NAFTA chapter XI and Canada's environmental sovereignty: investment flows, article 1110 and Alberta's Water Act.

• Author: Cumming, Joseph

I INTRODUCTION II BACKGROUND Foreign Direct Investment Past, Present and Future Canadian Treatment of FDI Policy Objectives of NAFTA Chapter XI III CANADA'S INVESTMENT OBLIGATIONS UNDER THE FTA AND NAFTA Chapter XVI of the FTA Chapter XI of NAFTA IV THE INCONSISTENT TREATMENT OF CANADA'S INVESTMENT OBLIGATIONS: EXPROPRIATION & REGULATORY TAKING DECISIONS Case Law Review Ethyl Corporation v. Government of Canada Sun Belt Water Inc. v. Government of Canada Pope & Talbot Inc. v. Government of Canada Metalclad Corporation v. The United Mexican States S.D. Myers Inc. v. Government of Canada Methanex Corporation v. United States of America Conclusions on Article 1110 Case Law V EXAMPLE OF AN ARTICLE 1110 CLAIM ARISING UNDER Alberta's Water Act Factual Context Application of the International Investment Jurisprudence Investor and Investment Thresholds Expropriation Outcome of the Claim Other Options for Canada Conclusions Based on the Case Study VI CANADIAN ENVIRONMENTAL SOVEREIGNTY VII CONCLUSIONS: POLICY OPTIONS ABSTRACT

This article addresses the potential affect of Chapter XI of the North American Free Trade Agreement (NAFTA) on Canada's ability to effectively protect its natural resources' through regulation. Specifically, the article discusses a case study involving Alberta's Water Act and how its' objectives could be undermined by Article 1110 of NAFTA. The article first outlines the historical and current position of Foreign Direct Investment Agreements and provides a perspective on Canada's involvement in both bilateral and multilateral agreements up to and including NAFTA. This is followed by a case law review of the relevant NAFTA Chapter XI tribunal decisions A case study regarding the interaction of Alberta's Water Act with a potential claim under Chapter XI is then considered. Using this case study, and in the context of the applicable case law, the article ultimately evaluates the potential policy implications that Chapter XI introduces with respect to Canada's environmental sovereignty.

RESUME

Cet article adresse l'affectation potentiel du chapitre XI de l'accord du libre-echange nord-americain sur la capacite du Canada de proteger effectivement ses ressources naturelles a travers la reglementation. Specifiquement, l'article discute d'une etude de cas impliquant la Loi sur la protection des eaux de l'Alberta et comment ses objectifs pourraient etre minos par Article 1110 de l'ALENA. L "article decrit premierement la position historique et actuelle des' accords d'investissement direct etranger et fournit une perspective sur l'intervention du Canada dans des accords bilateraux et multilateraux y compris celle de l'ALENA. Ceci est suivi d'un examen de jurisprudence des' decisions appropriees de tribunal du chapitre XI de l'ALENA. Une etude de cas concernant l'interaction de la Loi sur la protection des eaux de l'Alberta avec une reclamation potentielle sous le chapitre XI est alors consideree. Utilisant cette etude de cas, et dans le cadre de la jurisprudence applicable, l'article evalue finalement les implications potentielles de la politique que le chapitre XI presente en ce qui concerne la souverainete environnementale du Canada.

I INTRODUCTION

When the Parties to the North American Free Trade Agreement (1) negotiated its provisions, there was significant concern amongst academics, environmentalists, the media and the general public. Much of the outcry centred on the substance of Chapter XI, NAFTA's "Investment" Article, which attracted "virulent criticism" on the basis that it imposed "severe constraints on national sovereignty." (2) In particular, concerns were expressed that Chapter XI's provisions would prevent Canada from protecting its natural environment. (3) While few Chapter XI cases have gone through the full NAFTA dispute settlement process, and even fewer have specifically dealt with environmental issues, Chapter XI remains "controversial" (4) and concerns over environmental sovereignty persist. On the other hand, writers (5) and NAFTA jurists (6) have cited the lack of disputes to alleviate the criticisms that surround Chapter XI. In light of this continuing controversy, this article explores how a dispute arising under Alberta's Water Act (7) might be resolved under the NAFTA dispute settlement regime, given the existing body of NAFTA jurisprudence.

