Analysis Of The Main Problems Of The Isds Mechanism And Its Effects On Canada Under The Nafta
With the recent renegotiation of the North American Free Trade Agreement and Canada’s withdrawal for the Investor State Dispute Settlement mechanism. Along with, a new arbitrary system set in place under the Comprehensive Economic Trade Agreement signed between the European Union and Canada, it is evident that the private arbitration mechanism has been under a lot of scrutiny. Under the North American Free Trade Agreement Canada became the world’s most sued developed nation. The North-American country had to face private arbitrary courts a total of 41 times thus, having the full experience of the Investor State Dispute Settlement mechanism. The ISDS created multiple issues in the country thus, we must ask “What have been the effects of the ISDS on Canada?” This essay seeks to explore and explain the main problems of the ISDS mechanism and its effects on Canada under the NAFTA.
NAFTA came into effect in 1994 and with it came trade liberalization among North-America’s three largest nations, the US, Mexico and Canada. Since then, Canada has become the most sued developed nation in the world and has spent more than 95 million dollars in legal fees and has given out to investors about 219 million as payments in cases it lost. Therefore, for free trade to be put in place between the three North-American countries, the nations had to pay a big price; that was none other than giving foreign investors to hold governments accountable in private arbitrary courts. An Investor State Dispute Settlement mechanism was set in place to protect foreign investors from unfair governmental practices. The Investor State Dispute Settlement mechanist is a clause that has been gaining traction over the past 25 years and has been included in a plethora of free trade agreements with about 93% of the agreements concluded include an ISDS provision. The ISDS clause enables foreign corporations to sue governments for their policies, when these policies go against the interests of the foreign investors and may cause a disruption in their investments. One may presume that investors are simply exercising their democratic rights by bringing governments against justice. However, that is not the case as corporations do not bring the governments against public courts but, rather they do that in private arbitrary courts. Thus, bypassing the justice systems of countries.
The arbitrary panels that decide upon the cases of foreign investments, share some distinct characteristics which may come in contrast with certain basic judiciary rules of liberal democracies. Firstly, the courts do not follow a specific set of laws like the common law or civic law. Secondly, the courts do not follow a precedent that means that each case is judged independently which leads to a chaotic variation in how cases are decided. Thirdly, neither party has the power to sue corporations nor do they have the power to appeal the decisions of the panels as there is no higher or appeal court that can decide . This method of investment arbitration comes in contrast even with the World Trade Organization’s system, where the parties do have the right to appeal. Nevertheless, appeal processes tend to last long and be costly. Moreover, the cases do not have to be public and can be kept private in case one of the two parties deems so. It is not only the public that does not have access to the result of the cases but, it also members of parliaments and even members of governments that are denied access to the cases.
What is more, the panels of these cases are rotating, that means that each panel of each case is decided by a different set of arbitrators. The courts are comprised by three judges, one of which is selected by the claimant, that is investor/corporation, one is chosen by the defendant i.e. the country and one is chosen in accordance of both parties. Similarly to the previous characteristics this shows that the procedures of private arbitration do not follow any notion of known and established law practices of liberal democracies and thus, make each result of each case independent from previous ones. Furthermore, the ISDS provisions are not the same across the board the provisions differ and are specifically tailored to the needs of each treaty. In addition a significant issue that arises with the private arbitrators is the fact that a vast majority of them have previously either held positions at the corporations that bring the claims or have work with them in past cases. Therefore, it is clear that the procedure of solving claims brought against governments lacks transparency to a great extent. Furthermore, the proceedings and the decisions of the arbitrary courts tend to be tedious and expensive. This means that governments will not have to pay only the remunerations the investors demand but, they will also have to pay the expenses for the courts and potential the costs the investors had to bare, in case they lose the case.
Chapter 11 of the North American Free Trade Agreement gave the investors a wide range of possibilities to bring governments against private arbitration courts. Under Chapter 11, foreign investors were given the opportunity to challenge all kinds of public policy decisions from environmental to health policy and seek compensation if the policy hindered their interests. Just like with other agreements under the NAFTA and in particular due to Chapter 1105 investors had the possibility to hold governments accountable even for measures that are not prejudiced against foreign investors. The Chapter was used in over 90% of the claims against governments. Further provisions of the North American Free Trade Agreement allowed investors to bring governments against private arbitrary courts for reasons such as, direct or indirect expropriation, requirements of the development of local areas and naturally discriminatory measures.
