EU, Canada approach to investment could have mixed impact on US talks
Inside US Trade via Googlegroups - 06/28/2013
EU, Canada Approach To Investment Could Have Mixed Impact On U.S. Talks
A confidential text on the investment provisions of the Canada-European Union free trade agreement (CETA) shows that the two parties have broken new ground in defining the key concept of fair and equitable treatment for investors. The language that they have agreed upon contains similarities but also differences to the approach that the United States has taken in its investment deals, which could pose problems in the upcoming U.S.-EU trade and investment talks, according to copy obtained by Inside U.S. Trade.
Moving closer to the U.S. negotiating stance, the EU has agreed to partially link a government’s obligation to accord fair and equitable treatment to investments with the concept of customary international law. It does so by stating a violation of the fair and equitable treatment under the CETA is any treatment contrary to the fair and equitable treatment obligation recognized by the general practice of states as accepted as law, which experts say is a clear reference to customary international law.
This link has the effect of limiting the scope of the fair and equitable treatment obligation and leaves its interpretation up to governments. The EU initially opposed this link in the CETA negotiations (Inside U.S. Trade, April 5).
If the EU sought to go back to its initial stance in the U.S.-EU talks, U.S. negotiators could object and cite the fact that the EU has already agreed to the customary international law approach in the context of the CETA negotiations, investment experts said.
But the EU and Canada have also significantly diverged from the U.S. approach to fair and equitable treatment enshrined in the 2012 U.S. model bilateral investment treaty (BIT).
For instance, the CETA appears to expand the scope of fair and equitable treatment beyond the U.S. model BIT by saying that signatories need to provide such treatment not only for “covered investments,” but also for investors themselves, according to a private-sector lawyer.
The U.S. may resist this broader scope when negotiating with the EU, since the U.S. model BIT only promises fair and equitable treatment to covered investments, this lawyer speculated. Broadening the concept could lead investors to claim that they did not receive fair and equitable treatment during the process of setting up an investment, which is not contemplated in the U.S. language, this source said.
In a third difference from the U.S. approach, the CETA explicitly states that investor-state tribunals may take into account the issue of whether a company’s expectations about a certain investment were breached when deciding whether there has been a violation of the fair and equitable treatment obligation.
The language on fair and equitable treatment is included in a CETA investment text dated May 31 that was leaked to Canadian media and later obtained by Inside U.S. Trade, along with a June 5 European Commission memorandum on the status of the CETA talks.
These documents show that the overall approach the EU and Canada are taking on investment provisions in the CETA is in some respects vastly different from the U.S. approach, by for instance limiting the scope of the investor-state dispute settlement (ISDS) mechanism. But it also brings the EU closer to the U.S. on the issue of indirect expropriation (see related story).
The fair and equitable treatment obligation is one component of the minimum standard of treatment provided for in past U.S. free trade agreements and the 2012 model BIT. In those agreements, the U.S. has anchored the minimum standard of treatment to "customary international law" in an effort to narrow the scope of this obligation and ensure that the ability to define what constitutes minimum standard of treatment lies with governments themselves, as opposed to investor-state tribunals.
The U.S. approach does not further define fair and equitable treatment other than saying it "includes the obligation not to deny justice in criminal, civil, or administrative adjudicatory proceedings in accordance with the principle of due process embodied in the principal legal systems of the world."
Investment experts this week disagreed about whether the differences on fair and equitable treatment between the CETA and the U.S. model BIT would in practice result in a different scope of the obligation.
The CETA text defines the fair and equitable treatment obligation in two ways. First, it contains a finite list of actions that constitute a breach of this obligation, and does not link these to customary international law. Second, it says breaches of the fair and equitable treatment obligation can also occur in situations where there is a violation of the fair and equitable treatment under customary international law.
The situations listed are: denial of justice in criminal, civil or administrative proceedings; fundamental breach of due process; manifest arbitrariness; targeted discrimination on manifestly wrongful grounds; and abusive treatment of investors. The parties have also agreed to review that list in the future and consider adding to it.
Two experts argued that the EU-Canada formulation of the closed list plus the open-ended paragraph referring to customary international law would not appear to differ much in practice from the U.S. approach. One source said this is especially true since the situations in the closed list are generally considered under customary international law to be violations of fair and equitable treatment and have been used by some investor-state tribunals to determine whether a violation has occurred.
But a U.S. private-sector lawyer said the EU-Canada language could result in an expansion of scope from the U.S. standard, for several reasons. First, the situations listed are not explicitly tied to customary international law, meaning a tribunal could examine the concept of "denial of justice" in isolation, which could result in a broader scope than what is considered to be denial of justice under customary international law.
Second, the EU-Canada language refers to denial of justice in "criminal, civil or administrative proceedings," while the U.S. model BIT says such proceedings must be "adjudicatory" in nature, this lawyer said. He explained that the word "adjudicatory" typically refers to proceedings where a judge has to make a decision based on the views of opposing parties.
The U.S. might oppose broadening the scope of the fair and equitable treatment violation to cover denial of justice in non-adjudicatory proceedings, which would extend to regulatory rule-makings or license applications, as this could open up federal agencies to more investor-state claims, this lawyer speculated.
Finally, this source said U.S. negotiators might oppose any language similar to that in the leaked CETA text that allows parties the ability to expand the definition of fair and equitable treatment in the future, as this could lead to objections from members of Congress who might argue it amounts to renegotiating the agreement without requiring their consent.
Investment experts also differed about the impact of the provision related to investor expectations. The provision states that, when applying the fair and equitable treatment obligation, "a tribunal may take into account whether a Party made a specific representation to an investor to induce a covered investment, that created a legitimate expectation, and upon which the investor relied in deciding to make or maintain the covered investment, but that the Party subsequently frustrated."
Some advocates for investors take the position that an action by a government that contravenes the "reasonable expectations" of an investor amounts to a violation of fair and equitable treatment, and investor-state tribunals have taken a range of positions on this issue.
Experts said that while the CETA language would not establish that a breach of investor expectations is in and of itself a violation of the fair and equitable treatment, it is the first investment agreement that explicitly includes a reference to investor expectations. The provisions effectively direct tribunals to consider whether expectations were breached when deciding whether the facts of the case fall under one of the situations described in the CETA text, such as "manifest arbitrariness," according to these experts.
But Scott Sinclair, a senior research fellow with the Canadian Centre for Policy Alternatives, argued that the mere reference to investor expectations in the CETA text expands the scope of fair and equitable treatment obligation beyond what is currently applied under NAFTA.
He also made the point that this new language could lead to an expanded scope of fair and equitable treatment not only in the CETA, but also in NAFTA investor-state claims against Canada. This is because NAFTA explicitly refers to customary international law, which is based on the practice of states, and the Canadian government in agreeing to the new CETA text has affirmed that it believes the concept of investor expectations is relevant for determining whether a breach of fair and equitable treatment has occurred.
But a private-sector lawyer argued that the CETA text could also be seen as limiting the degree to which tribunals can take investor expectations into account. This is because it limits the types of expectations that can be taken into account to those based on "specific representations" made by a government to an investor, such those in a contract or letter.
In previous investor-state cases, claimants have cited expectations based on more generic statements by government officials welcoming investment, but that would no longer be possible under the CETA formulation, this lawyer said.
Inside U.S. Trade - 06/28/2013, Vol. 31, No. 26
