Author Archives: Lawrence Herman

About Lawrence Herman

Counsel on International trade and investment, global business transactions & public policy

Investor Arbitration – Unease Continues

Further to my post below (23 March 2015), there is growing concern in well-informed legal and public policy circles over the recent Bilcon v. Canada arbitration award under NAFTA Chapter 11.

These concerns are fueling opposition to investor-State dispute settlement (ISDS) as constituted in the NAFTA and a wide array of other investment treaties, with three-person arbitration panels having the authority to make virtually iron-clad and un-appealable decisions involving domestic regulatory measures.

In Bilcon, as noted in my previous post, the arbitration panel split 2-1, the majority holding that the Canadian environmental review process, which turned down a large quarry and marine project in Nova Scotia, breached the minimum standard of protection Canada owed the investor under NAFTA article 1105.

A strong dissenting opinion by highly-respected panel member Donald McRae said that irregularities of procedure and even breaches of domestic law in themselves do not give rise to breaches of the international standard of protection under the NAFTA. That international standard, he said, is of a higher order.

McRae said that the majority risks turning investment arbitration panels into supra courts of appeal, giving investors access to remedies that are not available to investors under local laws. This, he said, goes far beyond what investment protection agreements are set up to do.

Challenges under these treaties have been proliferating in recent years, with some law firms set up to take on these cases on a contingency basis. A case being followed with great interest is the arbitration launched by Philip Morris over Australian laws requiring plain cigarette packaging.

Unease over ISDS is being increasingly voiced by both left-wing and conservative circles in Canada, in the EU and in the US, largely centred on the unassailable power of arbitration panels, appointed on an ad hoc basis to determine the legitimacy of public policy and regulatory measures and not subject to appeal.

To the left, this gives unacceptable advantages to large, aggressive corporations. To the right, this is an assault on national sovereignty. It will be interesting to see how these opposing views play out in the days ahead, notably in the context of the Trans-Pacific Partnership negotiations and in the European Union’s ratification of the Canada-EU trade deal.

Trade, Innovation and Middle-Class Prosperity

A lot of media discussion about international trade gets caught up in process – the events at the WTO in Geneva, the next meeting of trade negotiators, plans for the next ministerial gathering, what’s happening in the various forums with confusing acronyms – TPP, CETA, NAFTA, ASEAN, APEC, and on and on.

Trying to make sense of all of this complexity, we lose sight of the broader picture.

First and foremost, trade agreements aim to carve out a rules-based system in global commerce from what was in the 1920s and 1930s a chaotic beggar-thy-neighbour free-for-all.

The old GATT that emerged from the war in 1947 and its laudable successor, the WTO Agreement in 1994, represent singular achievements in this regard — creating a rules-based framework for open markets and fair and non-discriminatory dealings in international commerce.

Even with regrettable setbacks in the WTO negotiating processes, the guiding rules in the Agreement remain, requiring that national laws and regulations be free from discrimination and unfair treatment that inhibits the movement of goods, services and capital.

There is no doubt that this entails a sacrifice of national sovereignty to that extent. But trade agreements, like all contracts, entail compromises, giving up uninhibited rights of action for gains in other respects.

It’s not a zero-sum game, however. In today’s world, governments are increasingly sensitive to ensuring that trade and investment agreements simultaneously give them room to legislate for the common good, be it to protect the health and well-being of their citizens or to protect against environmental degradation. This is a hard to achieve, but this critical balance must be maintained.

Within this balance, measuring success in these agreements – be they multilateral, regional or bilateral – is not just about non-discrimination and freeing up the movement of goods across national borders. Success is measured equally in promoting technological development, innovation and entrepreneurial activity across the globe.

For Canada, what does this entail? Here are three guiding elements that should be given greater prominence and that, if realized, will support Canadian innovation and entrepreneurship and, ultimately, improve the well-being for all our people.

