Introduction

Provisions in international trade and investment agreements that are designed to protect investments usually include an investor–state dispute-settlement (ISDS) mechanism that gives investors from one signatory to an agreement the right to access binding arbitration to settle a dispute if they believe that the government in another signatory has breached its obligations relating to the protection of investments.

Many of Canada’s trade and investment agreements contain an ISDS mechanism. For example, the trade agreements most recently signed by Canada – including the Canada–United States–Mexico Agreement (CUSMA), the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) and the Canada–European Union (EU) Comprehensive Economic and Trade Agreement (CETA) – have an ISDS mechanism. As well, Canada’s foreign investment promotion and protection agreements that have an ISDS mechanism include the Canada–Hong Kong Foreign Investment and Protection Agreement, the Canada–China Foreign Investment and Protection Agreement, and the Canada–Ukraine Foreign Investment and Protection Agreement.

On 23 October 2020, the House of Commons Standing Committee on International Trade (the Committee) adopted a motion to undertake a study on the impacts of ISDS mechanisms. During three meetings on this study, the Committee’s witnesses comprised the Minister of Small Business, Export Promotion and International Trade, government officials, a representative of a civil society organization and eight individuals appearing on their own behalf. The Committee also received a brief submitted by the Canadian Centre for Policy Alternatives.

According to the House of Commons Procedure and Practice, “witness selection [for Committee studies] may be carried out in a number of different ways. Generally, witnesses are proposed by individual committee members.” For this study, Committee members submitted the names of proposed witnesses in priority order, and witnesses were invited to appear in a proportion reflecting political parties’ representation in the House of Commons.

This report summarizes the comments made by witnesses in their appearance and in the brief about ISDS mechanisms. In particular, the first section outlines certain elements of ISDS mechanisms, and identifies some of their advantages and disadvantages, while the second section discusses selected current efforts to reform ISDS mechanisms. Section three describes these mechanisms in Canada’s existing trade and investment agreements, as well as several of their impacts on various groups in Canada, while the fourth section examines Canada’s future approach to ISDS mechanisms in its agreements. The report concludes with the Committee’s thoughts and recommendations.

Elements of These Mechanisms, and Their Advantages and Disadvantages

The Committee’s witnesses described certain elements of ISDS mechanisms. As well, with most indicating that the mechanisms have more advantages than disadvantages, they identified some advantages – such as promoting the de-politicization and de‑escalation of investment disputes, protecting Canadian investments abroad and reducing the diversity of  arbitration rules – and selected disadvantages – such as the “regulatory chill” effect and implications for environmental protection.

A. Certain Elements

In the view of Université Laval’s Charles-Emmanuel Côté, who appeared as an individual, the “fundamental feature” of ISDS mechanisms is “the parties’ consent” to use them to settle disputes in a binding manner. According to him, “states give their consent in advance, whereas investors do so when they file a claim.”

Appearing as an individual, the University of Ottawa’s Patrick Leblond explained that ISDS mechanisms in trade and investment agreements are “designed to provide a neutral—meaning non-politicized and impartial—and efficient conflict resolution framework” for situations in which a government’s discriminatory actions concerning a foreign investor lead assets to be lost or reduced in value. He added that foreign investors in “countries where tribunals are not very reliable” prefer the investment protections that exist with ISDS mechanisms.

According to McGill University’s Armand de Mestral, who appeared as an individual, ISDS mechanisms allow an arbitration tribunal to make enforceable decisions. He also noted that these tribunals have procedural powers that are similar to those of domestic courts.

B. Some Advantages

Concerning de-politicization and de-escalation, Charles-Emmanuel Côté said that ISDS mechanisms primarily provide “a political advantage by helping to depoliticize the settlement of investment disputes.” He pointed out that, as a result, there is no need for governments to become involved with their investors’ disputes in foreign jurisdictions. Similarly, Armand de Mestral noted governments’ preferences “to have these disputes dealt with independently in a much less politicized framework.” MAAW Laws’ Mark Warner, who appeared as an individual, also mentioned that one of the advantages of ISDS is that it brings disputes “down” to the “private level precisely to depoliticize them.”

Appearing as an individual, New York Law School’s Barry Appleton indicated that ISDS mechanisms allow disputes to be “compartmentalized and de-escalated.” He explained that these mechanisms ensure that decisions about “discriminatory, improper, unfair or even corrupt treatment against Canadian [investors] can be addressed” in foreign jurisdictions without the Government of Canada having to engage diplomatically to protect these investors’ interests.

