REUTERS | Kevin Coombs

Can the CETA model solve NAFTA’s ISDS problem?

There have been five rounds of North American Free Trade Association (NAFTA) renegotiations thus far, but seemingly little progress regarding Chapter 11 – the investor-state dispute settlement (ISDS) chapter. While Canada and Mexico both favour keeping Chapter 11 with some tweaks and improvements, the US seems to have a different view entirely, wanting either dramatic changes or possible removal. Clearly, NAFTA has an ISDS problem that needs solving, and the EU-Canada Comprehensive Economic Trade Agreement (CETA) model just might be the answer.

In August 2017, at the outset of the renegotiations, Canada stated that it would like to modify Chapter 11 so that it confers on governments an “unassailable right to regulate in the public interest” without being subject to a successful Chapter 11 claim. Canada has also suggested that some improvements could be considered “along the lines of” CETA. On 29 November 2017, Mexico’s Economy Minister, Ildefonso Guajardo, echoed this, stating that it is “considering alternatives by putting the European model on the table to see if it works in North America”.

Meanwhile, the US is, broadly speaking, thought to oppose Chapter 11 altogether because, amongst other things, it takes disputes outside the scope of national courts. US Trade Representative, Robert Lighthizer, apparently favours replacing the mandatory ISDS mechanism currently in place with an “opt in” mechanism instead, which could theoretically create a skewed system (that is, allowing American investors ISDS protection in Mexico and Canada – presuming they opted in, but subjecting Mexican and Canadian investors to American courts – presuming the US opted out).

In light of these differing positions, the question is: could the CETA model address the concerns that the US has about the current NAFTA system? On 17 November 2017, the US released an updated summary of its objectives for the NAFTA renegotiations. The US wants, amongst other things, to “establish rules that eliminate barriers to US investment in all sectors”, as well as a number of changes to the ISDS system itself. These changes echo many of the concerns which were presented in an open letter to President Trump, dated 25 October 2017 and signed by a large group of American academics, unambiguously entitled 230 Law and Economics Professors Urge President Trump to Remove Investor-State Dispute Settlement (ISDS) From NAFTA and Other Facts.

Overall, the US appears to have the following concerns about NAFTA’s ISDS system:

  • There is no appeals process and therefore no way of addressing possible errors of law or fact.
  • There is no oversight or accountability of the private lawyers who serve as arbitrators.
  • There is a lack of transparency for hearings and submissions, and no mechanism for domestic citizens or entities to participate in the proceedings.
  • There is a need to ensure that investors’ rights and standards are consistent with US legal principles and practice, and to ensure the protection of US sovereignty.

Appeals process?

In a departure from the NAFTA model of ad hoc party-appointed tribunals, CETA creates both a permanent investment tribunal as well as an appellate tribunal. Each tribunal will consist of a permanent roster of 15 members (five from Canada, five from the EU and five from other countries), who will be randomly allocated to three-person panels. The appellate tribunal will be able to uphold, modify or reverse the tribunal’s award. Unlike an International Centre for the Settlement of Investment Disputes (ICSID) annulment committee, the appellate tribunal will have a broad scope of appeal and can consider:

  • Errors in the application or interpretation of applicable law.
  • Manifest errors in the appreciation of facts, including the appreciation of relevant domestic law.
  • The grounds for annulment set out in Article 52 of the ICSID Convention.

These changes go far beyond the current version of NAFTA’s ISDS mechanism, and implementing them would address the US objective of “provid[ing] mechanisms for ensuring that Parties retain control of disputes and can address situations where a panel has clearly erred […]”.

More accountability?

CETA creates a strict regime of conduct for its arbitrators, and will close the revolving door of lawyers going between counsel and arbitrator positions. The rules for the conduct of arbitrators include being prohibited from acting as counsel or party-appointed expert or witness in any new or pending investment dispute under ICSID or any other international agreement. Further, if one of the parties challenges a member of a tribunal, that challenge will be determined by the President of the International Court of Justice, rather than the remaining members of the tribunal (as is generally the case). Finally, CETA requires the creation of an arbitrators’ code of conduct which will, amongst other things, prevent conflicts of interest. Introducing similar changes to NAFTA would greatly strengthen the ethical framework surrounding arbitrators and effectively treat them like judges.

Increased transparency and participation?

CETA specifies that “non-governmental persons established in a Party”, who can either be individual citizens or entities, are entitled to submit amicus curiae submissions which must specify the nature of the interest that they have in the arbitration proceeding. Furthermore, CETA mandates more transparency and introduces the requirement that all documents (that is submissions/pleadings) will be publicly available and all hearings will be open to the public. Similar innovations in NAFTA would significantly open up the proceeding beyond the narrow confines of the parties, thus providing a mechanism which allows for meaningful participation by all those with an interest – which is one of the US objectives.

Consistency with US legal principles and practice?

CETA states that tribunals must consider and apply the agreement in accordance with the principles of international law, and that domestic law will only be examined as a matter of fact. CETA confirms that determining whether a domestic measure is “legal” remains within the purview of Canada or the EU. Further, CETA states that tribunal decisions cannot lead to the repeal of a particular domestic measure, rather it can only lead to compensation and only to the level of loss actually suffered. That said, CETA provides Canada and the EU with the right to adopt binding interpretations, which gives both parties the ability to control and influence the interpretation of the agreement. Finally, both state parties will have the right to make submissions even when they are not the respondents. Although including these changes in NAFTA would certainly grant the state parties with much increased control over the interpretation of the agreement, it is hard to predict whether the US would consider them sufficient enough to ensure alignment with US legal principles and practices, and protect US sovereignty.

While many of CETA’s innovations deal with the US’ anxieties about ISDS, the ability of investors to circumvent entirely the US legal system seems to be a core concern for some. As the US academic community complained in their open letter, the current NAFTA model allows foreign investors to “bypass the robust, nuanced, and democratically-responsive U.S. legal framework” and therefore this “undermines the important roles of our domestic and democratic institutions, threatens domestic sovereignty, and weakens rule of law”. Ardent believers of this view are unlikely to be dissuaded by the shiny new changes in CETA.

Running out of time?

There are many loud voices in the US who strongly believe that NAFTA’s ISDS system is a key enforcement tool that helps to protect American investors and businesses and ensure that they are treated fairly abroad. In their own letters to high ranking US government officials (including one dated 8 August 2017 from over 100 US business associations representing small and medium sized businesses, and another dated 23 August 2017 from the leaders of the US Chamber of Commerce, Business Roundtable and the National Association of Manufacturers), the leaders of the US business community have emphasised the “critical importance” of ISDS and argued that eliminating or weakening ISDS “will harm American businesses and workers”.

While such support for ISDS is no doubt influential, at this stage of the renegotiations, when state parties will be looking to wrap up the outstanding issues, the US business community would be wise to consider extoling the virtues of the CETA model. But they should do so quickly… the next round of NAFTA renegotiations will be held in Montreal, Canada at the end of January 2018.

Mishcon de Reya Elizabeth Montpetit

Leave a Reply

Your email address will not be published. Required fields are marked *

Share this post on: