[Recorded by Electronic Apparatus]
Wednesday, April 9, 1997
.1610 
[English]
The Chairman (Mr. Michel Dupuy (Laval West, Lib.)): On behalf of all of us, I apologize to the witnesses. We were in the House performing our duty. Having started late, I think we'll move right ahead.
Today, we have three witnesses dealing with chapter 11 of the dispute settlement process.
[Translation]
The committee welcomes today from the Law Firm Thomas & Davis, Mr. Greg Tereposky; and from the Department of Foreign Affairs and International Trade, Trade Law Division, Ms Valerie Hughes, General Counsel, and Mr. Matthew Kronby, Counsel.
[English]
Mr. Tereposky, the floor is yours.
Mr. Greg A. Tereposky (Lawyer, Thomas & Davis): Thank you, Mr. Chairman.
Mr. Chairman and members of the subcommittee, I have set out my general speaking notes in a document that I have handed over to the clerk, so what I'm going to do is just speak very generally about chapter 11. I'd like to start with some introductory remarks, and then I will address some of the specific questions that have been posed to me.
The best way to understand NAFTA chapter 11 is to examine the two significant developments that are in that chapter. The first significant development is the nature of the rules and obligations in the chapter. These rules and obligations relate specifically to investments within each NAFTA country, and they are much more detailed and broader in scope than the rules in the old Canada-U.S. Free Trade Agreement. They are also substantially broader than the trade-related investment rules in the WTO.
For the purposes of our discussion today, you don't necessarily have to understand what those rules are. You merely have to understand that they are substantive, that they are broad-ranging, and that if there is a violation of those rules, the investor-state dispute settlement mechanism that we will be discussing can be invoked. So the second significant development is that dispute settlement mechanism, the investor-state dispute settlement. This mechanism establishes a dispute settlement procedure that can be invoked by a private investor.
Under international agreements, most dispute settlement is government to government, so any one of two governments involved in a dispute can control whether that dispute goes ahead or stops and can control the issues that go to a dispute settlement panel. So there are many checks and balances that can be put into place to control a dispute. When you have private investor dispute settlement, it is the private investor who initiates the dispute, who can control the scope of the dispute - within the terms of the agreement, of course. This is a substantial departure from the norm in international trade disputes.
Another point to remember is that private investor dispute settlement is binding on all parties, so the outcome of these private arbitral panels - the decision of the panel - is a binding decision. In the case of Canada, this is a very significant departure, because prior to the NAFTA Canada would not agree to binding investor-state dispute settlements, and Mexico was the same. As a reflection of this, if we look at the three international agreements we'll be discussing - one of them is the ICSID convention, which we'll get to in a moment - what we find is that Canada and Mexico are not signatories to those agreements. That's just a reflection of their general policy of no binding investor-state dispute settlement. But now we have binding investor-state dispute settlement and we find it in NAFTA chapter 11.
Given that we have these significant developments in the chapter, one way to determine how important those developments are or what the effect of those developments will be is to look at how this mechanism has been used to date. What we find is that it has not been used to a significant degree - at least, to date - in terms of actual disputes that have been started. To my knowledge, as of today's date, there have been four disputes in which the initial notice has been given to the governments, two in Canada and two in Mexico.
Keeping in mind that this is not a public procedure, that it's between the disputing parties, and that there's generally no public information available on these disputes, it's my understanding that the two Canadian disputes didn't go beyond the initial notice requirements. There are two cases in Mexico that are ongoing right now; the panels are currently being selected.
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So since NAFTA came into force, what we have at best are four disputes that have tried to invoke this new dispute settlement procedure.
It's important to note that one cannot assess the effectiveness of this mechanism simply by looking at disputes. Although people have tried to invoke the mechanism only four times, there have been many times when this mechanism has been held up to the Canadian government in negotiations, and parties have said, if you do this to us or don't compensate us for this and that, we are going to take you to NAFTA chapter 11. In my experience, with respect to our firm, we have been involved in several cases in which NAFTA chapter 11 - this investor-state dispute settlement mechanism - has been very important in the background of the negotiations, but it was not necessary to go further to resolve a dispute. That's just a general point to keep in mind.
That concludes my general comments on chapter 11, Mr. Chairman. I will now move to the specific questions that were posed to me. If there are any general questions from any of the members, I'd be willing to answer them now, or else we can just move on.
The Chairman: Perhaps we should hear our other witnesses and open the floor to questions, but we'll be back to you, Mr. Tereposky. Thank you very much.
[Translation]
Mr. Paré.
Mr. Philippe Paré (Louis-Hébert, B.Q.): I have one short question because there are two points I didn't understand. It might be a problem of interpretation.
At one point I understood our witness to say that disputes were settled on a government-to-government basis. But it was also stated that this is a private mechanism. How is there a link between governments if we are talking about disputes between private companies?
The Chairman: If you agree, we could first hear our other witnesses, and you could raise that point during the question-answer period.
[English]
Ms Hughes, would you like to make a statement?
Ms Valerie Hughes (General Counsel, Trade Law Division, Department of Foreign Affairs and International Trade): Thank you, Mr. Chairman. Given the limited time, unless you direct otherwise, we'll dispense with giving a statement. We had a short statement that my colleague Mr. Kronby was going to make, but if you'd prefer to go right to questions, we're in your hands.