First, services. Like the Canada-EU agreement (CETA), other regional agreements, including the proposed Trans-Pacific Partnership (TPP) agreement, must ensure the freest possible market access for Canadian service providers, giving them fair, equitable and non-discriminatory treatment abroad.

That will create new opportunities for Canadian enterprises – bankers, insurers, engineers, transportation industries, architects, computer software design specialists and scientists – in expanded global activities and thereby stimulate entrepreneurial activity and innovation at home.

Of course, Canadian service industries will have to compete against fierce global players from other countries, including from emerging economies. Our service industry is already achieving notable international success but being measured fairly and objectively against the competition through rules that are clear, objective and non-discriminatory will assist Canadians in achieving entrepreneurial successes abroad.

Secondly, procurement. Canada’s trade agreements must provide non-discriminatory opportunities for Canadian bidders in foreign public procurement projects at the national and, importantly, at subnational levels. Canadian public authorities, federal, provincial and even at the municipal level, will do the same on a reciprocal basis.

Guaranteeing a level (or mostly level) procurement playing field in and of itself isn’t a guarantor of competitiveness or a stimulator of innovation. But if Canadian companies enter bidding races abroad assured they will be judged on the basis of their competence, innovation and cost-effectiveness and not inhibited by local market preferences, success abroad will follow from innovation and improved performance at home.

Third, intellectual property. Prospective trade and investment agreements must guaranty intellectual property protection for Canadian companies based on the highest international standards. Some of this is already assured in the NAFTA, the CETA and other agreements recently concluded. Improvements in IP protection are forecast in the TPP negotiations as well as in Canada’s ongoing bilateral initiatives.

While Canada has not been a world leader in patent filings, strong international guarantees for Canada’s offshore-related IP activities will mean Canadian companies can exploit foreign markets with a high degree of certainty — and legal recourse — that their innovations will not be high-jacked by unscrupulous foreign operators.

While this also isn’t a guarantor of Canadian entrepreneurial activity on its own, a more secure international playing field in intellectual property protection is a key ingredient in spurring innovation in here in Canada.

These three elements are often neglected in public discussion, which often pays undue attention to the more political aspects of trade negotiations such as, in recent days, the investor-state dispute settlement (ISDS) regime. There has been talk, for example, about European opposition to ISDS in the recently concluded agreement with Canada (the CETA) and the possibility that this might jeopardize ratification of the agreement by the European Union.

These arguments miss the point. In my view, ISDS could be modified, adjusted and even sacrificed without diminishing the importance of the CETA or other international trade agreements in stimulating global prosperity and innovation in the three central areas mentioned above – services, intellectual property and procurement.

If these three goals are realized in a balanced set of treaty rights and obligations, the compromises will have been worth the candle.

Some Recent Newspaper Quotes

I was quoted in a Globe and Mail article by Shawn McCarthy, 24 March 2015, reporting on Canada’s loss in a NAFTA arbitration over a quarry and marine terminal that the Province of Nova Scotia refused to approve:

There is a growing concern in legal circles that the arbitration panels are expanding their mandate – including substituting their decision-making role for domestic courts – and that they cannot be appealed, Toronto trade lawyer Larry Herman said Tuesday. The Bilcon decision “will feed ammunition to those who oppose international arbitration as a form of dispute settlement,” he added.

It’s the second high-profile NAFTA loss for Canada. Last month, Ottawa was ordered to pay Exxon Mobil Corp. and Murphy Oil Ltd. $17.3-million after a NAFTA panel ruled that Newfoundland and Labrador had violated the trade agreement by imposing retroactive research-spending requirements on its offshore oil producers.

The ruling will also serve as a precedent should TransCanada Corp. decide to launch a NAFTA challenge against the Obama administration’s handling of the Keystone XL pipeline review.

“The fact that the Keystone XL project has been subject to purely political delays … in my view, gives TransCanada a good argument that the U.S. has breached the international standard of full protection and security,” Mr. Herman said.

To read the full article, click here.

