David Schneiderman is a professor of law at the University of Toronto, where he teaches constitutional law and international investment law.
There is a lively debate going on within Democratic Party ranks and in the U.S. Congress over granting President Barack Obama fast-track authority to complete negotiation of the Trans-Pacific Partnership agreement. Canada is among the 12 states hoping to finalize these negotiations. Yet there seems no prospect of a similarly vigorous debate occurring within Canada.
Among the many concerns identified by critics, such as U.S. Senator Elizabeth Warren, is the agreement's investment chapter and, in particular, its investor-state dispute settlement mechanism. This mechanism, the ISDS, can be found in a number of regional treaties (including the North American free-trade agreement) and in some 3,000 bilateral investment treaties.
The mechanism entitles foreign investors to sue states for damages when states run afoul of treaty commitments. Typically, claims are launched when there is a change of state policy that gives rise to allegedly discriminatory treatment, expropriation or violations of the imprecise standard of "fair and equitable treatment." Investment tribunals, staffed by a cadre of investment lawyers, issue decisions for which there is no real review and awards for damages ranging from tens of millions to hundreds of millions of dollars. There is little reliable evidence showing a relationship between signing these agreements and attracting new inward investment.
A recent decision of a NAFTA tribunal should give Canada and the other states reason to pause negotiations. In March, the Bilcon company of Delaware succeeded in its claim against Canada for having followed the advice of an independent environmental review panel. Under review was a proposal by Bilcon to build a rock quarry, together with a processing and ship loading facility, on the shores of Nova Scotia's Bay of Fundy for export to New Jersey.
The review panel recommended that the governments involved (both federal and provincial) reject Bilcon's proposal because of its adverse environmental affects to the land, marine and human environments. The independent panel report adjudged Bilcon's proposal as inadequate, giving rise to significant concerns that remained unaddressed by the investor.
The federal and Nova Scotia governments wisely chose to follow the advice of the independent panel. Feeling aggrieved, the investor elected to pursue compensation before an investment tribunal rather than seeking a review of the decision in Canadian courts. That is principally because the investor would never get an award for damages in Canadian courts for the government's alleged misbehaviour. At best, a court could be asked to order a "do-over" of the approval process. Instead, the investor chose to pursue a large monetary award before a more sympathetic cadre of investment lawyers.
Remarkably, the investment tribunal found that under the terms of NAFTA, it was competent to review the environmental panel's decision – as if the tribunal itself were a Canadian court.
The process was faulty, the tribunal concluded, because the panel applied the wrong criteria while failing to apply the right ones. The tribunal concluded that Canada had run afoul of its international commitments by following the panel's recommendations not to proceed with the project. This amounted to a denial of fair and equitable treatment. The tribunal even found that there was discrimination, as other similar projects had been authorized in the past using a less strenuous environmental review process.
One tribunal member dissented, however. University of Ottawa law professor Donald McRae complained that his fellow arbitrators had awarded damages for breach of Canadian law in a case where Canadian courts would never authorize an award for damages. Canadian courts were fully competent to review these alleged procedural defects but were never given an opportunity to do so. Moreover, the tribunal had added a layer of control over environmental review processes that would give rise to a "chill" on future environmental review panels. It amounts to a "remarkable step backward in environmental protection," he maintained.
It may be that the U.S. Congress has less reason to worry about this sort of regulatory chill. After all, the United States has not lost one investment arbitration dispute. Yet, it very well could have. In such cases, arbitrators have often acted strategically. In one such instance, the U.S.-appointed arbitrator was told by the State Department that if the United States lost the case, it would trigger congressional backlash and that they would "lose NAFTA."
Canada, by contrast, has lost as many investor-state disputes as it has won. Yet it looks like no federal political party will make this a subject of Canadawide debate. The Conservatives have been pushing aggressively for new agreements with ISDS while the Liberals have a disappointing track record on this front as well. Even the New Democrats seems to follow the prevailing winds, having approved of the Canada-South Korea free-trade agreement with an ISDS. More disconcerting is that the NDP's opposition critic for health, Murray Rankin, appeared as an expert witness for the investor in the Bilcon case.
It increasingly looks like a Canadian debate over ISDS will be missing in action.