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The interest of a private partner in a DBO contract with the GVRD will be an “investment” under NAFTA rules which defines this term to include all forms of investment, including:

interests arising from the commitment of capital or other resources in the territory of a Party to economic activity in such territory, such as under

  1. contracts involving the presence of an investor’s property in the territory of the Party, including turnkey or construction contracts, or concessions, or
  2. contracts where remuneration depends substantially on the production, revenues or profits of an enterprise;

NAFTA investment rules impose certain broad constraints on the capacity of governments to adopt or maintain “measures” relating to investors of another NAFTA party and their investments. Measures are defined by NAFTA to include “any law, regulation, procedure, requirement or practice.” Contractual agreements are not explicitly identified as measures by NAFTA. However, unless otherwise exempt, government measures affecting the contract (procurement practices), or incorporated as terms to the contract (local preference requirements), would be subject to NAFTA disciplines.

Moreover, the decision to terminate or renew such contractual arrangements, the imposition of environmental or public health orders, or even the regulation of water quality would each fall within the definition of government measures under NAFTA.

NAFTA investment disciplines apply fully to municipal and local governments, subject to a few limited reservations. The most important of these is a reservation for existing non-conforming measures as defined by Article 1108:1(a)(iii). However, even these measures must comply with several of the more onerous obligations established by NAFTA investment rules which apply without qualification to local government. These include rules concerning Minimum Standard of Treatment, Expropriation and Compensation and Dispute Settlement.

NAFTA rules concerning Performance Requirements and National Treatment will also apply to the Seymour project unless such measures can be characterized as non-conforming measures that existed when NAFTA was implemented on January 1, 1994. In our view, there are few if any measures concerning the Seymour project that would qualify under this reservation. A more definitive assessment would require a detailed consideration of the particular measure against any relevant historic benchmark.

The other possible reservation that might become relevant is set by Article 1108:7(a) which stipulates that National Treatment and two other provisions of Chapter Eleven do not apply to procurement by a party. However, the features of a public-private partnership are sufficiently distinct from the traditional ambit of public procurement to call into question the application of these disciplines to such an undertaking, although we also note that NAFTA procurement disciplines do not apply to local government.

 

With these few qualifications in mind, we turn to consider the potential impact of the disciplines for the Seymour project.

Public Health Measures as Expropriation

NAFTA Article 1110 provides that:

  1. No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except:

    1. for a public purpose;
    2. on a non-discriminatory basis;
    3. in accordance with due process of law and Article 1105(1); and
    4. on payment of compensation in accordance with paragraphs 2 through 6

  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.

We have already examined the expansive way in which these provisions may be applied by arbitral panels in our summary of the Metalclad case. This particular provision has been invoked to challenge environmental and public health measures in several other foreign investor claims as well.

 

The present risk is that Article 1110 would be invoked by a private sector partner to the Seymour Project to challenge environmental or public health measures that may require substantial expenditures to modify, or repair, the Seymour filtration plant. Such measures might include an order by a local health official to remedy a health hazard under the Safe Drinking Water Regulations to the Health Act, or new safe drinking water standards established either by the provincial or federal government. To the extent that such measures might diminish the value of private sector investment in the Seymour plant they are vulnerable to being challenged as offending the constraints of Article 1110.

In response to concerns expressed by the Burnaby Council about the risk of a challenge or claim arising from such regulatory initiatives, the GVRD has responded:

The DBO contract will have provisions to provide fair and equitable costs in the case of future changes in regulations. These costs would be no different, whether GVRD directly operates the plant or it is operated through a service contract.

The extent to which this latter conclusion might be justified would depend upon the precise conditions of the contract between the GVRD and its private sector partner. However, we believe this assessment discounts too readily the costs associated with making a major overhaul of the filtration plant and the potential for disputes to arise about their allocation.

For example, a public health order might concern problems arising from the negligent operation of the filtration plant by the GVRD’s private partner. In this scenario, the GVRD might have no liability for the costs associated with meeting the requirements of the order. It is also significant that such an order might emanate from public health officials responsible to the GVRD, in which case there is likely to be little common interest between the partners. There is also the risk that a private partner might use the threat of investor-state litigation to influence the judgment of public health officials.

