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Free-trade deals lack foreign safeguards

Montreal Gazette, Canada

Free-trade deals lack foreign safeguards

By Gus Van Harten, Troy Media

24 October 2011

TORONTO – One purpose for the federal government’s pursuit of free trade deals with other nations is to protect Canadian investors from mistreatment in foreign countries.

In fact, the government is currently negotiating a major trade deal with Europe and has announced a flurry of other agreements, including one just concluded with Honduras.

However, the agreements perpetuate a flaw in Canada’s trade model: the lack of safeguards for the independence of those chosen to adjudicate disputes in whcih investors from one country are harmed by the other country’s actions (what is commonly known as ‘dispute settlement or investor-state arbitration).

Canadian interests undermined

This flaw undermines Canadian interests. For example, Canadian investors have an abysmal record in investor-state arbitration. They have sued foreign countries – most often the U.S. – 16 times and lost every case. Although not necessarily definitive, this experience should raise alarm bells about investor-state arbitration.

In particular, safeguards of independence that are well-known in international and domestic courts need to be introduced. At present, investor-state arbitrators lack any security of tenure, are under-regulated in the activities they can pursue outside of the judicial role, and are not chosen from a set roster based on an objective method of appointment. This distinguishes investor-state arbitration from dispute settlement processes under other trade agreements, including the World Trade Organization agreements and most parts of NAFTA.

The Canadian experience in investor-state arbitration is dominated by NAFTA Chapter Eleven. To date, 30 claims had been filed against Canada, compared to 17 against Mexico and 16 against the U.S. Ten of the claims against Canada – all by U.S. investors – have been resolved, with a mixed record of wins, losses, and settlements.

On the other hand, Canadian investors have sued the U.S. nine times under NAFTA and lost every case. Likewise, under other treaties, they have sued various countries – such as Costa Rica, Croatia, and Sri Lanka – seven times and, again, they have lost every case.

Some of the cases lost by Canadian investors have pointed to the risk that investor-state arbitrators may avoid ruling against powerful states for political reasons. In Loewen v USA, a Canadian funeral homes company was required to pay a massive jury damages award following a civil trial in Mississippi, leading the Canadian investor to seek relief under NAFTA Chapter 11. The NAFTA tribunal condemned the civil trial as “a disgrace,” but surprisingly decided to “stay its hands” and avoid ruling against the U.S., apparently to protect against an anti-NAFTA backlash.

Decisions like Loewen raise concerns that, in the absence of well-known safeguards of independence, powerful actors may be more able to influence the appointment and supervision, and ultimately the decisions, of arbitrators. Thus, the lack of safeguards fuels a concern that the system does not offer the same protections for all countries and for all investors.

Investor-state disputes would ideally be resolved by an international investment court that incorporated the highest standards of fairness and independence. Short of this, Canada should look to other models of dispute resolution as a basis for re-shaping the system. As an example, the person-to-government arbitration process under Canada’s Agreement on Internal Trade (AIT) incorporates various safeguards that could be used in investor-state arbitration.

First, the AIT establishes a roster of qualified persons who are eligible to be arbitrators and provides that arbitrators must be appointed from the roster. This is important for reasons of quality control, public accountability, and independence.

Second, the AIT provides for random selection of a tribunal’s chair where the disputing parties do not agree about who to appoint. This ensures neutrality in the process and limits opportunities for behind-the-scenes lobbying to stack tribunals.

Third, the AIT imposes a mandatory code of conduct on arbitrators to protect against potential conflicts of interest. Other arbitration processes – such as financial arbitration in the U.S. – take similar steps by precluding arbitrators from earning significant income as lawyers in the investment industry.

In contrast, investor-state arbitration does not institute rigorous checks on the activities of arbitrators outside of the judicial role. In some instances, an arbitrator may interpret the law in one case while arguing on behalf of paying clients about how the same issues should be resolved in other cases. There is clearly a need for tighter regulation of both the arbitrators and the arbitration process.

Indeed, in a trade deal between developed countries with mature and democratic judicial systems, there is no clear rationale for allowing foreign investors to circumvent domestic courts via investor-state arbitration.

The lack of safeguards of independence in investor-state arbitration contrasts with international and domestic courts and with dispute resolution processes under other trade agreements. Canada should seek to reform investor-state arbitration under NAFTA Chapter Eleven and adopt a revised model in ongoing trade negotiations with the European Union.

Gus Van Harten is an associate professor of law at Osgoode Law School and author of “Toward an independent rules-based system of trade and investment”, recently released by the Macdonald-Laurier Institute. His research is freely-available at