Author Archives: Lawrence Herman

About Lawrence Herman

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

Germany, Canada and Investment Protection – Another Look

The reported German rejection of Investor-State Dispute Settlement (ISDS) in the Canada-EU trade and investment agreement, while inexcusably late in the day, shouldn’t come as a total surprise.

The July 26 Sueddeutsche Zeitung report simply articulates Germany’s growing distrust over these binding investment arbitration provisions, of particular German concern in the context of the EU-US trade and investment negotiations.

Maybe the German government looked at the many investor claims under the NAFTA launched against Canada by US companies – many more than against Mexico – and saw the potential exposure of German laws and policies to these kinds of claims by American corporations.

If the Germans don’t agree with investor-State arbitration in the agreement with Canada, never mind what the EU Commission’s technical mandate might be, it just won’t happen. The German position can’t be ignored.

Politically, this means a setback for the Harper government. I said so in my comments in the Globe and Mail today. But that’s only the immediate, short-term response.

We need to take a closer look at this.

While investor arbitration has been touted as a major gain for Canada in the EU deal, its value may be overstated. It’s not clear that investment arbitration is a critical tool for Canadian companies doing business in Europe. None of the 200 pending arbitrations under the International Centre for the Settlement of Investment Disputes, for example, involve Canadian companies suing European governments.

We don’t really expect serious problems for Canadian companies investing in the UK, France, Germany, Spain, Italy, do we? Canada has never pursued bilateral investment protection agreements (FIPAs) with these countries for that reason.

Regarding the others, Canada already has standalone FIPAs with binding arbitration provisions with many of the smaller EU members – Poland, Romania, Hungary, Slovakia, Croatia and the Czech Republic.

Regarding the 15 or so others EU governments, if ISDS has to be removed from the Canada-EU agreement because of German opposition, there’s nothing to prevent Canada negotiating separate FIPAs where there’s a serious investment interest (probably not too much Canadian interest investing in Bulgaria, Latvia, Estonia, Macedonia, I’d venture to say).

So, standing back and taking another look, can the CETA exercise go forward with either an attenuated set of investor arbitration provisions or even a removal of ISDS from the agreement altogether? I would think so. It might take some effort to re-jig the treaty language (which we haven’t seen yet), but it would seem do-able.

For example, the Australia-Japan free trade agreement excludes investor arbitration but has provisions allowing both sides to review the possibility of including ISDS in the future.

Another view is that, while ISDS may give some comfort to investors, when it comes to investing in Europe, Canadian companies should do their own risk assessments and make their investment decisions accordingly.

CETA Rescue is Possible – Don’t Despair

The German position rejecting investor-State dispute settlement (ISDS) in the CETA– while a last minute surprise and reprehensible for that reason – doesn’t spell the end of the Canada-EU deal by any means.

The Germans have simply come out with a position that has been bubbling for some time. More and more stakeholders, beyond the typical left-leaning organizations, have been expressing disquiet over the standard ISDS model.

The Australian government has abandoned ISDS as a standard feature in its trade agreements. Its new deal with Japan doesn’t have one.

While the Americans are pushing hard for binding investor-State arbitration in the Transpacific Trade talks, several TPP governments are increasingly skittish of including this.

The Germans are worried that if ISDS is included in the Canada-EU deal, it will be impossible to resist it in the current EU trade and investment negotiations with the Americans. That’s the real reason for this last-minute change of position on CETA.

So the German position in a way is just a statement on ISDS that at least lays things out clearly.

ISDS was conceived 20 years ago to ensure a level of comfort for investors from the wealthy, industrialized countries into developing economies where the rule of law was shaky.

A level of protection was there to prevent arbitrary and discriminatory seizures of assets by unreliable governments. It provided recourse where local measures were targeted against investments and failed to meet international standards of “fair and equitable treatment.”

But the process has morphed into something much more, with the aggressive use largely by well-funded American companies to challenge an array of government policies.

This is illustrated by the large number of American challenges brought against Canada under the NAFTA, the most recent one claiming that a judgement of the Supreme Court of Canada on patent rights has breached Canada’s treaty obligations. The owner of the Ambassador bridge at Windsor-Detroit is even claiming that Canada is in breach of the NAFTA by building a second crossing over the Detroit River.

There are now third-party financing mechanisms available to fund investor-State litigation by complainants.