As we have seen, if the GVRD’s private partner can claim the status of foreign investor under NAFTA or another investment treaty it would have recourse against unwanted regulatory initiatives, such as new safe drinking water standards, that simply do not exist under Canadian law. Moreover, equating the equanimity with which the GVRD and its private partner might greet such developments overlooks some very important differences between the two. Most obvious is the fact the GVRD’s first obligation is to the public health of its constituents, not the financial return of the shareholders of its transnational parent.

 

Moreover, for water corporations with multinational businesses there may be broader strategic reasons for wanting to head-off precedent-setting regulations that might inspire other jurisdictions to follow suit, causing attendant re-engineering costs at other facilities. After all, when Canada challenged a ban on asbestos established by the Government of France, it explained its motives as including a concern that other countries might follow the French example.

One of the most remarkable features of NAFTA investment disciplines is their application to environment and public health measures that are generally exempt from the application of most other international trade disciplines. The general exception for such measures is found in Article XX(b) of the General Agreement on Tariffs and Trade (GATT) which applies to environmental measures necessary to protect human, animal or plant life or health. As interpreted by WTO dispute bodies, the exemption has been given very narrow application (see discussion under the GATS below). However, the important point is that unlike NAFTA disciplines concerning trade in goods, this critical safeguard simply does not apply to NAFTA investment rules [Article 2101].

It might nevertheless be argued that such measures would be permitted under Article 1114:1 concerning Environmental Measures, which provides:

Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. [emphasis added]

Because this provision only applies to measures “otherwise consistent” with Chapter Eleven it would not apply to a measure otherwise found to be in breach of the expropriation or other investment rules. It is also unclear that environmental concerns would include public health measures, which are explicitly referenced in Article 1114:2.

It is, of course, impossible to anticipate the shifting circumstances and regulatory environment within which the DBO contract will exist over its 20-year life. What is clear however, is that a partnership with a private partner introduces the risk that domestic public health and regulatory measures may be challenged under NAFTA investment rules and procedures.

Termination of the DBO Contract as Expropriation

 

Another way in which the provisions of Article 1110 can come into play may arise if the GVRD seeks to terminate the DBO contract either during or even at the end of its term. Again, the threat of such litigation is likely to influence the judgment of GVRD officials. In fact, a claim such as this has already arisen under NAFTA investment disciplines, although in this particular instance it was unsuccessful.

Desona vs. Mexico

However broad the application of NAFTA investment disciplines may be, it is clear that they do not provide a remedy for a mere breach of the DBO contract. But an act that might represent a breach of contract may also represent a violation of the NAFTA and found a complaint under Chapter Eleven.

This happened in a case involving a claim for damages against Mexico by U.S. shareholders in a Mexican corporation, Desona. The company’s complaint concerned an administrative order annulling its waste management contract that had been obtained by its municipal partner.

According to the Tribunal convened to decide the claim, Desona had persuaded the city to enter into the contract based on misrepresentations that were “unconscionable” and “fraudulent.” Instead of 70 state-of-the-art vehicles which it had promised in order to service the municipality of two million, Desona managed to muster only two used garbage trucks.

When the company failed so dismally to perform the contract, the municipality had it annulled. Desona appealed to the courts, lost, and appealed again. When it failed for the second time, Desona invoked NAFTA investor-state procedures to claim damages, arguing that the annulment represented expropriation of its interest in the contract and a failure to treat the company in accordance with international law.

Confirming that it was not bound to follow the decision of a Mexican national court, the Tribunal carefully considered but ultimately dismissed Desona’s claim. In doing so the Tribunal impugned the credibility of the U.S. investors and concluded the contract was established under false pretenses. Nevertheless, and in spite of its characterization of the company’s conduct, the Tribunal declined to award costs against it. While Desona lost, the case illustrates the serious consideration that will be given investor claims even when they lack any merit.

 

Finally, we note that while Desona was unsuccessful in persuading the Tribunal that the annulment of its contract represented expropriation, similar claims have met with greater success.