The Chairman: It's very much up to you.
Mr. Kronby, do you want to make a statement?
Mr. Matthew Kronby (Counsel, Trade Law Division, Department of Foreign Affairs and International Trade): I don't need to make any specific statement, Mr. Chairman. I was going to propose to review the significant provision of section B of the dispute settlement provisions in chapter 11 if you thought it would be helpful. Having seen my colleague's answers to the questions, however, I have seen that a lot of them are covered in there. So if you prefer to go straight to dealing with those questions, that would be fine as well.
The Chairman: All right, we'll move on to questions.
Mr. Bill Graham (Rosedale, Lib.): Mr. Chairman, I understood Mr. Tereposky to be suggesting that he was going to pass to these specific questions that have been asked. Are we now going to break our questions into two stages, in which we'd ask general questions now and review these specific issues and then come back to another round of questions?
The Chairman: This is how I understand it to have been suggested, and I'm prepared to proceed that way.
Mr. Tereposky: Maybe the best way to proceed is for me to answer Mr. Paré's question, and then I can go through some of these general questions that were posed to me, because they will give my answer context. If there are further specific questions, they can then be put to me.
The Chairman: Let's proceed.
[Translation]
Mr. Philippe Paré: My question is as follows: if the mechanism is private, how do governments become involved?
[English]
Mr. Tereposky: When I referred to ``privately initiated'', I meant that the party starting the dispute is a private party, but the dispute is brought against a NAFTA government. If there's a Canadian investor in the United States that has problems with an investment, that investor can privately initiate a dispute against the Government of the United States and would not have to get the Government of Canada involved. That is what I was referring to when I mentioned private.
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What I'd like to do now is move directly to my responses to the questions from the subcommittee. I will deal with these briefly. My answers are in greater detail in the document I handed out.
The first question related to how a breech to an investment obligation is determined. It's important to note that there are really two dispute settlement mechanisms in chapter 11. There's the investor-state dispute settlement, which is the really interesting one and the new one. But we must remember at the same time that the general state-to-state dispute settlement under the NAFTA still does apply. Theoretically, you could have a dispute that has chapter 20 and investor-state dispute settlement mechanisms both moving at the same time. If the Government of Canada identifies an issue that's specific to the Government of Canada in an investor-state dispute, theoretically they could also invoke NAFTA chapter 20 and have that issue dealt with at a government-to-government level.
The second question posed is, what are the dispute settlement procedures under NAFTA chapter 11? I will just focus, again, very generally, on investor-state dispute settlement. Chapter 11 itself does not set out detailed procedures to conduct an investor-state dispute. Instead, the chapter relies on existing rules. Those rules are found in three different agreements.
One is the ICSID convention, the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The ICSID convention has been around the longest. It has over a hundred signatories. The United States is one of the major signatories to the agreement. This agreement embeds binding, private, investor-state dispute settlement into it, and as a consequence Canada is not yet a signatory to that agreement. Neither is Mexico, for that matter.
In order for a dispute to proceed under the ICSID procedures, both parties to the dispute or the government of the private party to the dispute - so if it is a Canadian investor who's bringing the dispute, the Government of Canada - would have to be a signatory to the ICSID Convention. We know that's not the case. We also know that Mexico is not a signatory. So the first set of rules of procedure - that is, those under ICSID - is not applicable at this time. In the future, Canada and Mexico may sign this agreement and then ICSID rules will apply, but as of today's date they do not apply. So we will not discuss those any further.
The second procedural set of rules available for conducting a dispute are the additional facility rules under the ICSID. This is simply a modification of the ICSID rules, and all that modification really does is state that these rules can apply to non-parties to the convention. So we can already see they can apply to Mexico or to Canada. The two disputes that are going on in Mexico right now are taking place under the ICSID additional facility rules. When I discuss these rules throughout the rest of the presentation, I'll refer to them as the additional facility rules.
The last set of rules are the UNCITRAL arbitration rules. These are the rules that were designed back in 1976 by the United Nations Commission on International Trade Law. Any country can apply these rules, and I'll discuss them a little bit later.
What we find, then, is in NAFTA there are three potential sets of rules but only two can be applied. So that's the second question.
The third question is, once a complaint is filed, what happens? In answering this question, I'm actually going to go to the procedures before an actual complaint is filed, because that is important.
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NAFTA takes those three different systems of rules and actually improves upon them a little. One of the big problems with ICSID arbitration and arbitration under the UNCITRAL rules is that there is not an initial consultation stage to try to resolve the dispute before you invoke private investor dispute settlement, and in most international dispute settlement mechanisms, you always start with consultations: Let's try to resolve this over the table; why get a panel involved?
What NAFTA does is state that before you invoke these rules under either of the three systems, you must first consult. Then you must give notice that you intend to file a claim, and this notice must be ninety days or three months before you actually submit your claim. The whole purpose of this is to give the parties a chance to resolve the issue, to negotiate a settlement.
As I mentioned to you, at least my experience is that the negotiation has been more important than the actual mechanism up to this point. So at least we can generally conclude that the consultation procedure is actually working.