So there is growing disquiet over the direction that investor-State arbitration is going and reasons justifying at least a re-thinking of the standard ISDS model.

Coming back to CETA, it certainly won’t be a fatal blow if ISDS isn’t included in the deal. While the Harper government has touted these investor rights as a cardinal feature of advantage to Canadian companies, do we really need one? Are Canadian investors at serious risk of European governments engaging in arbitrary seizure of their assets or unfair and discriminatory treatment?

The Germans clearly don’t feel their investors in Canada need that kind of protection. Other European governments may feel the same. Canada is a safe and reliable place to put your money. The Germans are actually giving Canada an endorsement in this regard.

In my view, the advantages of CETA in terms of opening up the EU market to Canadian companies on a preferential basis far outweigh the need for a system of binding arbitration in the deal.

There may be ways of modifying the arbitration provisions to meet German concerns. But even if ISDS is dropped from the deal completely, the Canada-EU agreement remains very much worth doing.

Russian Sanctions – A Moving Target

Canada’s sanctions against Russia and Ukraine are a moving target and are expanded on an ongoing basis, particularly in light of the evolving situation in that part of the world. This note adds to comments I made previously on this Blog.

I anticipate that Canada will tighten the Russian sanctions in light of the downing of the Malaysian aircraft last week.

As an ongoing compliance issue, Canadian companies should consider maintaining a Google alert and keep the Department of Foreign Affairs, International Trade and Development (DFATD) sanctions web-site under constant monitoring (http://www.international.gc.ca/sanctions/russia-russie.aspx?lang=eng).

The Department issues e-press advisories when additional names are added to the sanctions list and companies can subscribe to these.

As in the case of Iran, the Russian (and Ukrainian) sanctions apply broadly. The Russian sanctions state that,

3. It is prohibited for any person in Canada and any Canadian outside Canada to

(a) deal in any property, wherever situated, held by or on behalf of a designated person;
(b) enter into or facilitate, directly or indirectly, any transaction related to a dealing referred to in paragraph (a);
(c) provide any financial or other related service in respect of a dealing referred to in paragraph (a);
(d) make any goods, wherever situated, available to a designated person; or
(e) provide any financial or related service to or for the benefit of a designated person.

Note the words “any” and “directly or indirectly”. Pretty wide in scope. This makes it is critical for Canadian corporations to undertake all reasonable diligence to not contravene these prohibitions.

Another matter that requires care are the US sanctions against Russia. These are enforced by the Office of Foreign Assets Control (OFAC), part of the US Treasury Department.

On 16 July 2014, the Obama administration expanded these significantly, enlarging the so-called sectoral sanctions and, for example, adding Rosneft and Novatek, major Russian energy companies, to the prohibited list. While directed to capital-raising transactions of these entities – debt and equity – these sanctions may be expanded to prevent commercial dealings by persons in the US with these Russian companies.

In addition these prohibited capital transactions, there is a series of Executive Orders by the President that prohibits virtually all commercial dealings in the US with other Russian companies listed in those Orders. This applies to any entity organized under US laws, including branches of Canadian entities operating in the US.

All of this requires careful attention to compliance for any Canadian company potentially involved in Russian dealings. It is expected that these prohibitions will be expanded further in light of the deteriorating situation in that part of the world..

Thoughts About Investment Agreements

There is growing debate about foreign investment protection agreements – what Canada calls “FIPAs”, the Americans call bilateral investment treaties or “BITs” and what others refer to simply as international investment agreements or “IIAs”. Acronyms abound.

According to the UN Conference on Trade and Development, there are 3,200 of these around the world, proliferating in the last decade or so. Canada’s FIPAs have been around for about 25 years, the first concluded with Poland in 1990.

Foreign investor protection regimes have been embedded in Canada’s bilateral trade agreements like the NAFTA and in the recently concluded Canada-EU trade negotiations. Canada has stand-alone FIPAs as well, such as the one with Poland. And there are many others, some in force, some signed but not yet ratified, like Canada’s FIPA with China.

They are generally considered to be a positive force in promoting international stability and in aiding foreign direct investment (FDI) from wealthier economies to the developing world. They have many positive attributes, assuring stability, non-discrimination, due process and “fair and equitable treatment” of investors by foreign governments. They prohibit expropriation without prompt and adequate compensation.

