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Lawrence Herman

Lawrence Herman

LAWRENCE HERMAN

Is U.S. violating NAFTA with Keystone delay? Add to ...

Lawrence L. Herman, Herman & Associates, Toronto, is an international lawyer and Senior Fellow at the C. D. Howe Institute.

Approval of Keystone XL suffers delay after delay. Whether one is for or against, it’s obvious the project has become hostage to the unpredictable forces of American politics.

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It’s hard to get a handle on how the project is being evaluated by the Obama administration. Is it environmental factors that count, including arguments over Alberta’s oil sands, or is it energy security or American jobs that are critical?

Both TransCanada, as the pipeline’s proponent, and the Canadian government have played Keystone as best they could, insisting that the project meets all the required technical criteria and that Washington’s decision should be based on those considerations alone.

But Washington being Washington, it’s never as clean or neat as that. Politics are inseparable from the process of pipeline approval, more so in Keystone than in many others.

Because these political games seem so intertwined in the decision-making process, as this troublesome and vexing matter continues, including obscure deals and trade-offs between the White House and the Congress, there are international legal issues that come into play as reflected in the North American free-trade agreement.

Article 1105 of investment chapter of the NAFTA, entitled “minimum standard of treatment”, says that the U.S. is required to accord all Canadian investors (i.e., TransCanada) “treatment in accordance with international law, including fair and equitable treatment and full protection and security.”

Should Keystone ultimately be turned down, the question will be whether the US has met the “fair and equitable treatment” obligation – what insiders call “FET”. If authorization is refused, would TransCanada – and indeed the Canadian government – have a NAFTA case based on the failure of the U.S. to discharge that obligation?

The FET standard is central to hundreds of investment protection treaties around the world. It’s been invoked in countless of international investment disputes over the two or three decades.

Keystone’s ultimate future should be judged on proper regulatory criteria applied to similar pipeline projects in the U.S., including legitimate economic factors and technical and environmental assessments with credible underpinning.

But the more Keystone is caught up in political games and the more TransCanada’s application is treated differently from similar applications and denied normal timeliness, transparency and fair procedure, the more weight is given to the argument that the U.S. is in contravention of its NAFTA obligations.

Of course, in any NAFTA arbitration the question always will be: what does fair and equitable treatment mean in legal terms?

One of the unresolved controversies is whether FET is limited to the customary international law standard, the content of which is illusive and difficult to prove, or whether FET can have independent meaning and take into account, for example, administrative law requirements of due process, transparency, fairness and equity.

The governments of Canada, the U.S. and Mexico prefer to link FET to the higher customary international law standard and in 2001 issued an interpretative bulletin stating that the NAFTA FET standard was the standard recognized under customary international law.

But NAFTA tribunals are not necessarily bound by that statement and could arrive at a different conclusion based on their own reading of the NAFTA. For example, in a recent arbitral award (Waste Management Inc. v. Mexico), the NAFTA tribunal held that the FET standard included requirements of due process and natural justice beyond what was recognized in customary international law.

While other NAFTA investment arbitration awards have taken the more restrictive customary international law approach, NAFTA panels are not bound by precedent and can reach conclusions that depart from those of their predecessors.

At this point, all of this is in the realm of legal theory. The main point, whether under the international law standard or under an independent standard, is that the more that arbitrary factors enter the picture and the more Keystone is politicized, the more force there is to the argument that U.S. is in breach of its NAFTA obligations, not only to TransCanada as the investor, but to Canada itself as a treaty party.

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