Générale des Eaux v. Argentine Republic

In another case with close parallels to the present matter, Compagnie Générale des Eaux (CGE) which we understand to be a subsidiary of Vivendi, together with its Argentinian affiliate Compañía de Aguas del Aconquija (CAA), brought a claim for over U.S. 300 million against Argentina pursuant to the provisions of a bilateral investment agreement with features similar to those in NAFTA. The dispute arose from a Concession Contract that CAA entered into with the provincial government of Tucumán in 1995. That contract grew out of a 1993 decision by the government of Tucumán to privatize its water and sewage facilities.

Disputes soon arose between CGE and the province concerning the Concession Contract and became the subject of extensive publicity and controversy. The intractable nature of these disagreements ultimately drew the governments of France and Argentina into the dispute.

When efforts to settle the dispute failed, the French based conglomerate sued under the investment treaty. The company cited a long list of grievances predominantly directed at the provincial government and its officials. These included complaints that:

  • health authorities had improperly issued orders and imposed fines concerning the company’s alleged failure to install proper water testing equipment, or conduct and provide proper water testing;
  • an Ombudsman had improperly deprived CGE of the right to cut off service to non-paying customers, and;
  • that the province had failed to allow proper rate increases.

The first issue the Tribunal addressed was it jurisdiction to consider the complaint in light of an explicit assignment by Concession Contract of such disputes to the exclusive jurisdiction of local administrative tribunals. Rejecting this objection, the Tribunal found that notwithstanding this proviso, it had jurisdiction to hear the CGE claim that Argentina had violated its obligations under the investment treaty and held that:

Neither the forum-selection provision of the Concession Contract nor the provisions of the ICSID Convention and the BIT on which the Argentine Republic relies preclude CGE’s recourse to this Tribunal on the facts presented.

The Tribunal also confirmed that under international law:

it is well established that actions of a political subdivision of a federal state, such as the Province of Tucumán in the federal state of the Argentine Republic, are attributable to the central government. It is equally clear that the internal constitutional structure of a country can not alter these obligations.

But having found that it had authority to consider the complaint, the Tribunal also found that given the complexity of the 111-page single-spaced Concession Contract, it was impossible for it to distinguish or separate violations of the investment treaty from breaches of the contract without first interpreting and applying the detailed provisions of that contract. It also found that absent a clear and independent breach of the investment treaty by Argentina, the Claimants had a duty to pursue their rights before the domestic tribunals referred to by the Concession Contract before seeking recourse to international arbitration.

It is important in this regard to note that the circumstances of CGE case are distinguishable from those of the present case. For unlike the investment treaty that CGE relied upon, NAFTA investment rules explicitly bind sub-national governments. It would not therefore be necessary for a foreign investor to establish an independent breach by Canada in order to found a claim under NAFTA rules. This is clear from the Desona and Metalclad cases.

The case is important however for what it reveals about the inter-relationship of contracts such as the one now being contemplated for the Seymour project and the provisions of international investment treaties. It makes very clear the fallacy of assuming that a municipal government could rely upon the provisions of a contract with a foreign investor to preclude recourse to international arbitration under NAFTA investment treaties.

The case is also relevant because it is illustrative of the types of disputes that may arise in the present context including those concerning water quality testing, universal service guarantees and rate regulation.

Minimum Standard of Treatment

Another provision of Chapter Eleven which applies to local governments is the obligation under Article 1105 to accord foreign investors a Minimum Standard of Treatment which is defined to mean treatment in accordance with international law, including fair and equitable treatment and full protection and security. To date, in every NAFTA claim decided in favour of a foreign investor the impugned measure was found to violate this requirement.

However, the interpretation accorded this provision by two of the tribunals to have applied it, has now been criticized by the BC Supreme Court in the Metalclad case. It is unclear how the Court’s ruling will be regarded by future arbitral tribunals that are entirely free to ignore it. Moreover a careful reading of Mr. Justice Tysoe’s reasoning indicates that the Tribunal’s broad reading of this provision would have been sustained had it crafted its reasons somewhat differently.

