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Ottawa remains committed to investor-state dispute settlement, which has been a feature of every trade deal signed since NAFTA.DARRYL DYCK/The Globe and Mail

Nearly 10 years ago, Nova Scotia's then-environment minister, Mark Parent, sent a letter to U.S.-based Bilcon of Delaware Inc., informing the company that its proposed quarry on the shores of the Bay of Fundy would not be allowed to proceed due to the threat of environmental, social and cultural impacts.

With encouragement from the provincial government, Bilcon had spent considerable time and money on the plan for a basalt quarry and terminal on Digby Neck, only to have a federal-provincial review panel recommend against it, saying it would run counter to "core community values."

In response to the rejection, the company sued under the North American free-trade agreement's "investor-state dispute settlement" (ISDS) mechanism contained in the treaty's controversial Chapter 11. A bi-national panel of arbitrators – two Americans and one Canadian – ruled two years ago that Nova Scotia had violated NAFTA's guarantee of "fair and equitable treatment" and that Bilcon deserved compensation.

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The Digby Neck battle continues. While a NAFTA panel is due to weigh the company's demand for $100-million in compensation, Ottawa has challenged the 2015 panel ruling in federal court, arguing the arbitrators overstepped their role in issuing a judgment that was outside the scope of the trade deal and "in conflict with the public policy of Canada."

As NAFTA renegotiation gets under way next month, the Liberal government is being urged to demand significant reform to the ISDS provision – or eliminate it completely.

In its objectives for NAFTA renegotiation published last week, the Office of the United States Trade Representative proposed minor tweaking of the Chapter 11 provisions to ensure more openness in the process. It would also strengthen "national treatment" provisions. And it proposed to include a "general exception" to allow for protection of legitimate domestic objectives, including protection of health, safety and security, "among others."

Featured in myriad trade and investment deals globally, ISDS provisions are designed to protect firms that invest abroad against unfair treatment by foreign governments. They require governments to pay compensation for expropriated property, and provide the "fair and equitable treatment" to foreign firms.

Suits are heard by an arbitration panel made up of private-sector lawyers, and proceedings can be held in secret, with no clear appeal provision.

Opponents see NAFTA's ISDS mechanism as an unwarranted intrusion on sovereignty which benefits powerful, multinational corporations at the expense of ordinary citizens. Defenders argue investor-state chapters are necessary to prevent protectionist governments from running roughshod over foreign investors for the sake of political expediency.

Canada has been particularly vulnerable to NAFTA arbitration suits. Since the treaty came into force some 25 years ago, U.S. companies have filed 39 claims against Canadian governments, winning or settling in eight cases that have cost taxpayers $215-million. (The federal government is responsible for paying claims, even when the company was challenging a provincial action.)

Mexico has paid out more than $200-million (U.S.), while the United States has not lost a NAFTA Chapter 11 case.

Some environmentalists and academics worry the track record of Chapter 11 judgments is creating a "chill," preventing governments from pursuing environmental or other regulations if the actions would reduce the profitability of a foreign investment and leave the jurisdiction open to a NAFTA suit.

The Liberal government has not listed its negotiating objectives but Foreign Affairs Minister Chrystia Freeland has indicated she wants to update the accord in order to increase the legal rigour of the arbitration process and to assert governments' right to regulate in the public interest, such as on environment and labour. Such changes – along with a new appeal process – were incorporated into the Comprehensive Economic and Trade Agreement (CETA) that Ottawa concluded recently with the European Union.

However, some critics would rather see the ISDS regime scrapped entirely.

"I find it an unbelievable intrusion into sovereignty," said Gordon Ritchie, a principal adviser at Hill+Knowlton Strategies and a top negotiator on the original Canada-U.S. trade agreement.

The NAFTA provision creates "super rights for foreign investors who, as a result of these provisions, have recourse that Canadian investors do not have," Mr. Ritchie said. "I can make no case for it; I have never heard anyone make a case for it that was remotely convincing. In my view, it's a very, very bad provision."

Environment groups, in particular, worry the investor-state provisions are being used by multinational companies to challenge regulatory decisions that go against resource projects, as was the case in the Bilcon ruling.

Last June, Calgary-based TransCanada Corp. filed a $15-billion (U.S.) NAFTA suit against the American government after then-president Barack Obama rejected the company's proposal to build the Keystone XL pipeline to carry oil-sands crude from Alberta to the U.S. Gulf Coast.

TransCanada discontinued its claim after President Donald Trump approved Keystone XL in March. However, its precedent has raised speculation that U.S.-based Kinder Morgan Inc. could resort to an investor-state NAFTA suit against British Columbia if the new government manages to block its planned expansion of the Trans Mountain pipeline from Edmonton to Vancouver.

The dispute settlement provision "is one of the most dangerous chapters on the NAFTA," said Ben Beachy, Washington-based director of the Sierra Club's trade program. "It is empowering what is already the most powerful group in the world – multinational corporations – to bypass domestic courts and laws. No other class of actors has that ability."

However, Ottawa remains committed to investor-state dispute settlement, which has been a feature of every trade deal signed since NAFTA. Canada is a major supplier of capital for resource development – especially mining – in places like Africa and Central America, and the government is eager to ensure Canadian firms are protected from politically motivated expropriation or discrimination.

Toronto lawyer Barry Appleton said the NAFTA-type investor protections are now standard in bi-national agreements, while the volume of actions is minuscule compared to the amount of global trade and investment that occurs. Mr. Appleton – who represents Bilcon – argues Canadian governments, particularly provincial governments, have been more vulnerable to NAFTA suits because they have a history "being engaged in highly protectionist types of policies."

But he argued Canada should ensure investor protections remain in NAFTA, given that American federal and state governments – led by the Trump administration – are increasingly willing to discriminate against Canadian companies.

"You would think a country like Canada that is so trade reliant and so investment reliant would want to have the strongest protection possible in its treaties rather than weak protections," he said.

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