One of their central features is that they give private investors the right to bring legally-binding arbitration actions against host governments that fail to abide by these obligations. This is referred to as investor-State dispute settlement or ISDS.

ISDS is often criticised, mostly by left-leaning organizations who claim that these agreements respond to a mercantilist agenda and – because they give investors binding arbitration rights – allow corporate interests to thwart legitimate public policy measures by host governments.

Investor claims have been proliferating, as UNCTAD reports, with 58 new cases in 2012 alone, the highest number in a single year, confirming foreign investors’ growing inclination to litigate against host governments and their agencies.

So there are controversies surrounding these IIAs and some are coming to roost in various free trade initiatives now underway, like the Trans-Pacific Partnership (TPP) negotiations.

One of the challenges in these efforts has been to refine the standards of investment protection, mostly the meaning of the “fair and equitable treatment” obligation of host states. In the Canada-EU trade agreement, for example, the two sides have narrowed the meaning to avoid wide-ranging and dubious claims by private investors.

US businesses have criticised that approach. In the current US-EU trade and investment negotiations, they argue that it will circumscribe the recourse available to investors when their economic interests have been trampled on by governments. This runs right up against the concerns of civil society who want to protect the freedom of governments to legislate for the common good, even if foreign investors are impacted.

There are related issues taking on traction. One is that these investor-State arbitrations are ad hoc in nature and inherently impermanent, with panels often made up of experts from distant places who are appointed to hear a single case but may not know much about the parties or the government involved.

Unlike judges on domestic courts who are part of the local community and essentially known quantities, ISDS arbitrators, deciding public issues of great importance, are strangers from afar who then fade back to their own countries and their own callings.

This boils down to matters of legitimacy, as UNCTAD puts it, whether three individuals, appointed on an ad hoc basis, can be intrusted with assessing often critical public policy measures undertaken by governments.

Another weakness is the absence of an appeal process. In the quest to make ISDS efficient, governments developed a dispute settlement model that was final and binding. But what if arbitrators err on a key legal or factual issue?

Interestingly, the International Centre for the Settlement of Investment Disputes (ICSID), the dispute settlement arm of the World Bank – and now headed by a Canadian – has been looking at these concerns, considering how to improve transparency and consistency ISDS but also the possibility adding an appellate mechanism to its structure.

The solutions to all this are not out of reach. They will require some creative ingenuity and international consensus-building, but there are answers. At the very least, we should be actively discussing these issues and testing, even at this late stage and even with 3,200 of these investment agreements in force, whether the old paradigm, including Canada’s current model, fully serves the broader public interest.

Are Trade Negotiators Really Up to No Good?

The Council of Canadians, the self-styled champion of the public interest, has blasted governments for their collective secrecy in the TPP negotiations being held in Ottawa July 3-12. They issued demands for access to TPP negotiating documents and, in effect, for virtual inclusion the TPP talks on an ongoing basis.

This is a standard ploy by the Council and its fellow-travellers, portraying governments as being up to no good and conspiring collectively to betray the interests of their people.

Happily, there was relatively scant take-up of this stuff in the media, indicating an ennui with this kind of rhetoric. On the contrary, the public in Canada and elsewhere are paying less attention to these overdrawn concerns and seem willing to let the TPP negotiators get on with their business.

Their business is to negotiate. And to do that effectively, you can’t do it in public. It would be destructive of that process to have negotiating texts released, and indeed the leakage that has occurred to date in the TPP talks has not been helpful.

What is bothersome with interest groups like the Council is the implication that governments are intent on evil doings and just can’t be trusted with looking after the public interest. They imply some secretive effort by the twelve TPP governments to sell down the river millions of their own people.

That is so much nonsense. The claim that governments are bent on betraying their people behind closed door is hyperbole that should be dismissed for what it is.

This is not to say that every aspect of the TPP talks should be completely shrouded in secrecy. Governments have a duty to be as transparent as possible, to explain what’s on the table and to respond to reasonable expectations on the part of the public.

But there is a balance to be struck, recognizing the nature of the negotiating process. And because that process is a delicate one, having texts released in public and having self-styled interest groups involved in the talks would be like bringing Clydesdales into a china store.

Weighty Decisions in the WTO

One of the growing concerns in trade law is the long, dense and over-wordy WTO panel and Appellate Body decisions. These decisions run in the hundreds and hundreds of pages in densely-typed and often opaque paragraphs, vexing lawyers (let alone non-lawyers) in trying to grasp the meaning and long-term impact of these judgements.