Regarding protection for Canadian investors abroad, the Minister of Small Business, Export Promotion and International Trade stressed that “having that careful balance of ISDS provisions for companies to invest confidently while at the same time ensuring that a country continues to retain the right to regulate in the public interest is what [the Government of Canada aims] to do.”

In highlighting that Canada is “now a capital exporter,” Mark Warner contended that ISDS mechanisms protect Canadian investments aboard. Charles-Emmanuel Côté mentioned that, “until the 1990s, Canada was essentially a net importer of foreign capital” and that, “since then, Canada has been a net exporter of foreign capital.”

In the view of the Honourable Yves Fortier, who is with Cabinet Yves Fortier and appeared as an individual, recent geopolitical developments – “as evidenced by Trumpism and the imposition of tariffs” – underscore “the need to continue to include ISDS [mechanisms]” in Canada’s trade and investment agreements. According to him, due to a perception that certain jurisdictions “are unfriendly,” foreign investors avoid domestic courts and instead use ISDS mechanisms to resolve disputes. Charles‑Emmanuel Côté commented that ISDS “reassures investors.”

Furthermore, the Honourable Yves Fortier asserted that one of the “greatest strengths” of ISDS mechanisms is the absence of an appeal process. He underlined that this absence results in arbitral decisions that are “definitive and avoid the inherent delays” associated with the domestic judicial process that could be used as an alternative. Charles-Emmanuel Côté suggested that “ISDS is a tool or instrument for the settlement of the kinds of disputes that have always existed and that will in any event continue to exist.”

Global Affairs Canada officials said that Canada “get[s] significant benefits out of having” ISDS mechanisms “in economies where [the country's investors have] investments in the mining sector and various other sectors.” Appearing as an individual, Herman and Associates’ Lawrence Herman noted that ISDS mechanisms are a “benefit to Canadian outbound capital,” and pointed out that “there is [ISDS] arbitration going on beyond the extractive sector where Canadian investors have sought recourse to these provisions” in these mechanisms.

On the topic of the diversity of arbitration rules for foreign investors, Armand de Mestral stated that, if “all disputes are sent to domestic courts, there would be 189 different solutions.” Patrick Leblond observed that “Canadian businesses [would] then face greater uncertainty when they operate abroad” and “would be dealing with 189 different rules, one for each country.”

C. Selected Disadvantages

York University’s Gus Van Harten, who appeared as an individual, commented on the risks of governments changing their regulatory measures as a result of decisions about foreign investors’ claims under ISDS mechanisms. Moreover, he shared his view that the ability of ISDS arbitrators to “interpret vague language” in trade and investment agreements, and to order governments to pay damages of “potentially billions of dollars,” is “extraordinary.”

In a brief submitted to the Committee, the Canadian Centre for Policy Alternatives indicated its view that the “worst consequence” of ISDS mechanisms is the right provided to foreign investors “to challenge vital and legitimate public policy measures” before an arbitration tribunal. The Trade Justice Network pointed out that governments expend “significant energy” in determining whether their proposed regulations would violate ISDS mechanisms, and often decide that “it is too risky to even try,” leading to regulatory “chill.” It contended that ISDS mechanisms are “the clearest embodiment of the ways in which trade deals prioritize corporate rights … ,” and stated that the Government of Canada should not allow foreign investors to have rights that differ from those of domestic investors.

Concerning the “regulatory chill” that some believe exists with ISDS mechanisms, Barry Appleton maintained that “restrictions upon Canadian public policy come from the treaty text, not from the ISDS process.” In his opinion, the “broad public policy exceptions” in trade and investment agreements permit governments to regulate in the public interest, and suggested that government officials should rely on such exceptions to do so.

With a focus on the COVID-19 pandemic, the Trade Justice Network said that the risk of potential claims and millions of dollars in damages against governments under ISDS mechanisms prevent them from taking actions “that would protect the public health of their people,” such as producing generic vaccines.

In commenting on environmental claims under ISDS mechanisms, the Trade Justice Network stated that Canadian investors “have used ISDS to disproportionately target environmental policy in developing nations … ,” which – in its opinion – constitutes a barrier “to climate action” for these nations. The Canadian Centre for Policy Alternatives characterized Canadian investors – particularly from the mining and energy sectors – as “aggressive users of ISDS against other governments.” Furthermore, it asserted that Canada’s environmental protection and natural resource management measures “have been a favoured target,” accounting for more than 60% of ISDS claims against the country. According to the Canadian Centre for Policy Alternatives, these claims “undermine environmental protection efforts that benefit the global community.”

Current Efforts to Reform These Mechanisms

In their appearance before the Committee, witnesses made general comments about efforts to reform ISDS mechanisms, and focused on selected Canadian and international reform efforts.