I'll go very quickly through the other stages of the dispute, and again, they're set out in my document.
Once notice of an intent to submit a claim is given, there are ninety days for a claim to be actually submitted. Once the claim is submitted, the individual rules will then govern what happens after that. So if you're under an additional facilities system, you just look at those rules and they set out how you go through the procedure.
The NAFTA modifies a few things like how panels are selected, but generally what will happen is, after the claim is submitted a three-person panel will be struck. The parties will select this panel. The panel itself will establish a timeframe. This is not like WTO dispute settlement or NAFTA chapter 19, or for that matter NAFTA chapter 20, where there are specific timeframes to be met. The timeframes will be determined by the arbitral panel itself in accordance with the applicable rules.
Following the establishment of a schedule, paper will change hands. The parties will put in their submissions. There are no discovery procedures for getting evidence. Evidence is simply put in by each party without the parties being able to question whether the evidence is complete or not. However, the tribunal can call witnesses if the dispute occurs under the additional facility rules. Again, after all of the submissions and arguments are heard, the panel will issue its ruling.
So those are the general stages that are undertaken in a dispute.
The fourth question is, what is ICSID? I've spoken about what ICSID is. As I mentioned, Canada and Mexico are not signatories to the ICSID convention, so it's not too important other than to note that ICSID itself is a body; it's the centre for the settlement of investment disputes. This centre administers disputes both under the ICSID convention and under the additional facility rules.
It's interesting to note that when the two Mexican cases were started, it was the first time anyone had ever used the additional facility rules, so at the ICSID centre they were ecstatic. Just as a side point, they get excited about the smallest things over there.
The fifth question is, what is UNCITRAL? I've already mentioned that UNCITRAL refers to the United Nations Commission on International Trade Law. Unlike ICSID, UNCITRAL is not a body that administers. So when you go into an UNCITRAL arbitration, you don't have UNCITRAL actually there administering the process.
The way it works is that each country has their own arbitration centres: Toronto has one; Vancouver has the Vancouver arbitration centre. Each country also has their own domestic legislation that will implement the UNCITRAL agreement. In Canada, it's the Commercial Arbitration Act.
So it's a little bit different. You don't have this big body overseeing the entire process, but the outcome is the same. It's a dispute settlement procedure and the stages are roughly similar.
The sixth question is, what are the arbitration rules of UNCITRAL? Very simply, those are the procedural rules that have been passed under UNCITRAL, and those are the rules that are implemented in Canada under the Commercial Arbitration Act. There are some technical differences among all these rules, but for the purposes of our discussion I don't think it's necessary to go into them.
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The seventh question asked what the special and novel procedures are. I would require a bit of clarification on this question, because I'm not certain which procedures are being referred to. Maybe later when we follow up, if there are further questions on that, I can answer that.
The eighth question is, what is meant by ``consolidation of cases''? This is standard practice in any dispute settlement. Where you have a number of related cases you can consolidate them into one hearing. In this case when this is done the dispute must take place under the UNCITRAL rules. The reason is that all the countries can bring a dispute under the UNCITRAL rules. So you will not run into problems with one party not being a member.
The ninth question, what is a commission interpretation of the agreement, raises an interesting question. The panellists who sit on these arbitral panels are selected from rosters that are established by these arbitration agreements generally, and they are not necessarily trade experts. I mentioned at the very outset that we have these very important substantive rules in section A of chapter 11 that relate to investment. They are very complicated. Even seasoned trade lawyers and investment lawyers who are familiar with these issues find these provisions difficult; difficult to understand how they will apply, difficult to interpret.
If you have an ICSID or an UNCITRAL or an additional facilities panel ruling on these complex issues when the panel itself is not composed of trade experts who are expert on the NAFTA, you could have problems interpreting these difficult provisions. One way around that, which is the way the NAFTA chose to deal with it, is to have the commission interpret some of these provisions. So the commission refers to the NAFTA Free Trade Commission and the commission can offer to the panel its interpretation of these provisions. Why is that important? Because the commission is composed of all three NAFTA countries and therefore they can collectively come up with a reasonable interpretation of provisions.
That is why there is this provision in chapter 11 related to commission interpretations.
On the tenth question, what is the composition of arbitral tribunals, tribunals or these panels are generally comprised of three judges or three arbitrators, and they are selected in the following manner. Each party selects one individually, then collectively, together, they agree on the third party, who will be the presiding member. Again, this is standard practice in international disputes.
If there is a problem and the parties can't agree on a presiding arbitrator, or if they can't even agree on their own panellist, or cannot even appoint their own panellist, special rules allow another body to move in and make the selection.
The arbitrators are from different fields of occupation, although generally they are lawyers. That was the eleventh question.
On the twelfth question, is it a permanent body, and who covers the cost, the actual arbitrators are not a permanent body. They are ad hoc. They are selected from a roster and they exist only for the purposes of the dispute. So there is no permanent body. The costs of the arbitration are born equally by all disputing parties.
The last couple of questions I'll deal with very quickly. How long does the process take? There is no fixed timeline. ICSID arbitrations usually last about a year. The others can be more or less than a year. I guess a year would be a good estimate.