It’s puzzling why WTO decisions can’t be more straightforward and succinct. Some of us despair that someday the dispute settlement process will collapse under its own weight.

The WTO’s place as a respected global institution depends on respect for the dispute settlement process. If stakeholders, and even legal experts, have difficulty penetrating panel and appeal decisions, it could affect respect for the process over time.

Here’s an interesting comparison. The Supreme Court of Canada’s important judgement issued 26 June 2014 on aboriginal title in the Tsilhqot’in First Nation case, which is a judicial milestone for Canada, runs an economical 72 pages of double-spaced typing (or 858 KB in PDF format).

Compare this with the WTO Appellate Body decision in the Canada-EU seal import ban case earlier this year, a decision of much, much less significance in the scheme of things, but which runs to almost 200 pages of dense, single-spaced type, hundreds of paragraphs and almost four times the number of words (1,322 KB in PDF format). And this is short in comparison to other WTO decisions.

This isn’t a perfect apples-to-apples comparison. But it does illustrate the need for more attention in Geneva to better, clearer and more compact decision writing.

Trans-Pacific trade pact on the slow track

This was an op-ed piece of mine published on May 9, 2014, in the Financial Post.

Lawrence L. Herman: If a TPA bill is ever passed, Obama’s authority will likely be on a tight leash

The Trans-Pacific Partnership trade negotiations continue to move along, with Japan now intensively involved and the government of South Korea close to jumping in. With the collapse of broader multilateral efforts in the World Trade Organization in Geneva, the TPP is the biggest game on the planet.

The complexity of these talks is daunting. Items on the table go far beyond the kind of border measures that were typically covered by conventional trade agreements like the North American Free Trade Agreement.

Technical complexity is one thing. The other elephant in the room is that the Obama administration still doesn’t have legal negotiating authority – called Trade Promotion Authority (TPA) or “fast track” – something only the Congress can provide. And Congress is so far not moving ahead on this file.

Canadian officials keep saying “Don’t worry. Be happy. It’s just a formality.” The truth of the matter is that it’s more than that. It doesn’t make sense to negotiate with the Americans when they haven’t got the green light from Congress. We don’t even know if the light will be green or orange – or maybe even red.

Official Washington is starting to admit the truth. A recent report from World Trade On-Line posted said that a senior adviser to Obama publicly acknowledged that the administration is in a tough position in the TPP talks because the lack of TPA. At the same time the official confirmed that members of Congress are reluctant to approve a bill without knowing the content of any future trade deals that would be covered. A chicken-end-egg dilemma.

This was confirmed by U.S. Commerce Secretary Pritzker and Agriculture Secretary Vilsack, according to the same report. Those comments contradict previous statements by Obama administration officials about the lack of TPA not being an obstacle in the TPP negotiations.

Even if a TPA bill can be finessed, it will likely not happen until after the mid-term U.S. elections this fall, further delaying the whole TPP exercise.

But it’s far from certain that the bill will ever get through. Organized labour, very influential in the Democratic Party, is generally hostile to trade agreements, putting pressure on Obama’s own party to not approve TPA.

If a TPA bill is ever passed, Obama’s authority will likely be on a tight leash and there will be close Congressional oversight through each step in the negotiations. This would mean Canada and the other TPP countries would, in effect, be negotiating with the Congress and not with the Obama administration.

This whole problem is rooted in the U.S. constitution, full of checks and balances, with the Congress having shared authority with the executive branch over international trade.

The point of fast-track – going back to the 1970s – was to overcome that situation. Fast-track was devised so that Congress would pass the necessary negotiating authority and when the deal was brought back for ratification, all Congress could do would be to vote in favour of the entire package or reject it – but no changes could be insisted on. That gave other governments comfort in trade negotiations with the Americans.

What seems to be happening now is that the TPA concept is being radically altered. The Congress is not content to let the Obama team go ahead without direct Congressional supervision of the talks. This reflects Obama’s apparent inability to manage things with Capitol Hill.

Whether all of this TPA business can be resolved satisfactorily seems uncertain at this point. And that uncertainty could put the globe’s biggest trade game in some jeopardy.

Lawrence L. Herman, founding partner at Herman & Associates is a Senior Fellow of the C.D. Howe Institute in Toronto.

Keystone – Is the US Breaching International Law?

