A recent study by the Canadian Centre for Policy Alternatives (CCPA) has found that Canada has been the target of more claims under the North American Free Trade Agreement (NAFTA) investor-state dispute settlement (ISDS) mechanism than the U.S. or Mexico. [https://www.policyalternatives.ca/publications/reports/nafta-chapter-11-investor-state-disputes-january-1-2015]. The CCPA affirmed its abolitionary stance on ISDS by stating that “the pervasive threat of investor-state challenge under NAFTA Chapter 11 puts a chill on public interest regulation” and that “current trends will only worsen unless political and legal action is taken.”
ISDS, also known as Chapter 11 under NAFTA provides foreign investors, including Canadians, the right to seek compensation for damages when host state governments violate NAFTA investment obligations including: protection in cases of expropriation, as well as National Treatment and Most Favoured Nation Treatment standards, among others. These provisions allow private investors from Canada, Mexico and the U.S., to launch an action for compensation directly against the host state where that state implements or enforces measures that damages the investor’s investment. NAFTA’s Chapter 11 provides investors with direct access to third-party adjudication before an impartial international tribunal. Relying on the national courts of the host country to enforce obligations under NAFTA is not always easy, impartial or even possible in all cases. Since regulations affecting individual investors would not normally be challenged by governments through state-to-state dispute settlement, the creation of ISDS as a stand-alone procedure appears to be a reasonable step for a sovereign state to take.
There have only been 77 cases brought under NAFTA’s Chapter 11 since it came into force in 1994. That represents a rough average of 3.7 cases per year in its 20 year lifespan, in comparison to the several thousands of domestic commercial cases being launched in each respective signatory country on an annual basis. In total, there have been 35 claims against Canada, 22 against Mexico and 20 against the U.S. It is important to note that out of the 35 cases noted against Canada, 15 of them were withdrawn. This means that there were only 20 “real” cases brought against Canada, which represents an average of one case per year. Interestingly, out of the 77 overall claims brought forward under NAFTA Chapter 11 in the last two decades, only about 10% of cases were decided against the state. It is also noteworthy that out of the 35 cases filed against Canada, only 3 have been decided against it. In other words, only 8% of claims against Canada have been successful to date. The CCPA rightly identified that the increasing trend of ISDS cases reflects both a large increase in the number of bilateral investment treaties and free trade agreements, as well as an overall increased awareness by investors of their rights and available recourses in the age of the internet.
Concerns in Canada about increasing or potential claims should be balanced by consideration for the increased protection that is afforded to Canadian investors operating in Mexico or in the U.S. The investment protections provided for under NAFTA’s Chapter 11 promote investments and provide credible commitments from Canada, Mexico and the U.S., which serve to lower the risk of investing in foreign territory and consequently result in greater and cheaper Foreign Direct Investment (FDI) to the benefit of the participating countries. Although there is always good reason to re-evaluate existing systems on an ongoing basis, there are definitely some advantages to having a pre-established recourse for investors in a foreign territory to promote FDI globally. Some reform may be warranted to ensure the efficient and proper functioning of ISDS, and would likely be a better option than complete abolition, as suggested by the CCPA. For instance, potential reforms considered by United Nations UNCTAD in 2013 included: limiting investor access to ISDS; introducing an appeals facility; and creating a standing international investment court [http://unctad.org/en/publicationslibrary/webdiaepcb2013d4_en.pdf].
As it stands, no evidence has been brought forward to demonstrate that the 1 claim per year against Canada has resulted in illegitimate changes to regulations or that it has actually prevented the government from acting in what it considers to be the best interests of its nationals. That democracy would be so fragile as to crumble at the thought of 1 ISDS claim per year against Canada seems to be somewhat exaggerated. There is also no recognition that Canada, as a sovereign state, did have the right to agree to ISDS or that it is somehow bound to ISDS indefinitely. Over the coming weeks, we will endeavor to provide a longer, more in-depth critique of the CCPA report to strip away the assumptions and hyperboles rampant in the report and take a clear look at the remaining facts.