About the awards, this is another very interesting part of this procedure. No monetary awards are issued if you go to a NAFTA panel under chapter 20. However, if you go to an arbitral panel under the investor-state dispute settlement mechanism, monetary awards can be granted. As a matter of fact, that's the whole purpose of this process. The other award that can be granted is the restitution of property, which is returning the property to the investor.
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The award issued by a tribunal is not in itself enforceable within the countries. There is no automatic enforcement. If the Government of Canada lost an arbitration, the panel award would not automatically be binding on the Government of Canada. However, the winning party can go to a Canadian court to have that decision made binding. Again, in Canada, that would occur under the Commercial Arbitration Act.
On the last question, is the present system efficient, fair, and inexpensive, it's a little too early in the process to say, in my view. As I mentioned, there are only two arbitrations actively under way at this date.
However, as I mentioned, the fact that this process appears to press parties to resolve disputes in the consultation stage is an indication that it actually works as it should, which is to minimize the amount of disputes and resolve problems between investors and NAFTA parties.
That concludes my answer to that list of questions.
The Chairman: Perhaps I should return to question seven in which you sought some clarification. I gather that this is the thought behind the question: before NAFTA, the arbitration took place on the basis of bilateral agreements dealing with either the promotion or the protection of investments. That was the basis on which the arbitration would take place. Are the NAFTA rules relevant to the process of arbitration? To what extent are the NAFTA rules different from the kinds of provisions you found in the old agreements? That's the point.
Mr. Tereposky: That's a very good question. I assume you're referring to these many bilateral investment agreements that Canada would have with governments around the world. Hopefully, there will soon be a multilateral version of that, this multilateral investment agreement, or MIA, which is being negotiated in the OECD.
The primary difference with those old agreements under NAFTA is that the old agreements were really from government to government, and where there were investor rights, they were very limited. Again, in the case of Canada, this goes to the general policy such that Canada would not have binding investor-state dispute settlement.
If there was a problem with an investment in Costa Rica, Cuba, or wherever, the Government of Canada could deal with it through these bilateral agreements, but there was no real recourse through the investors. Investors would generally invoke the domestic laws in the country in which they invested. So in Chile, or wherever, they would go to Chilean law in a Chilean court and work their way up through the system. Alternatively, they would get the Government of Canada to act on their behalf.
But now, under NAFTA, at least with respect to the three NAFTA countries, we now have binding private investor dispute settlement.
My colleague has something to add.
Mr. Kronby: Mr. Chairman, if I could just add this, since NAFTA, our bilateral foreign investment protection agreements, or FIPAs, have adopted the NAFTA model. So there is now private investor-state arbitration provided for in our more recent bilateral investment protection agreements. I believe we have signed 13 of those since NAFTA.
[Translation]
The Chairman: Before giving the floor to Mr. Paré, I would ask Mr. Cullen to take the Chair as I must leave.
[English]
Mr. Cullen, would you take the chair?
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[Translation]
Mr. Philippe Paré: I have two short questions. First, are you saying that Canada and Mexico were not signatories to Chapter 11 of NAFTA?
[English]
Mr. Tereposky: No, I'm sorry. I was saying that one of the three procedures for investor-state dispute settlement is under the ICSID convention. Canada and Mexico are not signatories to that particular convention. So if Canada and Mexico are involved in a dispute under chapter 11, they will use the additional facility rules or the UNCITRAL rules.
So chapter 11 applies; it's just that one of the procedures they could use does not.
[Translation]
Mr. Philippe Paré: Therefore, if they are not signatories to that particular convention, the convention itself cannot be used against Canada or Mexico.
Mr. Kronby: That is correct.
Mr. Philippe Paré: Second, there was an article in La Presse yesterday stating that the OECD has drawn up a charter on investments. Is there a link between these two, since, unless I'm mistaken, this procedure also deals with investments? What is the main difference between the two? Since Canada is a member of the OECD, why should the OECD agreement not prevail over NAFTA, since Canada, the United States and Mexico are members of the OECD?
[English]
Ms Hughes: Mr. Tereposky had referred to the multilateral agreement on investments currently being negotiated in the context of the OECD. That is progressing. It is at the negotiation stage. It is an agreement that is in development. It is not meant to replace this agreement. It's dealing with the investment issues. It's a very broad agreement that has not been finalized.
So at this point I wouldn't be able to tell you what it's going to look like, in the end. The negotiations are continuing and are expected to continue for some time.
[Translation]
Mr. Philippe Paré: Thank you.
[English]
The Acting Chairman (Mr. Roy Cullen (Etobicoke North, Lib.)): Mr. Penson.
Mr. Charlie Penson (Peace River, Ref.): I would like to start by backing up a little bit to try to find out what would trigger a company needing to have protection, or making an appeal to the panel to begin with. Maybe you can help me out here.
Let's say a hypothetical company is going through this. First, are there certain restrictions in investment in all three countries that first of all restrict the ability of some of our countries to invest in other countries? Second, in the areas where there are no restrictions, I gather a company can invest. If they are denied that right, then they would appeal to this body.
Can you walk us through that? Just back up a little bit from starting the whole process and go on to how it would all take place.
