Canadian Corporation Uses NAFTA to Attack U.S. Judicial System

Use of a controversial North American Free Trade Agreement (NAFTA) provision by a Canadian corporation to sue the U.S. government for cash damages has come to light. On May 6, 1999, a Canadian real estate company filed a $50 million claim against the U.S. under NAFTA's Chapter 11 "investor to state" lawsuit provisions after it failed to win a contract dispute with the City of Boston.

The new NAFTA suit has nothing to do with international trade, and the firm, Mondev International of Montreal, has lost every appeal during extensive action within the U.S. court system. Mondev has turned to NAFTA's regulatory takings provisions to end-run around a U.S. federal court decision. At the crux of Mondev's argument is the notion that new rights for foreign investors granted in NAFTA trump a state's sovereign immunity protections as regards foreign investors. If a NAFTA tribunal finds for Mondev, the U.S. government is liable for Mondev's claimed damages, despite rejection of Mondev's claim by U.S. courts.

NAFTA Chapter 11's provisions on Expropriation and Compensation allow private investors to sue NAFTA nations directly outside of domestic courts and before NAFTA tribunals for cash compensation for government actions that the tribunal decides undermine an investor's NAFTA rights and privileges. Specifically Chapter 11 guarantees foreign investors compensation from NAFTA nation governments for any government action "tantamount" to an "indirect expropriation."⁽¹⁾ These provisions have been criticized as creating a broad regulatory takings mechanism.

Mondev's claim has nothing to do with international trade. Its NAFTA suit is based solely on the Massachusetts state courts' rejection of Mondev's claim against the City of Boston and the Boston Redevelopment Authority (BRA) in a contract dispute.

In December 1978, Mondev entered into an agreement with the City of Boston regarding the building of several shopping complexes and a hotel in downtown Boston. The agreement,­ called the Tripartite Agreement,­ was signed by the City of Boston, the BRA and Lafayette Place Associates (LPA), Mondev's U.S. actor.

The Tripartite Agreement was originally set up as a two-phased project. Phase I consisted of a straightforward real estate development deal whereby Mondev paid $175,000,000 for a downtown location parcel upon which it was to build a mall, an underground garage and a hotel. Phase II was set up as partially optional: subject to Boston's discontinuing a garage business on another parcel, this other parcel would be offered to Mondev for a formula price set out in the Agreement.⁽²⁾

The mall, the garage and the hotel were built as planned, and opened in 1986. Phase II, however, was not completed. In 1983, the city discontinued the garage, and in 1986 Mondev announced that it would exercise its option to buy the second parcel. However, by this time, almost 10 years after the original Agreement was reached, the formula price set out in the Agreement was much lower than the actual market value of the parcel, and the City and the BRA were reluctant to sell the land. At the same time, a new road to run through the center of the parcel was envisaged as part of the City's planning.⁽³⁾ This road would, ­ according to Mondev,­ make the land economically unviable for the completion of Phase II of the original project, and Mondev consequently sold its right to purchase to another Canadian real estate company, Campeau, dubbed "the real estate tycoon turned corporate raider."⁽⁴⁾ In 1989, the option to buy the second parcel expired.

One year later, after failed attempts to buy both Macy's and Federated,⁽⁵⁾ ­ two of the U.S. biggest department store chains,­ Campeau filed for bankruptcy, and its rights on the stalled Boston project reverted to Lafayette Place Associates and, through them, to Mondev.⁽⁶⁾

In 1992, Lafayette Place Associates sued the City of Boston and the Boston Redevelopment Authority in the Massachusetts Superior Court for breach of the Tripartite Agreement, as well as for "tortious interference" with the Campeau contract.⁽⁷⁾ In 1994, a jury found for LPA, awarding them and their Canadian partner $16 million in damages, an amount that was immediately lowered to $9.6 million by the judge.⁽⁸⁾ The judge also held that the BRA was a public employer and therefore as a matter of law immune from suit for tort claims. Both LPA and the City of Boston appealed.

In May 1998, the Massachusetts Supreme Judicial Court reversed and annulled the $9.6 million breach of contract judgment, holding that LPA had failed to demonstrate that it was willing and able to perform its own contractual obligations⁽⁹⁾ ­-- perhaps in light of the Campeau bankruptcy and history of failed real estate adventures. The Supreme Judicial Court also upheld the trial court's ruling that the BRA was statutorily immune from civil liability.⁽¹⁰⁾ In March 1999, the U.S. Supreme Court denied a re-hearing of the case, effectively reinforcing the Massachusetts Supreme Court's judgment on state sovereign immunity.⁽¹¹⁾

Mondev is now seeking relief under NAFTA's Chapter 11, claiming that its failure to obtain damages through the U.S. judicial system amounts to discriminatory expropriation without compensation, and that its cost has been at least $50 million in non-realized profits. Mondev claims that it was not treated fairly and equitably, and that the second parcel covered in the proposed Phase II of the Tripartite Agreement would have been sold to it for the below-market-value contract price, had it been a U.S. company.⁽¹²⁾ In other words, Mondev expects U.S. tax-payers to pay for profits it has not, and perhaps never would have, realized, for the simple reason that, as a Canadian company, the U.S. government owes it special protections under NAFTA.
-- This report was written by Marianne Mollman of Public Citizen's Global Trade Watch.

1. North American Free Trade Agreement, Part Five - Investment, Services and Related Matter, Chapter Eleven, Article 1110: Expropriation and Compensation, available at www.sice.oas.org/trade/nafta/chap-111.stm.

2. Notice of Intent to Submit a Claim to Arbitration under Section B of Chapter 11 of the NAFTA, Mondev International Ltd. v. The Government of the USA, May 6, 1999 [hereinafter "Mondev Notice of Intent"].

3. Id.

4. R. Powell & M. Gendron, "Pros See Euro-Knight," Boston Business Journal, Feb. 1, 1988.

5. Lawrence Solomon, "What It Takes To Become Filthy Rich," The Ottawa Citizen, Aug. 5, 1999.

6. R. Kindleberger, "US Supreme Court Move Ends Boston Development Dispute," Boston Globe, Mar. 3, 1999.

7. Mondev Notice of Intent.

8. Lafayette Place Associates v. Boston Redevelopment Authority, 427 Mass. 509 (1998).

9. Id.

10. Anthony Flint, "SJC Boosts City on Development Expected to Give Boston Freer Hand in Planning," Boston Globe, May 22, 1998.

11. Kindleberger, supra note 9.

12. Mondev Notice of Intent.