This article begins in Part II by providing a background to investment agreements in general, and Chapter XI of NAFTA specifically. Part III then presents an overview of the evolution of the substantive provisions of Chapter XI related to expropriation. In Part IV, the NAFTA dispute resolution case law dealing with Article 1110 of Chapter XI is explored. This examination includes a discussion of the Chapter XI claims that were resolved outside the formal procedures of a NAFTA Tribunal. Part V then analyzes how a "regulatory taking" claim arising under this statutory regime might be resolved under the Chapter XI dispute mechanisms. Part V! addresses the broader implications of Article 1110 jurisprudence in relation to Canadian environmental sovereignty. Finally, Part VII provides conclusions and offers policy alternatives for Canada as it deals with Article 1110 and the future of its environmental sovereignty.

II BACKGROUND

Foreign Direct Investment

Foreign Direct Investment (FDI) is defined as "an investment made to acquire a lasting interest in enterprises operating outside of the economy of the investor." (8) Although Chapter XI of NAFTA incorporates a broad definition of investment that might include smaller-scale acquisitions of securities by foreign entities, (9) NAFTA is principally concerned with FDI. FDI is of particular importance to NAFTA parties as it is this type of investment that is most vulnerable to the regulatory environment of a state, given the risk that the whole of the investment could be subject to a regulatory taking. (10)

During the late 1980s and throughout the 1990s there was an exceptional increase in worldwide levels of FDI. (11) For example, according to Canada's Department of International Trade, in 1990 Canada directly invested approximately $98.4 billion overseas, but by 2004 this amount rose to approximately $445.1 billion. (12) This dramatic rise in investment flows was both the impetus behind, and the result of, a series of investment agreements, of which Chapter XI of NAFTA is one. In particular, investors and developed states sought to establish a legislative framework that would govern international investment and provide rules to manage investor risk, and developing states recognized the potential benefits that FDI could bring to their economies. (13)

It might seem that investment regimes are heavily weighted in favour of developed states because investors gain access to emerging markets, and are the beneficiaries of reduced labour costs (14) and potentially more relaxed regulatory regimes. (15) Indeed, critics of investment agreements claim that such benefits to the developed world result in "economic imperialism" whereby the developed world influences and controls the economies of less developed countries (LDCs). (16) Despite these objections, the developing world also has the potential to benefit a great deal from FDI. LDCs obtain capital, infrastructure, technological know-how, and the managerial expertise needed to grow their economies. (17) As such, the facilitation of FDI through avenues such as Chapter XI of NAFTA can have measurable economic affects for not only investors, but also for the investment recipients.

Past, Present and Future Canadian Treatment of FDI

Historically, the Canadian approach to promoting FDI was through the negotiation and formation of bilateral investment agreements, which created binding commitments between Canada and another signatory state. (18) These bilateral agreements are known as Foreign Investment Protection Agreements (FIPAs). Since 1990, over twenty such agreements have been negotiated by the Canadian government. These agreements continue to remain in force. (19) In fact, Canada continues to enter into FIPAs, many of which are now modeled on Chapter XI type provisions. (20)

This bilateral approach to investment changed with the negotiation and ratification of the Canada--United States Free Trade Agreement (FTA) in 1987. (21) Investment provisions (Chapter XVI) were incorporated into the FTA, and served as the basis for Chapter XI of NAFTA. Moreover, similar provisions will likely be incorporated into the several new investment regimes that are being contemplated by Canada and the world community. For example, one potential future multilateral investment agreement is the proposed Free Trade Area of the Americas (FTAA). (22) This agreement may include up to thirty-four states from North, Central, and South America, and undoubtedly will contain investment provisions similar to those contained in Chapter XI of NAFTA. (23) Such an agreement could serve as a catalyst for major increases in the flow of FDI. (24) However, those groups that opposed NAFTA are surely troubled by a much broader agreement that might include the bulk of the states in the Western Hemisphere. (25)

A second example is the Multilateral Agreement on Investment (MAI), a proposed widespread investment agreement that would provide investment regulation and protection for any state party investing in the economy of any other state party. (26) It is expected that should a MAI ever be formalized and completed, its provisions would in many ways mirror those of NAFTA's Chapter XI. (27) Perhaps more than any other investment agreement, the MAI has been especially controversial. (28) If Chapter XI of NAFTA becomes the model for the MAI, the LDCs of the world could be subject to costly litigation initiated by sophisticated and financially powerful corporate investors. The potential threat of costly litigation may lead some LDCs to formulate policy that would prevent investor-led disputes...