Investor-State Procedures

The provisions of Section B of Chapter Eleven provide foreign investors with the extraordinary right to invoke international dispute resolution processes to enforce their rights under the Chapter. Accordingly, under Articles 1121 and 1122, foreign investors of a NAFTA party have a virtually unqualified right to sue national governments for any alleged breach of the expansive and broadly-worded investor rights they are granted by this trade agreement. These disputes are then decided, not by our courts or judges, but by international arbitration panels [Article 1120] operating under the auspices of institutions such as the World Bank.

Tribunals operate, not in accordance with domestic legal principles and procedures, but under international law and according to procedures established for resolving international commercial disputes. In many ways these procedures are antithetical to the principles of open, participatory and democratic decision-making that are the hallmarks of Canada’s legal system. For example, Article 24 of the ICSID Arbitration Rules (Additional Facility) provides:

The deliberations of the Tribunal shall take place in private and remain secret.

Moreover, the secrecy of these international arbitral processes is often described as one of its most attractive features for the business community.

It is also important for the GVRD to appreciate that in the event that a claim is made concerning the DBO contract, it would have no right to participate in the arbitral proceedings. Indeed even gaining access to the pleadings or evidence of the proceedings may not be possible. As a general matter, claims to confidentiality are taken very seriously by international arbitral tribunals when asserted by disputing foreign investors. So strict is the protection of the confidentiality of the proceedings that Canada was chastised in two cases for sharing information with provincial governments, notwithstanding their direct interest in the proceedings.

It bears emphasis that investor-state enforcement represents a rather significant departure from the norms of international law in two key ways:

  • by providing corporations with the right to directly enforce an international treaty to which they are not parties and under which they have no obligations; and,
  • by extending international commercial arbitration procedures to claims that have no foundation in contract, and which may only obliquely be considered commercial in character.

 

Thus, under Article 1122 Canada has unilaterally consented to international arbitration for claims arising under the Chapter, notwithstanding the absence of any contractual relationship with the claimant. Nor do investors have any obligation to exhaust domestic remedies before resorting to international dispute resolution [Article 1121].

Two other significant requirements of Chapter Eleven may also come into play with respect to the Seymour project. These are the National Treatment requirements of Article 1102 and the constraints on Performance Requirements set out in Article 1106. Both apply to local government measures [Article 1108:1(a)(ii)] unless they qualify as existing non- conforming measures on January 1, 1994, or in the case of National Treatment, the measure is one concerning procurement [Article 1108:7]. Given the innovative character of the Seymour undertaking and of the public-private partnership that is being considered for it, it is unlikely in our view that a claim to this reservation could be sustained.

National Treatment
Even should local government measures concerning the Seymour project be exempt from National Treatment obligations, the same would not necessarily be true for provincial and federal measures that may impinge on this GVRD initiative. Without having more information about the nature of federal and provincial participation in the Seymour project it is impossible to assess whether either or both provisions might impact this GVRD initiative. As we shall see, the impact of similar requirements of the GATS is also relevant to the Seymour project because of the explicit extension of these disciplines to local government.

With this qualification in mind, Article 1102: National Treatment provides:

    1

  • 1.Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

    ¼¼¼

  • 3. The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or province, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that state or province to investors, and to investments of investors, of the Party of which it forms a part.

The interpretation and application of this provision has varied significantly from case to case. However, there is a real risk that by entering into a DBO contract to supply potable water, the Seymour project may establish a new National Treatment benchmark that governments would be obliged to follow for other capital projects. The establishment of preferences for Canadian companies, or non-profit proponents, would then be difficult to reconcile with such new National Treatment obligations.

Performance Requirements

Article 1106 provides in part:

1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory:

¼¼..

(b) to achieve a given level or percentage of domestic content;

(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory;

3. No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements:

(a) to achieve a given level or percentage of domestic content;

(b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory;

Unless such requirements can claim the unlikely status of non-conforming measures, they would violate the constraints imposed by these NAFTA prohibitions. In this case the GVRD could not impose or enforce contract requirements intended to achieve benefits for the local economy during the design, building or operational phases of the project. This same constraint would apply to provincial or federal requirements along the same lines.

ADF vs. The United States

It is also relevant that a claim based on Article 1106 might be brought by someone other than the primary contractor. This recently occurred in an investor-state claim brought by a Canadian company, the ADF Group Inc., against the U.S.

