By Alan M. Field

Late in October, Canada and the European Union signed their long-delayed Comprehensive Economic & Trade Agreement (CETA). Like the troubled 12-nation Trans-Pacific Partnership, which was intended to bring together Canada, the U.S. and other nations that border on the Pacific, CETA is not an old-fashioned free-trade pact aimed at making further tariff cuts, but a next-generation agreement focused on facilitating market deregulation, liberalization, and, its critics say, the handing of further powers over law-making to big business. For some, its most nefarious component is its Investor State-Resolution System (ISDS), which would establish a “corporate court” system that gives foreign investors their own special legal process to sue governments.

Subject to the same massive protest movement that greeted TTIP and TPP, nearly 3.5 million Europeans have insisted that they don’t want CETA, in a huge 12-month petition campaign. In recent weeks, Wallonia and other Belgian regions froze the whole process temporarily by refusing to allow Belgium to sign the deal.

While polls show that Canadians tend to be more resistant to the pleas of anti-trade advocates than Americans, the struggle over ISDS provisions built into CETA parallel similar efforts to denounce ISDS provisions built into the Chapter 11 of NAFTA. While less controversial, World Trade Organization-endorsed efforts to enact anti-dumping and countervailing measures against goods that are sold at unfair and/or subsidized prices in either of those countries are also widely misunderstood and ignored by those critics of globalization who insist that the entire global trading system is being manipulated by low-cost Asian manufacturers.

In the U.S., ignorance about trade-related institutions is equally evident in the case of the longstanding dispute of Canadian softwood lumber exports. More than three decades after the first bilateral Softwood Lumber Agreement was enacted in 1982, an overwhelming number of Americans remain in the dark about the dispute, and its institutional foundations.

The case against the ISDS

What’s so awful about the ISDS? Wendy Wagner, partner at Gowling WLG law office in Ottawa, notes that the system empowers individual foreign corporations to skirt domestic courts and sue governments before a panel of three corporate lawyers. “As such, it is nothing new,” says Wagner. “Various forms of ISDS are now a part of over 3,000 agreements worldwide, of which the United States is party to fifty.”

For its part, the U.S. Trade Representative (USTR – the U.S. Trade “Ministry”) argues that, “Because of the safeguards in U.S. agreements and because of the high standards of our legal system, foreign investors rarely pursue arbitration against the United States and have never been successful when they have done so. According to a 2015 report by Canada’s Library of Parliament, seven out of the eleven free-trade agreements that are in force in Canada include an ISDS mechanism, as do all of the 29 Foreign Investment Promotion Agreements (FIPAs) to which Canada is a party. By 2015, Canada had received 37 notices from investors of their intent to submit to ISDS arbitration. All of these notices were delivered pursuant to Chapter 11 of NAFTA. Of those 37 notices, 23 cases went to arbitration, and the Government of Canada was required to pay damages in two of them: $6 million plus costs to S.D. Meyers in 2000, and $460,000 plus costs to Pope & Talbot in 2012.

For starters, many critics of free trade agreements tend to forget is that there is a strong link between these trade pacts and the foreign direct investments they facilitate. Notes Cyndee Todgham Cherniak, an international lawyer at LexSage PC, a Toronto firm, “When one enters into a free-trade agreement, one of the things that follows is foreign direct investment. So it’s not just market access for goods, and for services. It allows businesses to set up operations, subsidiaries for their companies in that other jurisdiction, to take advantage of the benefits of the free-trade agreement. If a Canadian company sets up a factory in a country with which Canada has an active trade agreement that includes an ISDS mechanism, the government in that jurisdiction cannot expropriate once, for example, the Canadians have spent all that money building the factory. They can’t just say, ‘Thank you for the one-billion-dollar factory; we would have liked to build it ourselves. But since you built it, we’re just going to take it.’ There needs to be compensation when that happens. That’s the extreme situation. The other situation is having something that is tantamount to expropriation.” In such a case, it’s not that they take the factory, but after spending all that money and setting up the factory, “they pass a law that is tantamount to expropriation; you’re not able to get the benefit of that factory. Since NAFTA, we’ve had the latter concept: minimal standard of treatment, and those are the things that come out of many of the cases. This is all about foreign direct investment, and how do we provide a protection for two things: If the government does do something, getting the appropriate compensation for the aggrieved party. Second, how do we keep governments in check, from doing extreme things?” An ISDS system “stops governments from doing things that they might otherwise do.”

