Most trade lawyers across the country are lauding Canada’s ratification of the International Centre for Settlement of Investment Disputes Convention. But they glaze over the serious and far-reaching effects for Canadian public policy.
In order to understand how and why that’s the case, it’s necessary to know a little bit about international investment law, which is what the ICSID convention is all about. Canada is a party to a number of bilateral and multilateral investment treaties. In them, Canada extends protection to investors of other partner nations. In exchange, those other partner nations extend Canadian investors the same protection. Investment treaties often protect investments from expropriation, ensure their free transfer in and out of the country, and provide the investor with fair and equitable treatment.
So if a Swiss investor in Canada has its investment expropriated, it can bring a claim directly against the Canadian government. And if a Canadian investor in Switzerland has its investment expropriated, it can bring a claim directly against Switzerland. The theory behind investment treaties is that they encourage investment by reducing the risks undertaken by foreign investors.
If a Swiss investor in Canada has suffered a wrong under an investment treaty, the Canadian government pays up. And if a Canadian investor in Switzerland has suffered a wrong, the Swiss government pays up.
The cost of securing the overseas investments falls on the taxpayer as it’s the Canadian and Swiss people who foot the bill when their respective governments take actions that violate investment treaties. Investment treaties, therefore, represent a transfer from taxpayers to big business.
Many proponents argue this system encourages foreign investment and stimulates growth. As with anything, though, there are potential downsides.
Some people, for example, criticize the fact that investment treaties require taxpayers to indirectly subsidize their domestic companies operating overseas. The ratification and implementation of ICSID aggravate such concerns for a number of reasons.
In Canada, as things currently stand, if a foreign investor feels it has suffered an infringement of its rights under a treaty, it can seek arbitration. An arbitral panel, usually of three members, meets to decide the investor’s claim. If the panel finds for the investor, it issues an award enforceable against Canada.
More often than not, Canada pays the award. However, in some circumstances, it refuses and the investor must bring a claim for enforcement in the courts.
The Canadian government can resist enforcement on a number of grounds. For example, if an arbitral award results from the government’s attempts to protect the environment or the safety of workers, a Canadian court may refuse enforcement. This is the public policy protection. Investors cannot bring a claim based on actions taken to fulfil a legitimate public policy. It stands as a defence against foreign investment encroaching on a society’s fundamental values and policies and reinforces state sovereignty where it matters most: to have the final say on how best to protect the health and welfare of Canadians.
With ICSID, this process changes dramatically as it eliminates the role of Canadian courts and public policy protection. If Canada doesn’t agree with an ICSID award, it can only appeal the matter to an ICSID review panel. The review panel can only review the arbitral decision on a limited set of grounds that don’t include public policy protection. Once the ICSID panel reviews the matter, Canadian taxpayers must cough up. There are no further routes of appeal.
The impacts of these changes are very significant. They create the very real possibility that taxpayers will be on the hook to international investors for conservation, environmental, and health policies. Let’s look at some examples.
In 2014, British Columbia intends to enact its Water Sustainability Act. This act would introduce a scheme to charge companies that draw water from B.C. wells.
Nestlé, a Swiss company, has been bottling and selling water in B.C. for years. These regulatory changes would affect its cost of doing business and arguably violate Canada’s obligation to ensure Nestlé’s fair and equitable treatment.
International investment law often considers significant changes to pre-existing regulations to be breaches of investment treaties. Prior to ICSID, Canada could have challenged a potential claim by Nestlé as conflicting with a legitimate public policy objective such as conserving groundwater. Under ICSID, such an argument would fall on deaf ears. And worse, Canada’s courts would be powerless to refuse enforcement.
Similar disputes abound. Quebec might not be able to refuse Lone Pine Resources Inc.’s demand to conduct fracking on the St. Lawrence riverbed to extract natural gas from shale formations or British Columbia might not be able to recoup the health costs of its residents from international tobacco companies under the Tobacco Damages and Health Care Costs Recovery Act. The examples are endless.
ICSID’s proponents argue it increases foreign direct investment and protects Canadian investors abroad. This may or may not be true, but at what cost? The government needs to convince Canadian taxpayers they should pay foreign investors when it seeks to protect the environment or their health.
For more, see "Canada ratifies international arbitration treaty."
Anthony Daimsis and Tolga Yalkin are law professors at the University of Ottawa.