I was also quoted a few days earlier in another article in the Globe, 23 March 2015, by Bertrand Marotte, about the NAFTA arbitration award in the Murphy Oil v. Canada case, referring to the need for some kind of internal agreement between the federal government and the provinces whereby awards involving provincial measures should be re-paid to Ottawa by the province concerned:

“Ottawa and the provinces need to get together to resolve this issue so that it doesn’t continue to be a problem in the future,” Toronto trade lawyer Lawrence Herman said.

“It’s a political issue rather than a legal one, it seems to me, and requires Ottawa and the provinces to settle it amongst themselves.”

To read this article, click here.

Campbell Clark quoted me in a story in the Globe, 18 March 2015, about the chill in Canada-US relations and the implications for Canada from the fact that the Congress has not yet given President Obama that required authority to negotiate trade deals. Here’s what I said, in part:

Mr. Herman said it looks as if Congress wants to impose conditions on what is to be negotiated before granting the authority – in other words, it might say going in that the deal must include concessions from certain countries, such as asking Canada to give on supply management.

Those things might just be bumps in the road, Mr. Herman said. “But in this case, we’ve got a kind of political overlay.” The chill makes it more likely irritants colour the government-to-government relationship anew, he said, and that in turn makes it harder to smooth away disputes that can hurt.

This article can be read in full by clicking here.

Canada Loses Another Investment Dispute under NAFTA

A NAFTA arbitration panel has decided against Canada in a long-standing investment dispute over a large coastal quarry and marine project in Nova Scotia that had been turned down over environmental and social concerns (Clayton/Bilcon v. Canada).

A majority of the panel said that Canada and Nova Scotia breached the minimum standard of treatment under international law, as required under Chapter 11 of the NAFTA.

The case was launched by the US investors in 2007.

No decision has been made on the amount of compensation, which the investors claim at $300 million.

The decision is likely to stir up considerable controversy, notably because of a strong dissent by one of the panel members, Prof. Donald McRae, who said that the NAFTA panel went far beyond its jurisdiction under the treaty in questioning the reasoning of the federal-provincial environmental panel. Prof. McRae said that even if the review panel had breached some aspects of domestic law , that didn’t mean that the matter could be reviewed under the high thresholds set out in the NAFTA.

This decision, together with another NAFTA award against Canada and Newfoundland in the Murphy Oil Case, seems to reverse a trend where NAFTA investment panels have sided with governments, holding that they had the legitimate right to regulate economic activity and legislate for the public interest as long as their laws and other measures weren’t unfairly discriminatory or arbitrary.

Apart from these Canada-US cases under the NAFTA, there is growing debate in legal and trade policy circles generally over the role of investor-State dispute settlement panels (ISDS), including the dramatically increased use of investor litigation in challenging governmental regulations, many of which concern resource development and environmental protection.

One of the items of focus is that foreign investors have much larger rights under investment treaties than do local investors under domestic law. Another issue concerns the absence of an appeal mechanism, leaving investment panels with essentially un-challengeable authority in deciding these disputes.

It is not beyond legal ingenuity to resolve some of these issues. A few international organizations have even put these points on their agendas for future discussion (e.g., UNCTAD and ICSID). However, in reality, given that there are over 2,500 bilateral investment treaties around the world already in existence, finding a solution to these concerns remains a distant dream.

US Congress Delays Approval of Obama’s Negotiating Authority

In an op-ed piece in the Financial Post (Toronto) on March 19, 2015, I discuss the machinations in the US Congress and the implications of the various political aspects surrounding the lack – so far – of the US administration’s authority to negotiate free trade agreements. This has a major bearing on the current Trans-Pacific Partnership negotiations, entering their final delicate phase.

To see my article, click here.

ISDS Redux: Canada Loses – But Very Little

It’s been reported that a NAFTA investment dispute panel has ordered Canada to pay $17 million in compensation to Exxon-Mobil and Murphy Oil due to changes to the to the Canada-Newfoundland Offshore Petroleum Board Guidelines governing offshore oil and gas development on the continental shelf off Newfoundland and Labrador.