A. General Comments About Reform Efforts

Gus Van Harten characterized efforts to reform ISDS mechanisms as “scattered, painfully slow, generally flagging or not that promising.” Patrick Leblond stressed the need to “focus the energies” of governments to make these mechanisms “more transparent, accessible and fair.”

In discussing procedural reforms, Armand de Mestral said that many trade and investment agreements now exclude certain “types” of ISDS claims, particularly those deemed to be “frivolous or clearly unfounded.” Concerning ISDS arbitrators, he asserted that they are now “appointed much more carefully” than in the past and must adhere to codes of conduct. He also suggested that “there is now much more diversity in the community of arbitrators.”

B. Canadian Efforts

From the Canadian perspective, Global Affairs Canada officials noted that discussions have occurred with “civil society, labour organizations, indigenous partners, business associations, pension funds, legal practitioners, academics, as well as our provinces and territories,” about the ISDS model that exists in the country’s foreign investment promotion and protection agreements. In highlighting that a “lot of analysis” has been done, they commented that the analysis of that model was the basis for a “comprehensive, new, inclusive and modern” model that – according to them – the Government of Canada will soon publish. They also indicated that the Government will provide the “internal analysis” that informed the development of this new model.

Armand de Mestral supported the “way the Canadian government has tried to modernize [its trade and investment agreements] as far as it can go.” He observed that “procedural reforms” have been made to some of Canada's “major” trade and investment agreements, which – in his view – indicates that the ISDS reform process is “well underway, but certainly not finished.”

C. International Efforts

With a focus on international ISDS reform efforts, the Honourable Yves Fortier mentioned that the EU has submitted a proposal for a multilateral investment court to the United Nations Commission on International Trade Law’s Working Group III: Investor‑State Dispute Settlement Reform. He underscored that the proposed court would be a “permanent body comprised of two levels, which are a first-instance tribunal and then an appellate tribunal, staffed with full-time adjudicators held to strict ethical and diversity requirements.” In sharing his opinion that it is in Canada’s interest to support the EU’s proposal, Armand de Mestral speculated that the composition of the proposed court’s arbitrators “would end up being fifty-fifty men and women.”

These Mechanisms in Canada’s Existing Agreements and Their Impacts

Witnesses spoke to the Committee about ISDS mechanisms in Canada’s existing trade and investment agreements, and several of their impacts on Canadian investors abroad and other groups in Canada.

A. Mechanisms in Canada’s Agreements

In asserting that the ISDS mechanisms in Canada’s trade agreements “offer protection for Canadian companies operating abroad,” the Minister of Small Business, Export Promotion and International Trade suggested that – as a result – Canadian investors can “confidently access those international markets.”

The Canadian Centre for Policy Alternatives pointed out that, despite CUSMA not having an ISDS mechanism that applies between Canada and the United States, the Government of Canada is “enmeshed in an extensive web of bilateral and regional accords” that contain such mechanisms. It particularly noted the CPTPP and Canada’s “comprehensive” trade agreements with such countries as South Korea, Chile, Colombia and “some other smaller countries.”

Gus Van Harten contended that including an ISDS mechanism in the CPTPP “was a turn in the wrong direction” because, at that time, Canada and the EU were “changing the ISDS [mechanism in] CETA” and “getting ready to get out of it in NAFTA” by not including such a mechanism between Canada and the United States in CUSMA.

Lawrence Herman focused on CETA in mentioning that the recent reforms to its ISDS mechanism “require ratification by all of the [EU’s] member states.” He expressed skepticism that this ratification will occur and, accordingly, speculated that “CETA will continue for some time without those [reformed] ISDS provisions.”

Charles-Emmanuel Côté underscored that, due to Canada’s “somewhat inconsistent approach” to ISDS mechanisms, “it might be relatively effortless for [foreign] investors to circumvent the [country’s potential] abandonment of ISDS” by investing in Canada through subsidiaries located in countries with which Canada has investment agreements.

B. Several Impacts on Various Groups

In discussing the impacts of ISDS mechanisms on Canadian investors abroad, Charles‑Emmanuel Côté said that Canadian investors “ranked fifth in terms of most frequent users of ISDS [mechanisms] globally” and that, “thus far, 55 claims have been made by Canadian investors abroad.” Gus Van Harten asserted that Canadian investors abroad would “have some setback” and would not “be as well off” if ISDS mechanisms are removed from Canada’s trade and investment agreements. However, in his view, the Government of Canada would benefit “overall” because not having “to worry about” the possible payment of “billions of dollars” in ISDS claims would enhance both the Government’s ability to regulate in the public interest and its “capacity to respond in a future crisis.”