Like other forms of commercial, labor, or judicial arbitration, an ISDS seeks to provide “an impartial, law-based approach to resolve conflicts,” explains a report by the Office of the United States Trade Representative. “ISDS in U.S. trade agreements is significantly better defined and restricted than in other countries’ agreements.”

According to the USTR, governments worldwide put ISDS systems in place for at least three reasons: To resolve investment conflicts without creating state-to-state conflict; to protect citizens abroad; and to signal to potential investors that the rule of law will be respected. Moreover, investment rules enforced by ISDS provide investors in foreign countries with basic protections from foreign government actions such as:

• assurance that firms doing business abroad will face a level playing field and will not be treated less favorably than local investors or competitors from third countries.

• protection against uncompensated ex­propriation of property

• protection against denial of justice in criminal, civil, or administrative adjudicatory proceedings, and

• assurance that investors will be able to move capital relating to their investments freely, subject to safeguards to provide governments flexibility to respond to financial crises and to ensure the integrity and stability of the financial system.

Cherniak outlines two primary benefits of ISDS for investors who risk their funds abroad: “First, if a [foreign] government does something that is unfair [to your company], there is a mechanism to address this, if that measure is affecting Foreign Direct Investment. Second, ISDS keeps [foreign] governments in check from doing just whatever they want to do because there are no consequences.”

The ISDS mechanism has a somewhat different payoff when an investor ventures into a less familiar country, or one with lower standards for rule of law. “When it came to NAFTA, did the Americans and Canadians trust the Mexican court system?” Cherniak asks rhetorically. “Under bilateral investment treaties, do we trust the court system in China and a whole host of [other] jurisdictions? No. So we say, let’s go to arbitration. We, as countries, will accept the results of these arbitrations because we know that it’s in the best interest of our investors when the issue is in that foreign country. We don’t want their foreign courts in charge, just as they don’t want our courts in charge [in such a case.]” The ISDS is “like going to Switzerland. It’s independent entity that is supposed to be the best solution for fairness. CETA was modified earlier this year to provide for the establishment of a permanent body, kind of like the WTO Dispute Settlement Body to receive these investment disputes that are made up of arbitrators selected by the governments of Canada and of the EU. And what they’ve got in CETA – but they don’t have in NAFTA – is a mechanism to appeal the decision of that [above] body to the local courts. So you still have access to the court system within Europe and within Canada, should the arbitral panel decision be unacceptable. So we took the concerns that have been raised and we’ve tried to craft a solution to those problems. It’s all about Foreign Direct Investment, and protecting that FDI. It’s less of an issue between Canada and Europe than it would be if it was between Canada and, let’s just say, Malaysia or Brunei or Vietnam.”

Why? Cherniak added, “You have a little more faith in the judicial system in Europe than in those countries. And there’s also the feeling that if it was the court system, maybe they wouldn’t treat the Canadian investor fairly; that they have a preference for their own people. So you take out the arbitrariness from the judges by having it in an arbitral panel, because you’ve got people from more than one jurisdiction, as opposed to one judge.” Nevertheless, “Even between the U.S. and Canada, the jury systems are different, and so the comfort level is somewhat questionable. That’s why the ISDS chapters – which provide ability to go to an arbitral tribunal – are the compromise position; they allow the FDI to proceed with a little bit less risk. And when there is FDI, there is more trade between the countries; and employment. And the economic benefits are improved.”