The award isn’t public as yet, but the story leaked out and was featured in a recent issue of the Investment Arbitration Reporter.

The arbitration was launched by the two oil companies as a result of Guideline changes in 2004, requiring them to make additional R & D expenditures in the Province.

The challenge was grounded in NAFTA Article 1106, which prohibits Parties from imposing local purchase and performance requirements on investors within their territory. The changes in the Guidelines were claimed as beyond the permissible NAFTA allowances.

There are several things to note about the proceedings, notably that the $17 award is substantially less than the $60 million plus interest and costs claimed by the companies.

While we don’t know whether the substantial arbitration costs (arbitrators’ fees and administration, etc.) will be charged 100% to Canada or whether they will be shared, an award of that amount will likely be eaten up by legal fees alone, incurred over the almost eight years since the claim was filed.

So it’s questionable how much the companies have really gained in all of this, illustrating the risks in pursuing investor-state litigation .

The other interesting element is that the award is against Canada – that is, the federal government – as the NAFTA respondent. Whether Ottawa will recover part of the $17 million from the Province is uncertain. In a prior NAFTA case initiated by Abitibi-Bowater in 2006 over Newfoundland’s expropriation of the company’s assets, Ottawa settled the case by paying $130 million in compensation to the company.

Even though the litigation there involved a Provincial expropriation measure, Newfoundland has apparently refused to repay any of the settlement amount to the Federal government. While this is a different situation in that it concerns a joint Fed-Prov agency, whether Newfoundland coughs up any of the money remains to be seen.

Here We Go Again, Maybe – Trade Disputes Looming

Just when there was some feeling that the old Canada-US trade wars of a couple of decades back were really at an end, there are new and darkening clouds on the horizon.

The first bit of gloom is in softwood lumber, a dispute that’s been off the front burner for a while under a bilateral agreement with the Americans, allowing Canadian lumber imports over a stipulated price and suspending any trade case being launched by American producers.

That agreement expires in October of this year. As Barrie McKenna wrote on 8 March 2015 in the Globe and Mail, there are rumblings in Washington that the US industry won’t agree to its renewal.

Without that agreement, American producers will be free to file a new trade case again Canadian exports. Chances are, they will.

The numbers make a new dispute inevitable. Look at it this way.

Canada’s annual market share in the US is over $8 billion. By forcing Canadian producers off balance in fighting a trade case, win or lose, the US softwood industry will come out ahead.

With a new Commerce Department investigation, gaining a mere 1% at the expense of Canadian imports equals $80 million annually in the Americans’ pockets. Why not pay a Washington law firm just half of that to bring on a new case?

The second gathering storm comes from a new petition just filed by US paper producers, arguing that Canadian imports are both dumped and subsidized. The target is Canadian exports of soft – or supercalendered – paper used to print magazines, catalogues, flyers and the like. The target companies are exporting industries in the Maritimes, Quebec and BC, so it has a cross-Canada impact.

Part of the US industry’s petition is that Canadian manufacturers benefit from low stumpage rates, just like the allegation in the softwood lumber dispute.

So here we go again.

While it’s expected that the Canada-US border won’t always be friction free, given the amount of bilateral trade involved overall, these two cases are cause for some re-evaluation. It shows that no matter how closely integrated the two economies have become under the NAFTA, when it comes to trade litigation, the border is still very much there.

Canada-EU Agreement – A Newfoundland Fish Tale

Op-Ed published in The Globe and Mail on January 28, 2015

Lawrence L. Herman, principal at Herman and Associates, practises international trade law and is a senior fellow at the C.D. Howe Institute in Toronto.

It’s happening again.

In the early 1980s, Canadians witnessed the sorry spectacle of provinces roaming around Westminster, cap in hand, lobbying British politicians to save them from their own federal government in its move to patriate the Constitution.

