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In our own back yard
NAFTA allows foreign corporations to evade state regulations by suing the US before international tribunals. One of the most important of these little-known cases originated in Boston.


WALKING PAST HAYWARD Place, a 37,000-square-foot city block on lower Washington Street, you might wonder why itís still just a parking lot, when for decades the city has been trying to develop the Downtown Crossing area. But youíd never guess that the lot currently lies at the center of a multimillion-dollar investment dispute between the US government and a Canadian corporation under the North American Free Trade Agreement (NAFTA). The highly secretive suit would likely enrage taxpaying Bay Staters, if they only knew it existed. Thatís because the Canadian company, a developer called Mondev International, hopes to use NAFTA to get around a Massachusetts law that protects the public treasury from potentially costly lawsuits. This particular law does not have universal support, and the issue is probably one no anti-NAFTA protester ever imagined. Still, an important principle is at stake. In trying to circumvent the statute, Mondev has challenged the stateís autonomy. And it has done so by exercising rights that no Massachusetts citizen or American corporation possesses ó rights reserved only to foreign corporations under NAFTA.

Throughout the 1990s, Hayward Place was the subject of a tangled legal dispute between Lafayette Place Associates (LPA), a Mondev subsidiary, and the City of Boston. LPA had already developed the nearby Lafayette Hotel (now the Swissôtel) and the failed Lafayette Place mall; it had also held an option to buy the Hayward Place parcel from the city. But by the time it tried to exercise that option and develop the site, land values had increased and the city was reluctant to sell. In 1992, LPA filed suit against the city and the Boston Redevelopment Authority, claiming that its contractual rights had been deliberately thwarted. After various legal maneuvers, however, the developer finally seemed to have hit a dead end by March of 1999, when the US Supreme Court refused to hear LPAís appeal of an unfavorable Massachusetts Supreme Judicial Court ruling. This " [put] an end to the matter, " the Boston Globe reported a few months later.

Only it didnít. " You talk to people here in Boston who remember the whole thing, " says Massachusetts state representative Byron Rushing, " but they donít know what happened. " What happened is that in May 1999, Mondev International filed a $50 million suit against the US government under Chapter 11 of NAFTA, a section that lays out strong property-rights and other protections for foreign investors. The suit alleges " damage to Mondevís investments " arising from the Supreme Judicial Court ruling and from the US Supreme Courtís refusal to hear LPAís appeal. The Supreme Judicial Court had invoked " sovereign immunity " for the Boston Redevelopment Authority, thereby classifying the agency as an arm of the state and rendering it impervious to Mondevís suit. But NAFTAís Chapter 11, Mondev argues, trumps Massachusettsís sovereign-immunity statute. And Chapter 11 lets the company sue the US directly over actions taken by state and municipal actors. This process is known as investor-state arbitration.

Mondevís suit is one of the first four NAFTA Chapter 11 cases against the US. The cases take several years to arbitrate and none has yet been decided, though US investors have already won several similar claims against the Canadian government. But Mondevís case could prove a key test of the new, highly controversial Chapter 11 protections that NAFTA affords foreign investors. Further, it tests the limits of the United Statesí political sway over the other NAFTA members. If the agreementís only economic superpower loses a NAFTA case to Canada, not only would it be embarrassing, but it would encourage further scrutiny of NAFTA within the US.

Even as cases like Mondevís wend their way through specialized, corporate-style arbitration outlets like the International Center for Settlement of Investment Disputes at the World Bank, a few critics have caught on, objecting that the broad rights NAFTA gives to investors come without corresponding responsibilities, and that the Chapter 11 process belittles and weakens state and local governments. And, they note, the proposed Free Trade Area of the Americas agreement ó NAFTA cubed ó would likely extend Chapter 11 privileges to extra-national corporations throughout the hemisphere.

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Issue Date: August 30 - September 6, 2001

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