Mr. Tereposky: Certainly.
This takes us back to the substantive obligations in section A of NAFTA, and what are those rights. The important thing to remember is that these disputes can arise over almost any set of facts. Probably the best way to illustrate this is to look at the four cases that have been started up to now. I'll start with the two Mexican ones, because they are the ones I'm most familiar with.
In one of the Mexican cases, an American company operating in Mexico had a contract to provide municipal waste removal - garbage collection, effectively. Their contract was terminated. It was a contract with the Mexican municipality.
As a result of that termination, they are bringing a claim under NAFTA, chapter 11. Their claim is that this termination of the contract amounted to an expropriation under the NAFTA provisions, or a measure tantamount to an expropriation. The government was taking away their business. So that's one example.
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Another example is the second Mexican case, which dealt with an American company trying to set up a hazardous waste landfill in Mexico. In order to set up this landfill they needed a number of permits, and the Mexican government for a number of different reasons refused to provide certain permits. They are bringing a challenge under NAFTA, and they are raising a number of grounds, including the fact that they feel they were discriminated against in the issuance of these permits.
It's important to know that one of the fundamental obligations in chapter 11 is the right not to be discriminated against if you're an investor. In that case Mexican companies and U.S. investors operating in Mexico would be treated the same, so in that case they argued they were being discriminated against.
The two cases where there was a notice of intent to submit a claim in Canada are much more creative. I won't comment on the merits of those cases, other than just to give you an example of the types of things companies look at when they are analysing chapter 11.
One of the cases was filed by a Mexican investor who had a joint undertaking in Canada relating to generic drugs. They were adversely affected by the generic drug legislation. I have not gone into the full facts of that case, but my understanding is they did not have the market opening they had thought because the drug patent holder...their patent extended more than they had thought it did. So they brought a claim on a number of different grounds.
The second document filed was filed by the Ethyl Corporation, which you may have read about in the newspapers, in their dispute over this MMT bill. MMT is the gasoline additive. It has been on the front page in Canada quite a few times. Among other things, they were arguing that the MMT bill - it was proposed legislation, which was one of the problems they would have to overcome if they were to bring a dispute, because it's not in effect yet - this proposed legislation, would expropriate their business.
There are many other factual circumstances. The Pearson Airport issue, where the government changed its mind about that particular contract... If U.S. investors were involved in that deal, chances are in negotiations they could have raised issues under chapter 11. Similarly in any other situation. You can get quite creative on these.
Mr. Charlie Penson: So the difference would be that in areas where there's no restriction to investment equal opportunity has to exist for businesses in all three member countries, but there are restrictions to invest in certain areas and those are excluded areas.
Mr. Tereposky: Yes. What one has to do is look at the obligations. Then the more important thing in chapter 11 when you look at obligations is the exceptions. You have to make sure the particular matter in question is not covered by an exception. If an exception applies, then you do not have any recourse under chapter 11.
The Acting Chairman (Mr. Roy Cullen): Mr. Graham.
Mr. Bill Graham: Mr. Chairman, I have three questions, and I'll jumble them all up.
One deals with ICSID and whether, Ms Hughes, you could tell us what the present position is on ICSID. It has been the view of a lot of the members of the bar for some years that ICSID should be adhered to by Canada. It would give our investors overseas additional protection, particularly in uncertain areas such as Africa.
My understanding is that the reason why we have never signed it is that Investment Canada has always objected because they've been concerned that somehow it would be used against Canada. I have never understood this, because you can't be brought into an ICSID agreement unless in fact the company or investment in question is covered by an ICSID clause in the contract. We don't enter into those contracts, so I don't see why it would ever be used. But I wondered if you could help the committee understand if there's any likelihood of our signing on to the ICSID process in order to help our own investments abroad, as much as this matter of NAFTA.
That's one question. The second question is to Mr. Tereposky.
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You mentioned the commission's interpretation of agreements under article 11. I was curious about that. I find the whole idea of this commission highly curious. It's supposed to consist of the three trade ministers. I don't think they've ever met, or not that I've ever heard of, and yet there are a million problems scurrying around in the dealing of the NAFTA agreement that we can't be seen to be dealt with because they can't get the three trade ministers together to deal with them.
How on earth would you or anybody ever expect the three trade ministers to hand down an interpretive ruling in this arbitration matter that would be satisfactory under the treaty? It seems to me it would be a total illusion, but maybe you can help us by understanding whether or not that's true.
The third thing would be an issue that any one of the panel might wish to comment on. It has come up before this committee quite often. It's a much more philosophical type of thing. Would we be better off to have a permanent tribunal between the three countries that would deal with these issues? I think it was recommended by Professor McRae and some of the other witnesses who have come.
For example, on anti-dump and maybe chapters 19 and 20, a permanent tripartite tribunal, not with the extensive powers of the European court, say, but at least a permanent tribunal that would be trilingual, permanent, and able to deal with these issues, should be formed. If so, obviously that would extend to investment disputes as well and probably take over the whole role of all dispute resolution under the agreement.
In your view, would that be helpful for investment disputes, or is it better that investment disputes be handled on an ad hoc, arbitral, party-to-party basis?