A rising tide of ISDS cases

Wagner said that ISDS “has gotten more attention as a left-wing regulatory issue; it seems “the thing” that has been seized on by anti-free trade opponents as a reason to be opposed to FTAs. It’s become a more standard part of FTAs as well.” While treaties with ISDS provisions have existed since the 1960s, just 50 known ISDS cases were launched in the regime’s first three decades combined. In contrast, corporations launched at least 50 cases each year from 2011-2015, with a record 70 cases launched in 2015. If a tribunal rules against a challenged policy, there is no limit to the amount of taxpayer money that the tribunal can order the government to pay the foreign corporation. Such compensation orders are based on the “expected future profits” an ISDS tribunal surmises that an investor would have earned in the absence of the public policy it is attacking.

In a typical statement assailing the workings of ISDS, Maude Barlow, national chairperson of the Council of Canadians, an anti-globalization activist group, wrote, “An elite coterie of lawyers, arbitrators and financial speculators are making a killing seeking out and actively recruiting corporations to sue governments around the world over new health and safety, labor or environmental rules.” For his part, Gus Van Harten, professor at Osgoode Hall Law School in Toronto, argued that there are essentially four reasons why ISDS provisions have become a lightning rod for opponents of free trade, and globalization in general. Van Harten said ISDS “gives powerful rights to foreign investors, without corresponding responsibilities; it creates potentially massive financial risks for democratic regulation; it allows foreign investors to side-step courts,” and “it compromises judicial independence and fair process, despite improvements on this point agreed earlier this year between the government of Justin Trudeau and the Europeans.” Along the same lines, Public Citizen, a U.S. non-profit, consumer rights advocacy group, has argued that trade agreements such as the Trans-Pacific Partnership (TPP) “would vastly expand the ISDS threat, newly empowering thousands of multinational corporations to demand compensation for U.S. policies,” rather than enabling the U.S. to write its own regulations. Some countries are “beginning to challenge this outrageous system,” notes Public Citizen. “South Africa, Indonesia and India have started terminating or renegotiating their treaties that contain ISDS provisions, and Ecuador, Venezuela and Bolivia have already terminated many of their treaties

In response to mounting criticisms of ISDS, the European Commission announced a plan to ‘reform’ this provision by establishing a new European investment court system for the upcoming European Union-United States Transatlantic Trade and Investment Partnership (TTIP). However, said Barlow, “This reform still fails to require foreign investors – like everyone else, including domestic investors – to go to a country’s domestic courts before seeking an international remedy. The proposed investment court system still gives a special status to foreign corporations by allowing them to challenge the laws that apply to everyone else through a special system outside established court systems.”

Opponents argue that ISDS restricts the ability of a domestic government to regulate in the public interest. Thus, if a Canadian province were to withdraw its approval of a new mine, after originally having approved the site, a foreign investor might bring a case against Canada, saying that Canada changed the rules and the foreign investor suffered losses because it developed the mine, but is no longer permitted to operate it.

Others believe that ISDS could put strains on national treasuries or that ISDS cases are frivolous. “Based on our more than two decades of experience with ISDS under U.S. agreements, we do not share these views,” wrote USTR officials in a report.  “We believe that providing a neutral international forum to resolve investment disputes under international law mitigates conflicts and protects our citizens.”

One of the differences between an ISDS and a bilateral investment treaty (BIT), adds Wagner, “is that BITs have been commonly applied between a developed country like Canada, the U.S. or European countries and a less developed country that may not have domestic court systems that are as robust. There is less precedent for these agreements to be between two developed countries; although obviously not unprecedented, since it’s been part of NAFTA for over twenty years. Wagner adds, “I don’t think it’s at all surprising that that kind of mechanism is in there, and that developed countries that are parties to [for example, the TPP] agreement would want to have that mechanism in there to protect their investors; in particular, in those countries where you might not be confident of the capacity of the domestic court system to resolve a dispute.” In the absence of the ISDS, say such supports of the system, the positive economic impact derived by job-generating foreign investments in new factories, infrastructure, and so forth, would be significantly limited.