Canada has a federal system of government comprised of provinces and territories, which tend to pass independent rules and regulations from the national government . This phenomenon has created a multiple issues with the ISDS provisions of the NAFTA agreement. In particular Chapter 11 was invoked by investors in a plethora of cases to challenge provincial legislation. However, due to the fact that Canada is one nation, provinces cannot represent themselves and do not pay the bill alone. It is the whole nation and particularly the federal government that has to face the arbitrary panels and pay the potential fine. This fact proves the great reach of Chapter 11. Quebec is a French-speaking province on Canada’s eastern coast. Quebec is one of the provinces where the local government tends to be heavily invested in passing regulations thus, Quebec has been a target of investors. One of the most infamous and contentious examples when the province’s legislation initiated investor arbitration proceedings against it, is that of Lone Pine Inc. The company specializes in the extraction of oil and gas and has a significant amount of plants and investments in Canada. However, Lone Pine is a company based and incorporated in Delaware, United States; thus, being essentially an American company which means that as a foreign investor it had access to Chapter 11.
So, when in 2011 the province of Quebec concluded that it would be better to ban all shale gas extracting activities (which are more commonly known as fracking) on the Saint Lawrence River, the American company was not pleased. The Canadian province undertook the decision to ban the extracting activities using fracking due to the fact that the method is dangerous and highly polluting. Essentially, fracking is a method to extract shale gas from the earth by mixing chemicals inside the earth in order to, extract gas particles. This however, is a dangerous method that may cause shatters to the ground and pollute surrounding areas. Therefore, when the ban took place the company chose to invoke Chapter 11 and sue the Canadian government for 250 million Canadian Dollars, which are approximately 184 million US dollars. Since the case began in 2012 there has been no decision and the company’s anticipated compensation for shale gas extraction on the Saint Lawrence River have decreased to 119 million US dollars.
However, before Lone Pine became upset with the Quebecois government’s legislations and regulations it was another company that did not want to accept the new set of rules passed. Nevertheless, similarly to Lone Pine’s case of 2011, the 2008 case dealt with environmental regulations and was again an American investor instigating Chapter 11. The provincial government had taken the decision to forbid the usage of certain lawn pesticides which might have been dangerous for human health. Following the decision by the Quebecois government Dow Agrosciences LLC undertook the decision to sue the Canadian government, of a relatively small sum this time, of 1.5 million dollars. But, as more provinces came to agreement Quebec’s decision and decided to put similar bans in place, the American corporation decided to settle the case with the Canadian government. Finally, no monetary sum was given to the company and the two sides agreed that the Canada’s provinces had the right to regulate. Nevertheless, Quebec was forced to clear out the situation surrounding the pesticide and had to state that products containing the pesticide called 2,4-D did not pose a hazard for humans or the environment as long as, the guidelines stated on the package were followed.
In 2013 the American pharmaceutical company Eli Lilly instigated a Chapter 11 claim against Canada. The company decided to bring the claim after the revocation of Zyprexa and Strattera patents by a Canadian Federal Court took the decision in 2010 and in 2011. The two patents were annulled because of the absence of utility under the referred as “promise utility doctrine” under the Canadian patent law. The Canadian doctrine contains three fundamentals. First is the documentation of what constitutes a promise in the patent disclosure, in contradiction of which utility is measured. Second is the prevention of usage of post-filing proof in order to demonstrate the utility. Third is the obligation to pre-file illustrations to prove a comprehensive estimation of utility which has to be included in the patent. The Federal Court basing on the doctrine cancelled the patents and the cancelation was confirmed by the Canadian Supreme Court. Thus, the American company claimed that the Canadian Supreme Court’s decision violated Chapters 1105 and 1110 which dealt with unfair and inequitable treatment and expropriation respectively. Consequently, the company demanded from the Canadian government a reparation of 500 million US dollars.
However, some believed that the company’s intention was not to get a remuneration but rather, to put pressure on the Canadian parliament to change the legislation. Even the company’s chief patent counsel stated “the Parliament could have stepped in and fixed Canada’s patent statutes, but to date they have looked the other way.” Nevertheless, on the 16th of March, 2017, the appointed tribunal dismissed the pharmaceutical’s claims and even awarded Canada 5 million Canadian dollars to pay for the costs it had accumulated over the years of legal battle. Nevertheless, the Canadian victory can hardly be considered a success as the over the five year battle the Canadian government accumulated over 15 million Canadian dollars in expenses for lawyers, legal experts and attorneys. Thus, showing once more the toll these legal battles may have on governments.