Those are the three questions I would have.
Ms Hughes: As usual, Mr. Graham, you always know more about these things than I do.
In terms of ICSID, and why Canada isn't a party, first of all, as a practical matter it was difficult for Canada to become party to ICSID, because there is no federal state clause. As a result, we would have to have all of the provinces have their legislation in place before Canada could become party. We would be undertaking an international obligation by becoming party to that convention. If one of the provinces hadn't implemented it and we found that particular province was involved, and there was a matter that hadn't been resolved in a particular province, we would have been in violation of our international obligations.
For some years now the federal government has been speaking with provincial authorities and seeking their buy-in, and actually have their legislation in place. Although it is my colleagues at the Department of Justice who are responsible for this matter, I am aware of their moving forward. I think they are fairly optimistic that we will soon become party to ICSID. I think we are headed in the right direction in that regard.
You addressed the question on the Free Trade Commission to Mr. Tereposky, but if I might take a minute, they in fact did meet on March 20 - as recently as that. You are correct that they don't meet very often. However, it it has been done that the commission has delegated authority to perhaps deputies. In this case this could be a situation where that might be done.
So I would think it's not necessary to have the commission decide these issues. They might be able to delegate it. But that, of course, on a case-by-case basis, might be interpreted.
I think you addressed the other question to Mr. Tereposky, so I should perhaps let him answer.
Mr. Bill Graham: First, though, as a quick follow-up, in your view, the way the agreement is worded in terms of this interpretation, the ministers, through the bureaucracy, could just refer this matter to the three governments, who would agree on an interpretation, and then this would be provided to the party of the dispute. It wouldn't actually have to go before the three ministers and be ratified by them and get into all the scheduling problem of trying to get three busy people together.
Ms Hughes: I would think it could be something that could be proposed to be delegated. The commission would have to agree to delegate it, but I think it could be done. It has been done. For the commission to delegate and -
Mr. Bill Graham: You would just get a Department of Justice lawyer here with somebody in Mexico and the United States to see if you could come to an agreement. Is that what you'd do?
Ms Hughes: That could be done. On the one occasion when I know they've delegated authority, they delegated it to their deputy ministers. Whether or not they would go so far as just the Justice lawyer, I'm not sure.
Mr. Bill Graham: Okay. I see how you do it. Thank you.
Ms Hughes: If you don't mind, Mr. Chair, I might address the permanent panel and whether or not that might be... I know Mr. McRae has suggested it.
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I think if we had a permanent panel dealing with chapters 11 and 20, they'd be as lonely as the Maytag repairman, because there really hasn't been enough work for them to do. I'm wondering whether it would be a good idea at this point. But you didn't address that question to me. I just thought I'd throw that out before Mr. Tereposky has his opportunity.
Mr. Tereposky: Those are great answers. I just have a few brief points to add.
On the commission interpretation, there is a fall-back rule that if the commission can't agree, the tribunal can make the decision. Keeping in mind how important these issues are, there is a real incentive for the three parties to get together on some of these issues. I agree with Ms Hughes that this could happen and they could come up with an agreed-upon interpretation. I have seen it work informally amongst the countries, where Ms Hughes and her counterparts in the United States and Mexico will pick up their phones to deal with a difficult issue and work it out. That is a process that can work.
With respect to the permanent panel, I agree fully with Ms Hughes's comments that there have not been a lot of disputes, so the panel would not be very busy. Also, there is the conflicts issue that you often run into when you get panels that are constructed with very knowledgeable people. Chances are they've been involved in a lot of different industries, so you'd run into a problem in chapter 19 where you have many different industries bringing in cases. It's the same with investment disputes, where it could be any industry from anywhere.
Those are the only comments I have.
Mr. Bill Graham: Thank you.
The Chairman: Mr. Penson.
Mr. Charlie Penson: Because the OECD is discussing this very important issue to try to move forward to a multilateral agreement, it seems to me whenever we do that we should try to advance our cause to improve what we have already. Do you have any thoughts on how we could make improvements to the whole investment area in terms of what we should be advancing at the OECD?
Ms Hughes: Regrettably, I can't answer your question. I'm not involved in the negotiations themselves and I'm not in a position to develop policy at Foreign Affairs because I serve in a legal capacity.
Mr. Tereposky: I think NAFTA is really the desired objective. If you look at public commentary on the OECD discussions, it appears that they are trying to ingrain certain principles that we find in the NAFTA, such as non-discrimination. They will have a problem at the OECD coming up with the scope and negotiating the scope for the agreement.
On the exceptions you were discussing, I think there will be broader exceptions in the OECD than in the NAFTA, simply because there are more parties. So I think NAFTA will probably still be the better agreement from an investor's perspective because it will have a broader scope and will cover more sectors. It's also a lot easier to agree on something with three countries than with the number of countries in the OECD these days.
Mr. Charlie Penson: In terms of the exceptions we have among Canada, Mexico, and the United States, have they been a source of problems?
Mr. Tereposky: No, they haven't been a source of problems. They were part of the negotiations, so the countries would have signed off on each other's exceptions. Because NAFTA has all of the exceptions in the annexes, you can tell very quickly where the inconsistencies are in each country by just looking at the annexes themselves. It was a balanced negotiation and parties agreed to them. To my knowledge, there are no impending disputes over the interpretation of any of those exceptions.