Regarding the controversial introduction of ISDS in the CETA text, Cherniak defends the Harper government for its efforts. She believes that “the Harper government negotiated what it believed was the best deal for Canada. It wanted to protect Canadian investors who make investments in European territories. And this is the mechanism that is in NAFTA, where it has been used … Under NAFTA, chapter 11 is working as it should work. There’s no case where one can say this country lost and was so mistreated by the arbitral panel; where the panel was so biased or had such a conflict of interest that this is the result. There is no such sense of wrongdoing on the part of arbitral panels in the decisions. I would ask anyone to bring to me any such cases to be made aware of them, if they do exist. “

Overall, she adds, ISDS “is a mechanism that is tried and true. Well-accepted and contained in thousands of BITs [Bilateral Investment Treaties] around the world. It is included in CETA because it has been accepted by the individual European countries, when you add together all the thousands of BITs that they have around the world. [Even the Belgian province of] Wallonia has it in its BITs. There are thousands of free-trade agreements with investment chapters, and there are thousands of BITs. When you combine the FTAs with the BITs, there are thousands of people who have recognized that investment settlement dispute is a good thing. It’s been accepted worldwide to use when a country takes a measure to unfairly treat foreign direct-investment. If you don’t want to have foreign direct investment in your country, okay, but you’re missing out on an economic opportunity that can flow from this free-trade agreement. Why not accept and take advantage of all the benefits that are available from an economic perspective?”

The U.S. position

Deflecting further criticism, USTR has declared that the U.S. is “at the leading edge of reforming and upgrading ISDS. The United States has taken important steps to ensure that our agreements are carefully crafted both to preserve governments’ right to regulate and minimize abuse of the ISDS process.” 

Further, U.S. trade officials note that although ISDS provides a venue for conflict resolution, it protects the sovereign right of governments to regulate. Under U.S. agreements, “ISDS [arbitral] panels are explicitly limited to providing compensation for the loss or damage to their investments; they cannot overturn domestic laws or regulations.

Over the past 25 years, the U.S. has concluded 50 agreements that include an ISDS clause. Collectively, in all of those agreements, the United States has faced only 17 ISDS cases, of which thirteen were brought to conclusion. That’s a small number of cases, considering that during that same time period, the U.S. government was sued in U.S. courts hundreds of thousands of times – in fact, more than a thousand times for alleged “takings” of property by the government.

Moreover, the impact of these agreements is less significant than opponents often argue because the U.S. already has international agreements with ISDS clauses that are in force with six of the eleven other countries participating in TPP (including Canada, Chile, Mexico, Peru, Singapore, and Vietnam). The remaining five countries (Australia, Brunei, Japan, Malaysia and New Zealand) are party to a total of over 100 agreements containing ISDS. “Thus, TPP will not newly introduce ISDS to any of the countries participating in the agreement.” And yet, the growing groundswell of public sentiment against ISDS may poison the waters for its further adoption.


Some of the most notable cases involving Canada and the NAFTA Investor-State Dispute Settlement (ISDS) mechanism

(1). Clayton BILCON vs. Government of Canada

Damages sought: $300 million; Bilcon won. Case is now in the damages stage.

Members of the U.S.-based Clayton family and Bilcon, a corporation they control, challenged Canadian environmental requirements affecting their plans to open a basalt quarry and a marine terminal in Nova Scotia. The Clayton family expected to extract and transport large quantities of basalt from the proposed 152-hectare project, which was located in a key breeding area for several endangered species, including the world’s most endangered large whale. Canada’s Department of Fisheries and Oceans determined that blasting activity in this sensitive area raised environmental concerns and thus required a rigorous assessment. The Clayton family argued that said assessment, which resulted in denial of the controversial project, was arbitrary, discriminatory and unfair, and thus a breach of NAFTA’s “minimum standard of treatment,” national treatment and most favored nation obligations.

In a March 2015 ruling, the tribunal majority decided that the environmental assessment was “arbitrary” and frustrated the expectations of the investors and thus violated a broad interpretation of the “minimum standard of treatment” obligation imported from another ISDS tribunal case. On June 16, 2015, Canada filed a notice of application with the Federal Court of Canada seeking to set aside the award on jurisdiction and liability, on the grounds that the Tribunal exceeded its jurisdiction and that the award is in conflict with the public policy of Canada.