It was a sad chapter in Canadian political history, provinces invoking Britain’s role as colonial master, asking Britain to save them from their own federal government because the provinces couldn’t settle internal differences with Ottawa by their own means.

This time, it’s Newfoundland complaining about a fisheries compensation deal with Ottawa that’s supposed to help ease adjustment once the Canada-EU trade agreement (CETA) comes into effect.

So piqued is the province that it’s withdrawn support for the trade agreement and is going around European embassies in Ottawa, complaining that the feds can’t be trusted and asking foreign governments to support Newfoundland’s cause.

As in the patriation episode some 35 years ago, we have a Canadian province asking foreign governments to save them from their own unfeeling government in Ottawa.

Apparently, Newfoundland government ministers are even heading to European capitals to voice opposition to CETA and continue the lobbying.

The mind boggles. This is, after all, an agreement that provides substantial market gains for Newfoundland and all other exporting provinces. As if Canadians can’t sort these disagreements out themselves.

Newfoundland’s action is both unhelpful and dangerous. Unhelpful because it undermines critical political support for the agreement on the other side of the Atlantic.

Dangerous because at this sensitive juncture in the European Union’s internal procedures, it could put the entire treaty ratification process at risk.

Until now, Canada could pressure the Europeans to move ahead with CETA ratification, pointing out that Canada had its ducks in order. But Newfoundland’s gambit gives the Europeans an argument to go slow on ratification. Why should they move ahead if Canada hasn’t sorted out its own internal problems?

Newfoundland’s position is also legally off-base. Constitutionally, the federal executive (Prime Minister Stephen Harper’s cabinet) has the exclusive authority to negotiate, sign and ratify international treaties. Parliament alone can pass the necessary legislation to give a treaty international legal effect, binding on Canada as a whole.

Provinces have no constitutional voice in that process. It’s true that federal-provincial practice has meant that provinces have been consulted and in some cases involved directly, but as a legal matter, they have no role in negotiating and ratifying international agreements.

This means that once the federal government, under its exclusive authority, signs and ratifies a treaty, Canada is bound under international law. What happens then?

A province could decide not to comply with treaty obligations – but it’s unclear whether provincial laws can legally violate Canada’s international treaty obligations.

Suppose the federal government moved ahead and ratified CETA without Newfoundland’s consent. If Newfoundland then refused to recognize the EU’s treaty rights, Ottawa might challenge that in the courts and may well prevail on constitutional grounds.

The other, more plausible scenario is that the EU would invoke binding arbitration against Canada for breach of the treaty. If the EU succeeded and Newfoundland still refused to comply, the EU would have the right to retaliate. They would do that by applying prohibitive duties on Canadian exports. Those duties would target Newfoundland’s own fishery products.

The CETA, of course, provides tariff-free access to the huge EU market and many other benefits for exports of Canadian goods and services. This includes seafood and other exports from Newfoundland. So in the end, Newfoundland would be the big loser.

That’s why the Newfoundland seafood processors and other business groups in the province have come out against their government’s actions.

Let’s stand back for a moment and accept that there may be some legitimate differences over the compensation to be paid to Newfoundland as a result of the CETA. Fair enough. But the proper response is to settle those issues internally, among Canadians.

The wrong course is to parade the disagreement among our European partners. Not only does that put the CETA ratification process at risk on both sides of the Atlantic, it portrays Canada as a less-than-reliable negotiating partner that can’t get its own team in order.

Countering the Aggressive Reach of US Law

The broad and aggressive out-reach of US law has again reared up in Canada.

This time it’s Buy America and the requirement that the Prince Rupert ferry upgrade must use US steel. It shows how Canada can be sideswiped by the American approach in legislating with intended global effect.

In this case, a rapid Canadian response is called for. The December 16 editorial in the Globe and Mail is right on point.

The US Buy America requirement is a carve-out from that country’s obligations under the WTO Government Procurement Agreement. Because that is a “bottom-up” agreement, it means that governments are allowed to list only those procurements that are covered by the GPA’s obligations– and as well those that are not.

So the US excluded all government procurements subject to its Buy America requirements, including all transportation infrastructure projects that get US government funding. Recipients of that funding must only use US goods in their projects, meaning any port terminal projects benefitting from these subsidies.

And since the Prince Rupert terminal, leased to an American operator, wants access to these funds, the condition is that all steel used in the project has to be of US origin.

It wasn’t really intended that Buy America would apply outside the geographical limits of the United States. But it happens that these foreign projects actually do qualify – as apparently would a US operated port facility in Asia, the Middle East or elsewhere.

Unintended or not, the effect is unacceptable when it comes to Canadian projects and the government must take appropriate counter-measures. You may have seen my comments in a piece by Barrie McKenna in the December 14 edition of the Globe and Mail on this very point.

Canada has a law called the Foreign Extraterritorial Measures Act, a more-or-less dormant piece of legislation that was passed by Parliament in the 1985, mostly to counteract the effect of US laws that required American subsidiaries in Canada to comply with the US trade embargo of Cuba.

Canada has no prohibition on trading with Cuba and it was – and is – considered unacceptable for American laws to try to prevent someone in Canada from doing something that is perfectly legal here.

To prevent that, FEMA prevents any Canadian-based company and any person in Canada from complying, directly or indirectly, with the American trade embargo of Cuba.

In more technical terms, statute says that where Canada’s justice minister determines that a foreign state has taken any trade-related measure that (1) “has adversely affected or is likely to affect significant Canadian interests . . . involving business carried on in whole or in part in Canada” or (2) “otherwise has infringed or is likely to infringe Canadian sovereignty”, the justice minister, with the concurrence of Canada’s foreign minister, can issue an order preventing the application of that foreign measure in Canada.

Under those provisions, the government enacted the Cuban blocking order in 1992, making it an offence for any one in Canada to comply, directly or indirectly with the American trade embargo of that country.

No criminal prosecutions have been taken under the blocking order since its enactment. But it continues on the books and it happens that from time to time Canadian companies get caught up in the prohibition against following the US embargo.

While the issue is not the same in the Prince Rupert affair, it would be perfectly in line with the objectives and the statutory language of FEMA for the government to pass an order similar to the Cuban blocking order, preventing Buy America rules having any direct or indirect effect here. It would require Mr. McKay, as justice minister, to make a determination that these Buy America rules infringe Canadian sovereignty and, with Mr. Baird’s concurrence, to issue the necessary blocking order.

Of course, there’s more than technical points at stake here. The issue has broader Canada-US dimensions. Action under FEMA will also affect the redevelopment of the Prince Rupert facility – although the $15 million sacrifice can conceivably be made up with Canadian infrastructure money. This will clearly require the Prime Minister’s sign off before any such action can be taken.

But as the Globe editorial has got it right. Canada must respond and FEMA offers the road map for that response.

The Investor-State Dispute Controvery

I just published a short article on the current controversy regarding the rights of investors to invoke binding dispute settlement proceedings again host governments. This is known as Investor-State Dispute Settlement or ISDS and is enshrined in hundreds of bilateral investment protection treaties around the world.

The issue has recently come to the fore with comments by German government representatives indicating opposition to these ISDS provisions in the recently-concluded trade and economic agreement between the EU and Canada. The newly-elected President of the EU and the new EU Trade Commissioner have also voiced misgivings over these special rights for private investors.

My article looks at those issues and suggests a couple of ways to meet these concerns. One is to allow for appeals from arbitration decisions, so that there is at least some recourse to a higher body where one side or another disagrees with the decisions of arbitration panels. The other is to institute permanent arbitration panels, to eliminate the ad hoc nature of these proceedings.

These don’t answer all the concerns being voiced. However, within the current framework of investor protection agreements, I suggest that this is a feasible approach for governments to examine.

To see my article click here.