Mr. Charlie Penson: I'm not thinking so much of being able to identify which ones are the exceptions, but if we had another round of NAFTA and, for example, Chile were to come in, that would open it up again. I guess I'm asking you to gaze into the crystal ball to see if there would be areas included this time around that weren't last time, or more exceptions.
Mr. Tereposky: The Chilean exception is a difficult one, because I think both Canada and Mexico would take a fairly firm position that they've done their negotiations and at least certain parts of the agreement, or a lot of the agreement, should not be opened up. But it is possible that some of those reservations could come up for negotiation. That's the whole purpose of having it transparent: you can negotiate them away over time and become much more liberal. But I think that will be a very slow process.
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Mr. Charlie Penson: So as far as you're concerned there's no pressure from industry in Canada to try to lessen the amount of exceptions for investment in the United States, for example, or vice versa.
Mr. Tereposky: Not at this time, again because it's very balanced. If you have aeronautics, for example, big exceptions in all three countries...the industry interests here would lose something if they tried to balance their negotiation in the other country. Really, it's reasonably balanced, and I'm not aware of any concerns at this point.
The Acting Chairman (Mr. Roy Cullen): Mr. Graham.
Mr. Bill Graham: I have a couple of questions arising out of that issue.
The Canadian cultural exception, as I understand it, would apply -
Mr. Tereposky: Yes.
Mr. Bill Graham: - with all the difficulties attendant on determining what a cultural measure is, etc.
But leaving that aside, you mentioned aeronautics. I assume that the normal exceptions - I haven't looked at this - would be national security, culture, and these sorts of general, overarching themes. Are there actual individual industries in there as exceptions? What would drive someone to exclude aeronautics unless it was considered part of the national security image?
Mr. Tereposky: There are different annexes to the NAFTA. Annex I has all of the sectoral exceptions. Certain sectors are very sensitive. In Canada we have Canadian ownership requirements in aeronautics. If you look into the annexes, those requirements that are inconsistent with the provision in chapter 11 are carried forward in the reservations and cannot be challenged. There are many different sectors for which Canada has these requirements, and they are basically all carved out from the agreement.
Mr. Charlie Penson: Banking.
Mr. Tereposky: Banking is another one.
Mr. Bill Graham: But now an American is entitled to own a part of a Canadian bank, up to 10%...and with all the rules, just like a Canadian. So if I were an American owner of part of a Canadian bank, could I not use the provisions of chapter 11 if I got into an investment dispute about the nature of the bank?
I clearly couldn't use it to challenge the rules in place in terms of limitations on ownership, because that's enshrined in the treaty. But if I had another commercial dispute of some kind in which I was alleging that the government had somehow expropriated my interests along the lines of the Pearson International Airport, or some of these other things that have been discussed, surely I could use it for that purpose.
Mr. Tereposky: Yes. Again, this has never been ruled on, but the general principle established by the GATT and adopted at the WTO is that exceptions are always interpreted narrowly, so I think you would look for the gaps that the exceptions don't cover. Likely you would be able to find areas that you could challenge. If you look at the reservations, they are very carefully drafted. It would be only within their terms that the reservation would apply.
Mr. Bill Graham: Okay.
May I ask another question about the investment agreements that are, I appreciate, being negotiated at present. There was a suggestion, which I think was in yesterday's Toronto Star, by a knowledgeable writer in the area of economic trade issues that Canada's interests in this agreement would be limiting our ability to insist upon the job creation measures of investors making investments in Canada by saying they're going to have to create so many jobs if you do it and things like that. Therefore he was critical of the suggestion that we're involved in it.
Upon reading that article, it just seemed to me that this was sort of an assumption that the old FIRA was alive and there and actually placing these sorts of obligations on investors in Canada.
Quite apart from the NAFTA context, is it the practice these days for the government to require commitments from foreign investors to create jobs as a consequence of entering into an investment in Canada?
I appreciate that I'm getting into the whole of the Investment Canada-FIRA sort of business and my question is a bit fuzzy, because my thinking is rather fuzzy on it. I just wondered whether the discussion around the MIAs isn't fighting a war that's already over rather than the one of the future.
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I don't know whether any of the panellists are capable of commenting on that, or want to.
Mr. Kronby: I can't speak directly to what is now being negotiated in the MIA, because I'm not involved in that, but I do know, for example, that one of the types of rulings or measures that cannot be challenged under chapter 11 is rulings by Investment Canada. I can also tell you that requirements to create jobs are not among the performance requirements set out in article 1106 of the NAFTA. One of the areas where obligations are imposed on parties regarding investments and investors is article 1106, which provides that you can't impose certain so-called ``performance requirements'' on companies. You can't require them, for example, to buy a certain percentage of domestic goods as a condition of their right to invest.
So subject again to other provisions, such as national treatment, or MFN, which are also captured by chapter 11, unless there were a specific performance requirement, an obligation relating to job creation...again, I don't know for certain, but that might be something that would be permitted.