 

This Quebec-based company subcontracted to provide certain steel products to a highway construction project for the Virginia Department of Transportation through its Florida-based subsidiary. Funding for the project was contingent upon the recipient State complying with the requirements of the Federal Highway Administration, including its “Buy America”provisions. These federal requirements were further stipulated as terms to the contracts that had been negotiated with the Virginia Department of Transportation.

A dispute arose concerning ADF’s plans to do certain fabrication work at its Quebec factory on steel supplied from its U.S. facility. When U.S. officials refused to authorize work outside the country, the company incurred substantial costs and delays in sub-contracting to U.S.-based fabricators. It was also at risk of being sued by the main project contractor should a $U.S. 10 million “no excuse” bonus be lost because of ADF’s default.

In July last year ADF issued a notice of its intention to claim $U.S. 90 million in damages, alleging several breaches by the U.S. of its obligations under NAFTA. The gist of that claim is that the provisions of the U.S.“Buy America” program and the contractual provisions that gave them expression offended the National Treatment, Performance Requirement and Minimum Standard of Treatment provisions of Chapter Eleven. The case has yet to be determined.

While the facts of the ADF case are distinguishable from the those of the Seymour project, the principles are not.

ent treaty it would have recourse against unwanted regulatory initiatives, such as new safe drinking water standards, that simply do not exist under Canadian law. Moreover, equating the equanimity with which the GVRD and its private partner might greet such developments overlooks some very important differences between the two. Most obvious is the fact the GVRD’s first obligation is to the public health of its constituents, not the financial return of the shareholders of its transnational parent.

 

Moreover, for water corporations with multinational businesses there may be broader strategic reasons for wanting to head-off precedent-setting regulations that might inspire other jurisdictions to follow suit, causing attendant re-engineering costs at other facilities. After all, when Canada challenged a ban on asbestos established by the Government of France, it explained its motives as including a concern that other countries might follow the French example.

One of the most remarkable features of NAFTA investment disciplines is their application to environment and public health measures that are generally exempt from the application of most other international trade disciplines. The general exception for such measures is found in Article XX(b) of the General Agreement on Tariffs and Trade (GATT) which applies to environmental measures necessary to protect human, animal or plant life or health. As interpreted by WTO dispute bodies, the exemption has been given very narrow application (see discussion under the GATS below). However, the important point is that unlike NAFTA disciplines concerning trade in goods, this critical safeguard simply does not apply to NAFTA investment rules [Article 2101].

It might nevertheless be argued that such measures would be permitted under Article 1114:1 concerning Environmental Measures, which provides:

Nothing in this Chapter shall be construed to prevent a Party from adopting, maintaining or enforcing any measure otherwise consistent with this Chapter that it considers appropriate to ensure that investment activity in its territory is undertaken in a manner sensitive to environmental concerns. [emphasis added]

Because this provision only applies to measures “otherwise consistent” with Chapter Eleven it would not apply to a measure otherwise found to be in breach of the expropriation or other investment rules. It is also unclear that environmental concerns would include public health measures, which are explicitly referenced in Article 1114:2.

It is, of course, impossible to anticipate the shifting circumstances and regulatory environment within which the DBO contract will exist over its 20-year life. What is clear however, is that a partnership with a private partner introduces the risk that domestic public health and regulatory measures may be challenged under NAFTA investment rules and procedures.

Termination of the DBO Contract as Expropriation

 

Another way in which the provisions of Article 1110 can come into play may arise if the GVRD seeks to terminate the DBO contract either during or even at the end of its term. Again, the threat of such litigation is likely to influence the judgment of GVRD officials. In fact, a claim such as this has already arisen under NAFTA investment disciplines, although in this particular instance it was unsuccessful.

Desona vs. Mexico

However broad the application of NAFTA investment disciplines may be, it is clear that they do not provide a remedy for a mere breach of the DBO contract. But an act that might represent a breach of contract may also represent a violation of the NAFTA and found a complaint under Chapter Eleven.

This happened in a case involving a claim for damages against Mexico by U.S. shareholders in a Mexican corporation, Desona. The company’s complaint concerned an administrative order annulling its waste management contract that had been obtained by its municipal partner.

