By Gus Van Harten, Oct. 12, 2012
Dear Prime Minister Harper and Minister Fast,
I am an expert in investment treaties. As a Canadian, I am deeply concerned about the implications for Canada of the Canada-China investment treaty. As I understand, the treaty is slated for ratification by your government on or about Oct. 31. I hope you will reconsider this course of action for these reasons.
1. The legal consequences of the treaty will be irreversible by any Canadian court, legislature or other decision-maker for 31 years after the treaty is given effect. The treaty has a 15-year minimum term, requires one year’s notice prior to termination, and adds another 15-years of treaty coverage for assets that are Chinese-owned at the time of termination. By contrast, NAFTA for example can be terminated on six months notice.
2. Other investment treaties (aka FIPAs) signed by Canada have a similar duration and, in this respect, are exceptional among modern treaties. Yet none put Canada primarily in the capital-importing position. As such, the Canada-China treaty effectively concedes legislative and judicial elements of our sovereignty in a way that other FIPAs do not. Chinese asset-owners in Canada will be able, at their option, to challenge Canadian legislative, executive, or judicial decisions outside of the Canadian legal system and Canadian courts.
3. To elaborate, the treaty will likely be largely de facto non-reciprocal due to anticipated in-flows of Chinese investment to Canada outstripping Canadian investment in China. The deal gives Cadillac legal status to Canadian investors in China and vice versa. Yet Canada will be much more exposed to claims and corresponding constraints as a result of the de facto non-reciprocity. Two awards of a billion dollars-plus, and many over $100 million, have been issued against countries to date under these treaties, with more likely on the way. The awards are immune from judicial review, largely or entirely, and are often extra-territorial, depending on how the investor’s lawyers frame the claim.
4. Usually, the capital-importing position under these treaties is occupied by a developing or transition economy. Under the Canada-China treaty it is occupied by Canada. This poses a serious fiscal risk. Notably, to sue under the treaty, a Chinese company requires only a minority share in any Canadian enterprise or other asset in Canada. Based on interpretations by arbitrators in numerous cases, a Chinese investor could obtain, or may already have obtained, ownership in Canadian assets via a holding company in a secrecy jurisdiction such as the Cayman Islands, without losing its right to sue under the Canada-China treaty. What steps have you taken to ensure that there is not now and will not be in future Chinese-ownership of assets of which the government is unaware?
5. The only comparator for Canada in terms of fiscal risk is NAFTA. Canada has been sued about 30 times under NAFTA Chapter 11 although many cases were minor. Canada has paid out around $170 million in compensation in four cases to date. Other countries have been ordered to pay much more. Our biggest loss apparently came last May in a claim by Mobil Oil/ Murphy Oil involving R&D expenditure requirements in the Hibernia and Terra Nova projects. To my knowledge, a damages award has not yet been issued in that case although Canada was found by the arbitrators to have violated NAFTA. The decision reportedly undermined Canada’s standard approach to reservations in investment treaties with potential implications for the Canada-China treaty. It is not possible to confirm this because your government has not released the Mobil/ Murphy award against Canada in spite of your commitment to openness in these arbitrations. Would you please send me a copy of this award?
6. This heightens my concern that you have, in the Canada-China treaty, retained the right of the federal government not to release documents filed in Chinese investor lawsuits against Canada under the treaty if the government deems it not “in the public interest” to do so. This is not consistent with longstanding Canadian government policy to make such documents, and the arbitration hearings, public as a matter of course. If you intend to release the documents in any event, then why have you retained the right not to do so in the treaty? Other Canadian FIPAs state very clearly that all of the documents will be made public.
7. In terms of the fiscal risks, the Canada-China treaty goes beyond NAFTA in important respects and probably increases Canada’s exposure to lawsuits under NAFTA itself, on a non-reciprocal basis. Under NAFTA, the fiscal risk is contained by carve-outs of existing state and provincial measures from various NAFTA disciplines. The Canada-China treaty goes beyond NAFTA by extending a ban on performance requirements to existing provincial measures, including legislation. This ban will extend to Canadian provincial treatment of U.S.-owned, as well as Chinese-owned, assets due to the most-favoured-nation requirement under NAFTA. However, Canadian investors in the U.S. will not receive reciprocal treatment in relation to U.S. state measures. This will likely frustrate the ability of any federal or provincial government to ensure that value-added benefits of resource exploitation in Canada accrue reasonably to Canadians. Have you analyzed the risk-benefit comprehensively in light of all existing provincial measures?