Mr. Bill Graham: But didn't we lose a GATT case involving a performance requirement some years ago, one requiring a certain amount of internal Canadian purchases? It seems to me we lost a GATT case years ago. It blew a hole in FIRA.
Mr. Tereposky: Canada did lose the FIRA case. However, it did not lose the entire FIRA program in that case. As Mr. Kronby referred to, there were certain types of performance requirements related to investment. If you invested in Canada you had to produce or purchase x amount of domestic content, as opposed to importing.
What the panel ruled on was a very limited subset of performance requirements, effectively now referred to as ``trade-related investment measures''. These are the requirements that are caught by the new TRIMs agreement in the WTO. Insofar as performance requirements relate to the trade in goods, if you have a domestic content requirement, you are limiting the amount of imports of those particular components that are going to come in. That is a trade-related measure. That is what is already dealt with in the WTO. It could be that those are the types of matters they are looking into in the MIA.
I also agree with Mr. Kronby's point about the distinction between these specific types of performance requirements and general matters such as labour and employment. There is a scale here. You have clearly trade-related measures, you have measures that may or may not be trade-related, and then you have labour and culture and all these other things. If they are discussing things in the MIA, and again I'm not involved in this either, they are probably shooting somewhere in the middle of the spectrum. It would be very unlikely they could move to these grey areas, which are very, very internal, in those negotiations, given the number of countries involved.
The Acting Chairman (Mr. Roy Cullen): I think we're getting close to winding down here. I myself have just a couple of questions for the panel.
I would like to get a little into this issue of the permanent body and whether that is something one should examine. I appreciate the comment from Ms Hughes about the Maytag repairman and the loneliness that could ensue, but if you look at combining a permanent body that would look at chapter 11 and chapter 20 disputes, I guess there's a question of critical mass. Do you have enough volume - we hope not - to deal with? Would you need the same skill sets? If you were going to form a body, could the same group, for example in theory, adjudicate on chapter 11 disputes as well as chapter 20 disputes? Would different skill sets be involved?
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Ms Hughes: I think there are two different rosters established under the NAFTA, one for chapter 20 disputes and another for chapter 11, and the requirements for being on each roster are different. That's not to say they are entirely different, but there are some differences. Under chapter 11, I think it's much more specific, it's much narrower in terms of what is at issue. But some of the provisions of chapter 11 really are, again, very broad international law issues, such as the fair and reasonable treatment that's referred to under article 1105.
I don't know what Professor McCrae's suggestion is for a permanent panel, but at the WTO there is a permanent appellate body, for example. There are seven members, but only three at a time sit on a case. I suppose that's one way of dealing with the differences you might require in terms of skills or knowledge or expertise. It's not something I've spent a lot of time studying, Mr. Chairman, but I suppose that is one way of dealing with the different elements that you would like to look at in terms of who's going to sit on those panels.
Mr. Tereposky: Another thing that should be taken into account as well is that there are rosters set up under ICSID. Those roster panellists are very familiar with the procedural rules. When you go into an ICSID or UNCITRAL arbitration, it's much more like going to a trial court than it is like going to a party-to-party dispute for NAFTA chapter 20. So I'm not sure if all of the areas would be covered by the same type of knowledge. But at the investor-state level, I certainly think it would probably be better to have pure lawyers who also have some trade knowledge on the panel, simply because it's very procedural.
The Acting Chairman (Mr. Roy Cullen): I have another question. Mr. Tereposky, you indicated that in the chapter 11 disputes you could have state-to-state at the same time that you have a private sector claim against the state. Could you describe the circumstances in which that would occur? Is that where the state has a particular interest in a generic issue that's being adjudicated and where it would want to establish some kind of presence in that particular dispute? Could you describe the circumstances in which you could have those running parallel?
Mr. Tereposky: As a hypothetical example, let's look at the Canada-U.S. context. The Canadian investor invests in the United States and has an operation working in the United States. A state government creates a piece of legislation that either discriminates or expropriates or does something that it cannot do with respect to that company. That Canadian investor suffers damages, loses profits.
There are two approaches to challenging that. The Canadian investor can go to the Canadian government, get a dispute initiated under chapter 20, and remove the law or get that bad law changed because it's inconsistent with the NAFTA. The Canadian government would probably want to do that because it doesn't want this particular state law applied to other Canadian investors. So there's the chapter 20 interest. At the same time under chapter 20, this investor cannot get his money back, his compensation. He would therefore go to an investor state panel under chapter 11 to get that money back.
So there are two parallel disputes. One gets rid of the law, which you can't do under investor-state. The other gets your money back.
Mr. Charlie Penson: Helms-Burton might be one.
The Acting Chairman (Mr. Roy Cullen): I have one last, quick question. There has been much discussion under the multilateral investment agreement, and I gather the Americans are pushing for some provisions on corruption, bribery, or what have you. Just as a matter of interest in terms of the substantive provisions on investments under the NAFTA, are there any clauses with respect to business corruption?
Mr. Tereposky: No.
Ms Hughes: No.
The Acting Chairman (Mr. Roy Cullen): I guess that's because we don't need them, right?
Are there any other questions? No?
With that, I would like to thank the witnesses very much for appearing here today. We've learned a lot. Thank you for the work you have put into it.