Patrick Leblond argued that, if the objective is to protect Canadian investments abroad, Canada’s trade and investment agreements should have an ISDS mechanism. In his opinion, Canadian businesses that invest abroad would be “put at a disadvantage” if their investments are not protected by ISDS mechanisms that are at least as effective as those that can be accessed by their competitors from other countries. Charles‑Emmanuel Côté commented that Canada should have a “more considered and systematic approach” to protecting these investments, and suggested that it is “imperative” to begin by identifying these investors’ needs and “essential” to establish whether the Government of Canada “wants the responsibility of settling disputes on behalf of all Canadian companies abroad” if it decides to pursue removal of ISDS mechanisms from its agreements.

According to Mark Warner, Canadian businesses that want to invest abroad are “going to look for some kind of insurance” if they “can't get a remedy through something like ISDS.” He maintained that, for these investors, the existence of ISDS mechanisms precludes the need for “some really highly subsidized insurance scheme.” In his opinion, if Export Development Canada is providing insurance for these foreign investments, then Canadian taxpayers “are the ones that ultimately will be underwriting that risk.” The Trade Justice Network contended that it is not Canadians’ or the Government of Canada’s “responsibility” to insure Canadian businesses that invest abroad, and commented that the Government should require these businesses to purchase insurance.

Concerning the impacts of ISDS mechanisms on Canadian small and medium-sized businesses that invest abroad, Gus Van Harten argued that an ISDS mechanism in trade and investment agreements “isn’t going to help [these businesses] because they can't afford the litigation.” He said that a “state-to-state mechanism” is needed to protect them. Barry Appleton provided a different perspective, stating that an ISDS mechanism in such agreements is “more important to the small companies because they don't have access to influence and wealth, and access to justice needs to be available for the small as well as for the mighty.”

Regarding the impact of ISDS mechanisms on the rights of Indigenous peoples in Canada, the Trade Justice Network identified a need for “indigenous representation at the bargaining table” when trade agreements are negotiated in order “to fully realize [the United Nations Declaration on the Rights of Indigenous Peoples] and [the] trading rights [of Indigenous peoples].”

Canada’s Future Approach to These Mechanisms

In speaking to the Committee about Canada’s approach to ISDS mechanisms in its trade and investment agreements, witnesses focused on the removal of such mechanisms from existing agreements and their inclusion in future agreements.

A. Removal from Existing Agreements

Gus Van Harten suggested that Canada should not have ISDS mechanisms in its trade and investment agreements, and highlighted the need to retain and to strengthen both the Government of Canada’s “capacity and flexibility,” and its “domestic institutions based on Canadian law that protects all investors.” He urged the Government to: develop a “strategy“ for removing these mechanisms from its agreements “however possible”; engage in “quiet determination” as it pursues the removal of these mechanisms; and limit ISDS-related risks to the greatest extent possible. In his view, the risk of negative impacts from Canada not having ISDS mechanisms in its agreements “would be low,” and could be reduced “even lower” if their removal occurs “in a quiet, unprovocative way.” In mentioning that this approach would be similar to that followed by South Africa, he said that foreign investors should be assured that other investment protections are available, and advocated the enactment of legislation that would “make those protections more robust.”  Lawrence Herman observed that the removal of ISDS mechanisms on a “case-by-case basis” could be a “viable approach.”

The Canadian Centre for Policy Alternatives proposed that the Government of Canada should “phase out” ISDS mechanisms by taking a range of actions: inform foreign investment promotion and protection agreement partners of “Canada’s willingness to renegotiate [these agreements] based on a new template that does not include ISDS”; withdraw from these agreements “as soon as possible” if a partner refuses to renegotiate with Canada; and, regarding trade agreements that contain an ISDS mechanism, provide partners with an opportunity to renegotiate the agreement’s investment provisions based on a new model that does not include ISDS.

In providing a different perspective, the Honourable Yves Fortier said that ISDS mechanisms “should continue to be part of Canada's trade and foreign policy arsenal.” In his view, it is “essential for Canada to continue to provide foreign investors with ISDS protection.” He maintained that removing ISDS mechanisms from Canada’s trade agreements might lead these investors to think that “Canada is not a reliable and serious partner.” According to Lawrence Herman, such removals would be “politically, diplomatically and legally very difficult.” He speculated that “it's going to be impossible to change the ISDS system” that is “ingrained” into the country’s trade and investment agreements.