Judging from the above-mentioned cases and also, by the numerous amount of cases brought against Canada, a claim could be made that the ISDS clause and Chapter 11 of NAFTA may have led to an effect referred as 'regulatory chill'. The term 'regulatory chill' has been defined as 'a State actor will fail to enact or enforce bona fide regulatory measures because of a perceived or actual threat of investment arbitration'. Even though, there has not been a Canadian wide research on whether Chapter 11 of NAFTA has led to a regulatory chill effect; Van Harten and Scott have conducted a series of interviews with policy makers from Canada’s southern province of Ontario. While, the research done by the two scholars has as they point out several issues such as their limited access to information, it did confirm that the potential litigation was a cause for altering or not enacting legislation. The two Canadian scholars bring forth a series of examples of anonymous governmental employees that show the true effect on Canada’s policy making. For instance, the research brings forth the example of a governmental lawyer in ministry dealing with environmental issues who claimed that trade related issues started appearing on his desk after the early 2000s. The most common ones as he claimed were WTO and ISDS provisions from NAFTA’s Chapter 11, as he put “Chapter 11 is the one that really bites”. In addition, the lawyer stated that he had to review multiple legislative suggestions, regulations and policies each year for trade compliance. These reviews occupied an important amount of the lawyer’s time. However, the lawyer was not the only one from the related ministry to make such a claim. A former official in the same ministry made a similar claim and said that the potential risk litigations under NAFTA’s ISDS provisions were taken into strong consideration.
Even though the analysis of the Canadian experience with the ISDS under NAFTA may lack substantial evidence to make convincing arguments that Chapter 11 and the ISDS clause may hinder public policy making; there is substantial indications to lead us to this assumption. First of all, the research done by Van Harten and Scott leads us to this assumption, due to the fact that policy makers affirmed that they had potential litigation in their minds whilst drafting and reviewing legislation. Second of all, the analysis on Canada helps us understand that the ISDS clause poses a great threat to a more environmentally friendly policies as well as a plethora of other policies that may be put in place to improve the situation in a country. Due to the fact that investors will sue and seek significant amounts of compensation. On top of the compensations that countries may have to pay come the arbitrary costs that countries will acquire as seen by the case of “Eli Lilly v. Canada” and the 95 million dollars that Canada has had to spend on legal fees.
Recently, it seems that the North-American country has understood that the ISDS may have hindered its policy making capabilities and caused the government to spend significant sums of money. Therefore, in the renegotiated North American Free Trade Agreement, which from now on will be referred as the USMCA with the name standing for the initial of each participating nation, Canada decided to pull out from the ISDS clause. So, from now on the basic protections that have to be in place for investors such as, most-favored-nation treatment, impartial and equitable treatment, free choice of management, protection against performance requirements, free transfer of capital and profits, and protection against direct and indirect expropriation, will be able to be challenged only in a national court. Both for Canadian enterprises investing in the other two counterparties i.e. Mexico and the United States, and enterprises from the two nations investing in Canada, there will not be any USMCA investor protections applied after the three year transition period from NAFTA for remaining and pending claims that are still under NAFTA’s Chapter 11.
Furthermore, recently the Canadian government negotiated the Comprehensive Economic Trade Agreement, or more commonly referred to as CETA, with the European Union. Canada having felt the full might of the ISDS and the EU facing public backlash with the ISDS had to create a new framework for investor protection and international arbitration. Thus, the ISDS under CETA tries to solve many problems with the standard arbitrary systems. Firstly, there shall be an ad-hoc tribunal residing for a 5 year terms. Secondly, the tribunal will comprise of fifteen members, five appointed by the EU, five by Canada and five appointed by third countries. Moreover, in a rather unexpected manner the investor arbitrary system under the CETA shall include an appellate body. Also, the arbitrators shall have a fixed salary so as to not have the possibility to make the cases long lasting in order to increase their payment and also eliminate the possibility of corruption. However, issues with the system and the arbitrators remain. For example, one of the issues that remain is the fact that the arbitrators shall have the possibility to work as arbitrators in other non-CETA related ISDS cases. That is the arbitrators will be able to be appointed in cases under other treaties and be paid lucratively by their new clients. Nevertheless, this seems to undermine the process of independence of the court’s arbitrators as in potential future cases they may be biased in favor of the party that paid them lucratively to judge upon its case.
In conclusion it can be said that the ISDS comes with a plethora of issues for basic democratic and legal values. As, it tends to bypass certain elementary but essential rules. This can be demonstrated from the Canadian experience; an ISDS clause gives the power to foreign investors to directly or indirectly influence policy making as policymakers are afraid of potential litigation and high costs. This may instigate either a delay or an easiness with the policy making process. Furthermore, the costs that Canada had to pay are significant and the nation could have spent the more than 300 million dollars that went to the legal procedures, to other more important issues like the welfare system. So, it is evident from the high costs and the confirmation by certain policy makers that they take the clause seriously into consideration when they draft policies; that the Canadian experience is negative with the ISDS clause. From the recent developments and the country’s stance and withdrawal from the ISDS in NAFTA and the implementation of a new arbitrary method for international trade agreements between nations, it seems that Canada is tired of the private arbitrary system.
