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Trade Pacts’ “Investor-State” Systems: Private Corporate Tribunals Used to Attack Countries’ Courts

“Loewen” NAFTA Case: Foreign Corporations Unhappy with Domestic Jury Awards in Private Contract Disputes Can Demand Bailout from Taxpayers

By By Public Citizen's Global Trade Watch

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The Loewen Group, a Canadian firm, initiated a case against the U.S. government in July 1998 at the World Bank’s International Centre for Settlement of Investment Disputes (ICSID) demanding $725 million in damages. This was the first NAFTA Chapter 11 investor-state case challenging a domestic court ruling. In this claim, the Canadian funeral home conglomerate challenged a Mississippi state court jury’s damage award in a private contract dispute and various rules of civil procedure relating to posting bond for appeal. The underlying civil court case involved a suit initiated by a local Mississippi funeral home owner that claimed Loewen had engaged in anti-competitive and predatory business practices in breach of contract. Loewen lost the domestic civil court case. It then decided to appeal and, under normal rules of civil procedure, Loewen was required to post a bond covering the lower court’s damages award. (This is also a similar requirement for appeal under U.S. federal civil procedure, which is designed to safeguard against a losing party reorganizing its assets to avoid the lower court judgment.)

In 2001 and 2003 rulings, the ICSID tribunal held that the functions of a domestic court hearing a private contract dispute qualified as a government action covered by NAFTA’s Chapter 11 investor rules, and thus was subject to a NAFTA investor-state claim. The panel also discussed the merits of the case in some detail, blaming the U.S. for a “miscarriage of justice” in the function of the civil court. (The case was dismissed on a technical standing matter: in 2002, Loewen’s lawyers had reorganized what had been a Canadian firm as a U.S. corporation under bankruptcy protection, thus terminating the firm’s standing as a foreign investor.) However, the case shows the perils of NAFTA’s privatized system of dual track “justice.” U.S. individuals and firms rely on our domestic judicial system, one of the finest in the world. But foreign corporations not only can attack our domestic judicial system writ large, but can do so in a parallel “court” where only they can initiate cases and where the private litigants in the underlying domestic case have no standing or rights.