Charles-Emmanuel Côté identified the existence of an ISDS mechanism as “one of several considerations to be weighed in making investment decisions.” He observed that, if such mechanisms “were to disappear, foreign investment would not disappear.” In his opinion, ISDS is a “tool or instrument for the settlement of the kinds of disputes that have always existed and that will in any event continue to exist.“ He contended that, “apart from a number of fairly well-known exceptions, damages awarded amount to only a tiny fraction of the capital invested in states.”

With a focus on particular trade agreements signed by Canada, Armand de Mestral described NAFTA as “a bit of a wake-up call for Canada,” noting that the country was involved in the first two claims made under Chapter 11. However, Global Affairs Canada officials stated that the ISDS cases under that agreement included “very few cases against Canada by foreign investors.”

Gus Van Harten characterized the absence of an ISDS mechanism between Canada and the United States in CUSMA as a positive outcome, while Mark Warner commented that the result could be the politicization of every trade and investment dispute between the two countries “all over again.”

As well, Gus Van Harten mentioned that, because of “side deals” under the CPTPP, an ISDS mechanism does not apply between Australia and New Zealand. In his opinion, Canada could “conclude similar side deals with those countries … .” Lawrence Herman agreed with this view, and suggested that Canada could negotiate bilateral side deals with CPTPP signatories “to eliminate ISDS.”

Regarding specific countries, Barry Appleton argued that ISDS mechanisms protected Canadian businesses when they invested in Venezuela’s mining sector. Global Affairs Canada officials underlined that Canada receives “significant benefits” from the ISDS mechanisms in its trade and investment agreements with countries where Canadians have invested in the mining and various other sectors.

B. Inclusion in Future Agreements

Concerning the inclusion of ISDS mechanisms in Canada’s future trade and investment agreements, the Minister of Small Business, Export Promotion and International Trade stated that she has “been working closely with the international community” in seeking ISDS “protections for Canadian companies abroad while also maintaining [the Government of Canada’s] ability to regulate in the public interest.”

Global Affairs Canada officials contended that the potential inclusion of an ISDS mechanism in Canada’s future trade agreements “needs to be examined on a case-by-case basis.” They explained that “every market is different,” and commented that including an ISDS mechanism in an agreement could make “perfect sense, particularly if [Canada does not] have much confidence in the domestic court system in a particular country.”

The Trade Justice Network proposed that Canada should “permanently shift [away] from” including ISDS mechanisms in its trade and investment agreements. In agreeing, the Canadian Centre for Policy Alternatives also urged Canada not to ratify pending agreements that have such a mechanism.

Mark Warner, Charles-Emmanuel Côté, Armand de Mestral and Barry Appleton said that Canada should seek to include an ISDS mechanism in any potential Canada–Indonesia free trade agreement.

The Committee’s Concluding Thoughts and Recommendations

ISDS mechanisms are prevalent in international trade and investment agreements, and there is ongoing debate – and divided views – about their merits and impacts.

One concern relating to ISDS mechanisms is the extent to which they may constrain governments’ ability to make decisions that are in the best interest of the public they serve. The Committee recognizes that the ability to take actions in the interest of all Canadians is perhaps particularly important in times of crisis, such as the pandemic that continues to be uppermost in the minds of many. No provision in Canada’s trade and investment agreements – current or future – should curtail the Government of Canada’s ability to legislate and regulate – promptly, adequately and effectively – in a manner that best serves Canadians. From that perspective, exceptions that permit actions to be taken in the public interest are vitally important.

Foreign investments can contribute to countries’ economic prosperity, and some analysts and commentators assert that ISDS mechanisms provide needed protections for such investments. The Committee acknowledges that investments abroad should be protected, with protections perhaps especially required when investments are made in jurisdictions characterized by unreliable or inadequate domestic legal systems. Historically, ISDS mechanisms have been among the options available for protecting foreign investments.

The world is constantly changing, with new ways of doing business, undertaking trade and investment, and resolving disputes. To recognize this ongoing change, the Committee notes that periodic review of trade and investment agreements – and needed reforms – should occur. For that reason, the recent review of Canada’s ISDS model, and other ISDS-related domestic and international review and reform efforts, are notable. Enhanced transparency, accessibility and fairness, as well as arbitral objectivity, diversity among arbitrators and reduced litigation costs, should be among the goals of ISDS reform efforts.

In the context of the foregoing, the Committee makes the following recommendations:

Recommendation 1

That the Government of Canada carry out a periodic review of trade and investment agreements signed by Canada and identify needed reforms.

Recommendation 2

That the Government of Canada produce a report on all past and present litigation against the Government of Canada and against the government of a foreign state brought by Canadian businesses under investor–state dispute-settlement mechanisms, including the total amount of damages paid to foreign investors and any other costs to Canada.