David Schneiderman is a professor in the law faculty at the University of Toronto and a Senior Fellow with the Centre for International Governance Innovation. He is the author of Red, White, and Kind of Blue? The Conservatives and the Americanization of Canadian Constitutional Culture.
There is probably no more contentious issue in modern treaty-making than the system of investor-state dispute settlement (ISDS). This is the method of handing over to panels of investment lawyers the determination of whether states have violated treaty norms that protect foreign investors. Investor rights are meant to significantly inhibit state policy space. The record of arbitration is unpredictable (states often win) but also alarming (states also lose for not very good reasons).
So alarming is ISDS that citizens and states in the European Union objected to including it in the transatlantic trade and investment partnership (TTIP), the free-trade and investment agreement currently under negotiation between the EU and the United States. To break through this impasse, the European Commission on Trade proposed a new investment court, with a tribunal of first instance and a tribunal to hear appeals. Canada and the EU have now successfully completed the negotiation of their comprehensive economic and trade agreement (CETA), which will include a new investment court as originally proposed for TTIP. Although there is no prospect that the Americans will take up this proposal, Canada is now on the front lines of the EU initiative, one that is so modest that it may make little difference to arbitral outcomes.
Admittedly, there are some advantages to the investment court model. It has the merit of avoiding the innumerable conflicts of interest that arise under investment treaty arbitration. Not only do some arbitrators also act as lawyers in other disputes, they have an incentive to read expansively treaty disciplines in order to ensure a steady clientele for their legal services. Having an appellate body may also result in a little more consistency in treaty interpretation and, therefore, in outcomes. Both investors and states could use a little more of that. But an investment court will not remedy the principal defect of investment arbitration, which is not about process but about substance. The treaty disciplines enforced by this cadre of investment and trade lawyers, on retainer or not, remain mostly intact.
This is because CETA's investment chapter looks in many respects like most every other investment chapter. It is intended to set high standards for the protection of foreign investors by prohibiting government measures that favour local employees or suppliers, or that significantly curb returns on investment, or that deny investors "fair and equitable treatment," an opaque standard of protection that includes, in the CETA text, denials of due process and "manifest arbitrariness." There is the addition of the seemingly helpful clause that reaffirms the "right to regulate" in order "to achieve legitimate policy objectives, such as the protection of public health, safety, the environment or public morals" and so on. But this hardly generates any meaningful constraint on the power of investment lawyers and tribunals.
This is one of the problems with this regime of investor rights. It confers enormous discretion on an elite corps of lawyers – experts in international trade and investment law, as required by CETA.
As enforcers, investment tribunals have an immense amount of room to manoeuvre in determining whether governments have run afoul of a treaty text. Take, for example, the recent investment tribunal decision in Bilcon that found the government of Canada liable under NAFTA for having acted "arbitrarily" by heeding the advice of an independent environmental review panel concerning the construction of a rock quarry and ferry terminal on a sensitive shoreline of the Bay of Fundy. The panel recommended that the project not be authorized because of adverse environmental effects. The investment tribunal was of the view that the panel acted beyond its authority and so violated NAFTA, and that the project should have received less scrutiny, like previous projects in Nova Scotia.
It was discriminatory, in other words, for the environmental review panel to have been interested in the environmental effects of this project, more so than other ones. The investment tribunal's findings of fact and legal conclusions surely are contentious. Indeed, a dissenting tribunal member declared that the majority opinion was entirely disconnected from both international law and Canadian law and would cast a chill on future environmental review. Yet the tribunal's interpretation of international treaty norms has had the effect of supplanting Canadian law. There is no reason to think that other investment lawyers, operating under the rubric of CETA's court system, would behave any differently.
So long as a broad set of rights are conferred upon foreign investors and their interpretation is left to a cadre of investment-law personnel, the regime will remain flawed. It certainly is not worth saving by way of a new investment court.
International Trade Minister Chrystia Freeland declared that she had heard "no opposition" to CETA when she recently held consultations on the Trans-Pacific Partnership accord. This is a deal that includes ISDS, as CETA did until recently. If she heard no opposition, then she does not understand the problem with the regime of international investment law and the problem of interpreting broad and opaque rights intended to protect foreign investors.
What the minister should be doing is commissioning independent study of the relationship, if any, between signing these agreements and attracting new inward investment – a matter that is in doubt. There is even the question of whether investors are well-served by this legal order and whether there might be some other, less costly and more efficient means of addressing their concerns. In this way, Canadians can begin to make a contribution to meaningful reform of this failing system.