Chapter 11 of NAFTA and the provinces--will the constitutional question be asked?

• Author: Thakur, Rajeeve

1. INTRODUCTION

   Canada's unique version of federalism has resulted in an uncertain division of powers between federal and provincial governments. International trade law is among the areas of law that have been significantly impacted by such uncertainty. An important question that remains unanswered today is whether the federal government has the constitutional authority to implement international trade treaties, such as the North American Free Trade Agreement ("NAFTA"), into domestic law so that the treaties will have force against the whole of Canada (including the provinces). The Labour Conventions Case provides some guidance on this question; but considering its vintage and the facts on which it was based, the answer remains uncertain. (1) The recent expropriation of the assets of AbitibiBowater by the Government of Newfoundland and Labrador lead AbitibiBowater to launch a dispute under Chapter 11 of NAFTA. (2) The Government of Newfoundland and Labrador did not make any attempt to settle the dispute under the dispute resolution process outlined in Chapter 11. Instead, the federal government paid out a settlement. With the federal government having to pick up the tab in a NAFTA dispute arising out of purely provincial act, the hand of the federal government may finally have been forced to take legislative action.

   A straightforward approach would be the promulgation of legislation implementing NAFTA into domestic law. To help ensure the provinces will be held accountable if they violate Chapter 11, the federal government could also enact a provision, as part of the implementing legislation, stipulating that provinces will be held liable for such violations. Legislation that implements NAFTA and imposes liability on provinces for violations thereof, however, will likely be met with challenges by the provinces. As a result, the Supreme Court of Canada may have to revisit the Labour Conventions Case and opine on whether the federal government has the power to implement international trade treaties into domestic law.

2. BACKGROUND

   1. Chapter 11 of NAFTA

      Chapter 11 of NAFTA deals specifically with investment disputes. (3) It has three primary objectives:

      (1) establish a secure investment environment through the elaboration of clear rules of fair treatment of foreign investment and investors;

      (2) remove barriers to investment by eliminating or liberalizing existing restrictions; and

      (3) provide an effective means for the resolution of disputes between an investor and the host government. (4)

      Structurally, Section A of the chapter provides substantive rules and principles, while Section B establishes a dispute settlement mechanism. (5) Section A draws on some of the most common principles of international trade law, including the principles of "National Treatment" (6) and "Most-Favored-Nation Treatment." (7) Two of the most important rules established in Section A are the rules on "fair and equitable treatment" (8) and "expropriation." (9)

      Article 1105(1) states "[e]ach Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment ..." (10) Due to the lack of detail regarding what constitutes fair and equitable treatment under Article 1105, a large number of Chapter 11 claims have been brought, leading to varied interpretation. (11)

      Unlike Article 1105, Article 1110 provides significant detail on expropriation and compensation. It prohibits NAFTA Parties from expropriating the investments of an investor of another NAFTA Party and other measures tantamount to expropriation. (12) It does, however, offer an exemption from the prohibition if the expropriation is "(a) for a public purpose; (b) on a nondiscriminatory basis; (c) in accordance with due process of the law and Article 1105(1); and (d) on payment of compensation[.]" (13) In paragraphs 2 through 6 of the article, the details of what exactly constitute just compensation are spelled out. (14) Paragraphs 2 through 6 state the following:

      2. Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place ("date of expropriation"), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.

      3. Compensation shall be paid without delay and be fully realizable.

      4. If payment is made in a G7 currency, compensation shall include interest at a commercially reasonable rate for that currency from the date of expropriation until the date of actual payment.

      5. If a Party elects to pay in a currency other than a G7 currency, the amount paid on the date of payment, if converted into a G7 currency at the market rate of exchange prevailing on that date, shall be no less than if the amount of compensation owed on the date of expropriation had been converted into that G7 currency at the market rate of exchange prevailing on that date, and interest had accrued at a commercially reasonable rate for that G7 currency from the date of expropriation until the date of payment.

      6. On payment, compensation shall be freely transferable as provided in Article 1109. (15)

      Thus, a NAFTA Party may expropriate the investments of an investor of another NAFTA Party, as long as it is a proper expropriation under Article 1110(1) and just compensation, as set out in Paragraphs 2 through 6, is paid.

      Under Section B, the mechanism for the settlement of investment disputes between an investor of a NAFTA Party and another NAFTA Party is international arbitration. (16) As part of the agreement, each Party has pre-authorized the submission of disputes to arbitration. (17) Chapter 11 provides the following three avenues for submission of claims: (1) the International Centre for Settlement of Investment Disputes ("ICSID") Convention, (2) the Additional Facility Rules of ICSID, or (3) the United Nations Commission on International Trade Law ("UNCITRAL") Arbitration Rules. (18)

      One of the key characteristics of Chapter 11 is that it gives private investors the right to bring a claim against a national government of one of the State Parties to the treaty. (19) Under its predecessor, the Free-Trade Agreement, a dispute settlement regime for private investors was not available. (20) The private cause of action afforded to disgruntled investors under Chapter 11 has also made it one of the most controversial chapters of the agreement. Given the controversy surrounding this particular part of NAFTA, it may come as a surprise that both Canada and the United States were intent on NAFTA providing this type of formal dispute settlement mechanism. (21) At the heart of this controversy is the issue of sovereignty. Many have argued that bestowing such rights on private parties erodes the sovereignty of state parties. (22)

      Although the Chapter 11 investment regime is quite comprehensive, it does permit reservations and exceptions under Article 1108. Article 1108 provides an exemption for provincial governments from having to comply with Articles 1102, 1103, 1106 and 1107, as long as these governments listed their non-conforming measures within two years of NAFTA's entry into force. (23) As mentioned above, Article 1102, National Treatment, and Article 1103, Most-Favored-Nation Treatment are two of the bedrock principles of international trade law, (24) so allowing the provinces to exempt some of their laws from these principles is significant. None of the provinces formally provided a list of their non-conforming measures. (25) On March 29th, 1996, in a letter from the Canadian Minister for International Trade to his NAFTA counterparts, the Canadian Minister provided a general reservation. (26)

   2. Treaty Making in Canada

      Part of the controversy that surrounded, and continues to surround, Chapter 11 relates to the general treaty-making process in Canada. Treaty-making is not specifically addressed in Canada's written constitution. (27) Under the Constitution Act, 1867, however, the British Crown was given the power to represent Canada on the international plane; today, the prerogative of the Crown is exercised by the executive branch of the Canadian federal government. (28) The treaty-making power lies with the executive: the executive negotiates, signs, and ratifies international treaties. (29) After ratification, states are subject to the international legal obligation to implement the treaty. (30)

      In Canada, for a treaty that alters domestic law to be enforceable at the national level, it must be incorporated through domestic law. (31) This is distinct from self-executing or monist regimes where an international treaty gains national effect by virtue of ratification. Canada's two-step or dualist treaty implementation regime requires both ratification and domestic implementation through legislation. (32)

      The level of government--provincial or federal--that must promulgate the treaty implementing legislation turns on the subject matter of the treaty itself. (33) The Constitution Act, 1867 divides the power to legislate between the federal government and the governments of the provinces. In the Constitution Act, 1867, section 91 enumerates particular powers that are the responsibility of the federal government, and section 92 enumerates particular powers which are the responsibility of the governments of the provinces. However, because of significant overlap and omissions, the division of powers between the national and sub-national governments is not always clear.

      Unlike the United States Constitution, the Canadian Constitution bestows the federal legislature with the power to preempt the laws of subnational governments. Article VI, clause 2 (the "Supremacy Clause") of the United States Constitution states "[t]his...