This was an op-ed of mine in the on-line version of the Globe and Mail (Toronto), 29 April 2014. It elicited many comments.

Approval of Keystone XL suffers delay after delay. Whether one is for or against, it’s obvious the project has become hostage to the unpredictable forces of American politics.

It’s hard to get a handle on how the project is being evaluated by the Obama administration. Is it environmental factors that count, including arguments over Alberta’s oil-sands, or is it energy security or American jobs that are critical?

Both TransCanada, as the pipeline’s proponent, and the Canadian government have played Keystone as best they could, insisting that the project meets all the required technical criteria and that Washington’s decision should be based on those considerations alone.

But Washington being Washington, it’s never as clean or neat as that. Politics are inseparable from the process of pipeline approval, more so in Keystone than in many others.

Because these political games seem so intertwined in the decision-making process, as this troublesome and vexing matter continues, including obscure deals and trade-offs between the White House and the Congress, there are international legal issues that come into play as reflected in the North American Free Trade Agreement.

Article 1105 of investment chapter of the NAFTA, entitled “minimum standard of treatment”, says that the US is required to accord all Canadian investors (i.e., TransCanada) “treatment in accordance with international law, including fair and equitable treatment and full protection and security.”

Should Keystone ultimately be turned down, the question will be whether the US has met the “fair and equitable treatment” obligation – what insiders call “FET”. If authorization is refused, would TransCanada – and indeed the Canadian government – have a NAFTA case based on the failure of the US to discharge that obligation?

The FET standard is central to hundreds of investment protection treaties around the world. It’s been invoked in countless of international investment disputes over the two or three decades.

Keystone’s ultimate future should be judged on proper regulatory criteria applied to similar pipeline projects in the US, including legitimate economic factors and technical and environmental assessments with credible underpinning.

But the more Keystone is caught up in political games and the more TransCanada’s application is treated differently from similar applications and denied normal timeliness, transparency and fair procedure, the more weight is given to the argument that the US is in contravention of its NAFTA obligations.

Of course, in any NAFTA arbitration the question always will be: what does fair and equitable treatment mean in legal terms?

One of the unresolved controversies is whether FET is limited to the customary international law standard, the content of which is illusive and difficult to prove, or whether FET can have independent meaning and take into account, for example, administrative law requirements of due process, transparency, fairness and equity.

The governments of Canada, the US and Mexico prefer to link FET to the higher customary international law standard and in 2001 issued an interpretative bulletin stating that the NAFTA FET standard was the standard recognized under customary international law.

But NAFTA tribunals are not necessarily bound by that statement and could arrive at a different conclusion based on their own reading of the NAFTA. For example, in a recent arbitral award (Waste Management Inc. V. Mexico), the NAFTA tribunal held that the FET standard included requirements of due process and natural justice beyond what was recognized in customary international law.

While other NAFTA investment arbitration awards have taken the more restrictive customary international law approach, NAFTA panels are not bound by precedent and can reach conclusions that depart from those of their predecessors.

At this point, all of this is in the realm of legal theory. The main point, whether under the international law standard or under an independent standard, is that the more that arbitrary factors enter the picture and the more Keystone is politicized, the more force there is to the argument that US is in breach of its NAFTA obligations, not only to TransCanada as the investor, but to Canada itself as a treaty party.

Ukraine Crisis – Canada Extends Sanctions Net

There are now 41 individuals listed as designated persons plus three Russian banks. This extends the scope of the sanctions that were promulgated in March.

For Canadian businesses, the critical part of the sanctions is the following:

3. It is prohibited for any person in Canada and any Canadian outside Canada to

(a) deal in any property, wherever situated, held by or on behalf of a designated person;
(b) enter into or facilitate, directly or indirectly, any transaction related to a dealing referred to in paragraph (a);
(c) provide any financial or other related service in respect of a dealing referred to in paragraph (a);
(d) make any goods, wherever situated, available to a designated person; or
(e) provide any financial or related service to or for the benefit of a designated person.

Particularly significant in the prohibition are the important words, “facilitate, directly or indirectly, any transaction . . . “ that relates to property held “by or on behalf of” one of these designated persons.

Care must be taken to be doubly sure that business transactions do not run afoul of the ever-widening sweep of the net.

Just a note to state what is pretty obvious – be extremely cautious in dealing with Russian businesses and banks.