(2) Ethyl Corp. versus Canada

Ethyl, a U.S. chemical company, launched an investor-state case over the Canadian ban of MMT, a toxic gasoline additive used to improve engine performance. MMT contains manganese − a known human neurotoxin. Canadian legislators, concerned about the public health and environmental risk of MMT emissions, and about MMT’s interference with emission-control systems, banned MMT’s transport and import in 1997, despite Ethyl’s explicit threat that it would respond with a NAFTA challenge. MMT is not used in most countries outside Canada, and is banned by the U.S. Environmental Protection Agency in reformulated gasoline.

Making good on its threat, Ethyl initiated a NAFTA claim against the toxics ban, arguing that it constituted a NAFTA-forbidden indirect expropriation of its assets. Though Canada argued that Ethyl did not have standing under NAFTA to bring the challenge, a NAFTA tribunal rejected Canada’s objections in a June 1998 jurisdictional decision that paved the way for a ruling on the substance of the case. Less than a month after losing the jurisdictional ruling, the Canadian government announced that it would settle with Ethyl. The terms of that settlement required the government to pay Ethyl (now known as Afton Chemical) $13 million in damages and legal fees, in addition to reversing the ban on MMT, and advertising that MMT was safe. Today Canada depends largely on voluntary restrictions to reduce the presence of MMT in gasoline.

(3). TransCanada versus the U.S. government

In June 2016, the TransCanada Corporation launched an ISDS case under NAFTA demanding $15 billion in compensation because the corporation’s bid to build a pipeline was rejected by the U.S. government. The $15 billion claim is five times more than the $3.1 billion that TransCanada says it already had invested in the pipeline project because the compensation demand includes the future expected profits that TransCanada claims it would have earned had the pipeline been allowed. The proposed 875-mile pipeline – called the Keystone XL – was to transport to the U.S. Gulf Coast up to 830,000 barrels per day of toxic, highly-corrosive crude oil extracted from tar sands in Alberta, Canada. The pipeline would have transported one of the dirtiest fossil fuels on the planet across more than a thousand rivers, streams, lakes and wetlands as it traversed six U.S. states.

(4). Pope & Talbot

Damages sought: $508 million/ Damages won: $0.5 million ($500,000)

Pope & Talbot, a U.S. timber company operating in British Columbia, challenged Canadian implementation of the 1996 U.S.-Canada Softwood Lumber Agreement. Pope & Talbot claimed that quotas on duty-free imports of Canadian timber into the United States violated NAFTA national treatment and minimum standard of treatment guarantees, and constituted expropriation. The U.S. and Canadian governments had agreed on the quotas to avert a trade war over U.S. industry complaints that Canada was unfairly subsidizing logging companies. Although Pope & Talbot was treated in the same manner as similar companies in British Columbia, it pointed to logging companies in other provinces not subject to the quota to support its allegation of discrimination. A NAFTA tribunal dismissed P&G’s claims of expropriation and discrimination, but held that, even though Canada reasonably implemented the lumber agreement, the allegedly rude behavior of Canadian government officials seeking to verify Pope & Talbot’s compliance constituted a violation of the “minimum standard of treatment” required by NAFTA for foreign investors. The panel also stated that a foreign firm’s “market access” in another country could be considered a NAFTA protected investment.

(5). Eli Lilly v. Canada (medicine patents), pending

Eli Lilly and Company, the fifth-largest U.S. pharmaceutical firm, launched a $481 million claim against Canada in September 2013 under the North American Free Trade Agreement (NAFTA). Eli Lilly is challenging Canada’s patent standards after Canadian courts invalidated the firm’s patents for Strattera and Zyprexa, drugs used to treat attention deficit hyperactivity disorder, schizophrenia and bipolar disorder. Canadian federal courts ruled that Eli Lilly had failed to meet the utility standard required to obtain a patent under Canadian law. Namely, the firm had failed to demonstrate or soundly predict that the drugs would provide the benefits that the company promised when applying for the patents’ monopoly protection rights. The company claims Canada’s legal standard violates the NAFTA guarantee of a “minimum standard of treatment” for foreign investors and resulted in a NAFTA-prohibited expropriation. A tribunal has been formed and the first procedural order was issued in May 2014.