8. Other legal protections that will be extended to Chinese investors under the treaty involve topics of expropriation and fair and equitable treatment, among others. These concepts sound straightforward but arbitrators in many cases have taken them in unanticipated and investor-friendly directions by requiring public compensation for foreign firms whose “legitimate expectations” were not met by a government or who were denied a “stable regulatory framework” over the lifespan of an investment. These arbitrator-made disciplines are far- reaching because they may preclude any changes to legislation that affect negatively a Chinese investor, without taxpayer compensation to the investor for its business losses. The possibility of the arbitrators reading such requirements into the Canada-China treaty adds to the fiscal risk and illustrates the concession of sovereignty under the treaty. So-called “stabilization clauses” are usually found in investment contracts signed with governments in developing countries, not treaties agreed by Canada.
9. The arbitration process itself is a long story. Briefly, it does a lot for the lawyers and arbitrators in the field, for investors from major capital-exporters (here, China or the U.S.), and for major multinationals able to entangle governments in never-ending legal contests of attrition, especially in the resource sector. Philip Morris has used these mechanisms to attack, for example, anti-tobacco measures in Australia and Uruguay. On the other hand, the arbitration process does little for, and may harm, anyone else. Above all, the process is not judicial in the manner of domestic or international courts and thus not reliably independent.
10. Canadian investors have never won compensation in any of their 16 known lawsuits against the U.S. and other countries under NAFTA and FIPAs. I have not heard this mentioned by Canadian lawyers and arbitrators who champion these treaties. It may be that Canadian companies have benefited by their ability to pressure governments to settle disputes in cases that are not public, but if so this reaffirms the danger that Chinese investors will pressure governments in Canada to back away from laws or regulations without public knowledge.
11. Because the arbitrators under the Canada-China treaty operate outside of the authority of the Canadian legal system and Canadian courts, the treaty appears to contravene the judicature provisions of the Constitution concerning the role of the superior courts. In various historical cases, the Supreme Court of Canada struck down legislation that contained broad privative clauses precluding review of tribunal decisions by the superior courts. The treaty’s transfer of judicial authority to arbitrators is analogous and, arguably, more far-reaching. Notably, the arbitrators may make non-monetary orders against states as well as issue damages awards for potentially massive amounts.
12. The treaty clearly impacts on provincial powers on natural resources, taxation, land and property rights, and other matters. It applies to provincial legislation, regulations, or court or tribunal decisions that affect Chinese-owned assets, with limited exceptions. It does not contain a NAFTA-style carve-out for provincial performance requirements or any carve-outs for provincial measures regarding the treaty’s expropriation and fair and equitable treatment provisions. Thus, there is a real possibility that, over the lifespan of the treaty, Canada will face billion dollar-plus awards due to provincial decisions that are not reviewable in Canadian courts. Does your government intend to assume the fiscal risk and have you obtained formal provincial consent for the proposed ratification of the treaty in light of its constitutional implications?
13. This quote by one of the arbitrators emphasizes the significance of a decision to ratify this treaty, including its arbitration mechanism:
“When I wake up at night and think about arbitration, it never ceases to amaze me that sovereign states have agreed to investment arbitration at all” … “Three private individuals are entrusted with the power to review, without any restriction or appeal procedure, all actions of the government, all decisions of the courts, and all laws and regulations emanating from parliament.” — Juan Fernández-Armesto, arbitrator from Spain.
14. This treaty will have major implications for core elements of Canadian legislative and judicial sovereignty. It will tie the hands of all levels and branches of government in Canada in relation to any Chinese-owned asset in ways that many governments in Canada, I suspect, have not considered closely. The implications will be legally irreversible by any Canadian court or other decision-maker for at least 31 years.
I urge you please to reconsider your decision to proceed with ratification of this treaty, without provincial consent or a serious public debate, on or about Oct. 31. I request replies to the questions posed in paragraphs 4, 5, 6, 7, and 11 above.
Gus Van Harten
Associate Professor, Osgoode Hall Law School