAFTA parties (state-to-state disputes).
Chapter 11, on the other hand, governs investor-state dispute settlement (ISDS) – disputes between a private entity (an “investor”) and a state.
The Chapter 11 dispute resolution process enables a Canadian company doing business in the United States to arbitrate if it feels that its access to the U.S. market has been blocked by, for example, practices that unfairly prioritize U.S. companies.
There is concern that the NAFTA process for ISDS is too expensive and cumbersome for the average individual or company; that Chapter 11 dispute settlement is accessible to large multinational companies but not SMEs.
The accessibility (or lack thereof) of ISDS under NAFTA has not gone unnoticed. The Canadian Bar Association, among others, recommended that Canada introduce accommodations for SMEs in the dispute settlement process.
One reason to think Canada might be interested in making some changes to Chapter 11 to support small business is the recently negotiated Comprehensive Economic and Trade Agreement (CETA) between Canada and the European Union, which came into force on September 21. It provides special concessions for SMEs to engage with its dispute resolution mechanisms.
Here are some of the changes to the dispute settlement process that, if introduced, could have an impact on small business.
Currently, Chapter 11 provides that the dispute be resolved by a panel of three arbitrators. In CETA, SMEs can request that a single arbitrator settle the dispute. As disputing parties bear the cost of the tribunal’s fees, a reduction from three members to one is a significant cost saving.
Further, CETA also includes discretion to impose supplemental rules to reduce the overall financial burden on SME claimants. This can include consideration of the amount of compensation sought, or apportionment of legal costs.
If adopted into NAFTA, the opportunity for SMEs to seek supplemental rules would be a significant improvement for access to justice.
From a cost-saving perspective, the place of arbitration is perhaps one of the most important decisions made during the arbitration process. Per NAFTA Article 1130, the disputing parties can agree on the place of arbitration. If they cannot agree, the tribunal will decide the place.
The place of arbitration is especially important because lawyers’ fees typically constitute a large portion of the overall costs of arbitration. The hourly rates lawyers charge in each jurisdiction, and even within one jurisdiction, vary widely. This is one of the primary considerations for a small business when deciding whether to embarking on ISDS.
While the text of Article 1130 is unlikely to change, if supplemental rules are introduced, parties could conduct some hearings via video conferencing. That would reduce travel fees and allowing the SME to choose its lawyer irrespective of location.
CETA also explicitly allows SMEs to hold video-conference consultations.
Though perhaps not quite as riveting as the Twitter rhetoric, these potential NAFTA developments are important. The concessions discussed above would make NAFTA’s dispute settlement process more accessible, thereby improving the lot of Canadian businesses and individuals when their venture in the United States or Mexico goes awry. As a relatively uncontentious change, accommodation for SMEs could easily become a new feature in a renegotiated NAFTA – but Canadian business will have to wait to find out.
The United States hopes to conclude NAFTA negotiations by the end of the year, although whether that deadline is feasible is another question. While SMEs should not alter their business plans just yet, this potential new feature of NAFTA is worth watching. •
Kelsey Rose ([email protected]) is an associate with Harper Grey LLP whose practice focuses on helping clients resolve disputes in health, commercial and environmental law.