According to the Tribunal convened to decide the claim, Desona had persuaded the city to enter into the contract based on misrepresentations that were “unconscionable” and “fraudulent.” Instead of 70 state-of-the-art vehicles which it had promised in order to service the municipality of two million, Desona managed to muster only two used garbage trucks.

When the company failed so dismally to perform the contract, the municipality had it annulled. Desona appealed to the courts, lost, and appealed again. When it failed for the second time, Desona invoked NAFTA investor-state procedures to claim damages, arguing that the annulment represented expropriation of its interest in the contract and a failure to treat the company in accordance with international law.

Confirming that it was not bound to follow the decision of a Mexican national court, the Tribunal carefully considered but ultimately dismissed Desona’s claim. In doing so the Tribunal impugned the credibility of the U.S. investors and concluded the contract was established under false pretenses. Nevertheless, and in spite of its characterization of the company’s conduct, the Tribunal declined to award costs against it. While Desona lost, the case illustrates the serious consideration that will be given investor claims even when they lack any merit.

 

Finally, we note that while Desona was unsuccessful in persuading the Tribunal that the annulment of its contract represented expropriation, similar claims have met with greater success.

Générale des Eaux v. Argentine Republic

In another case with close parallels to the present matter, Compagnie Générale des Eaux (CGE) which we understand to be a subsidiary of Vivendi, together with its Argentinian affiliate Compañía de Aguas del Aconquija (CAA), brought a claim for over U.S. 300 million against Argentina pursuant to the provisions of a bilateral investment agreement with features similar to those in NAFTA. The dispute arose from a Concession Contract that CAA entered into with the provincial government of Tucumán in 1995. That contract grew out of a 1993 decision by the government of Tucumán to privatize its water and sewage facilities.

Disputes soon arose between CGE and the province concerning the Concession Contract and became the subject of extensive publicity and controversy. The intractable nature of these disagreements ultimately drew the governments of France and Argentina into the dispute.

When efforts to settle the dispute failed, the French based conglomerate sued under the investment treaty. The company cited a long list of grievances predominantly directed at the provincial government and its officials. These included complaints that:

  • health authorities had improperly issued orders and imposed fines concerning the company’s alleged failure to install proper water testing equipment, or conduct and provide proper water testing;
  • an Ombudsman had improperly deprived CGE of the right to cut off service to non-paying customers, and;
  • that the province had failed to allow proper rate increases.

The first issue the Tribunal addressed was it jurisdiction to consider the complaint in light of an explicit assignment by Concession Contract of such disputes to the exclusive jurisdiction of local administrative tribunals. Rejecting this objection, the Tribunal found that notwithstanding this proviso, it had jurisdiction to hear the CGE claim that Argentina had violated its obligations under the investment treaty and held that:

Neither the forum-selection provision of the Concession Contract nor the provisions of the ICSID Convention and the BIT on which the Argentine Republic relies preclude CGE’s recourse to this Tribunal on the facts presented.

The Tribunal also confirmed that under international law:

it is well established that actions of a political subdivision of a federal state, such as the Province of Tucumán in the federal state of the Argentine Republic, are attributable to the central government. It is equally clear that the internal constitutional structure of a country can not alter these obligations.

But having found that it had authority to consider the complaint, the Tribunal also found that given the complexity of the 111-page single-spaced Concession Contract, it was impossible for it to distinguish or separate violations of the investment treaty from breaches of the contract without first interpreting and applying the detailed provisions of that contract. It also found that absent a clear and independent breach of the investment treaty by Argentina, the Claimants had a duty to pursue their rights before the domestic tribunals referred to by the Concession Contract before seeking recourse to international arbitration.

It is important in this regard to note that the circumstances of CGE case are distinguishable from those of the present case. For unlike the investment treaty that CGE relied upon, NAFTA investment rules explicitly bind sub-national governments. It would not therefore be necessary for a foreign investor to establish an independent breach by Canada in order to found a claim under NAFTA rules. This is clear from the Desona and Metalclad cases.

The case is important however for what it reveals about the inter-relationship of contracts such as the one now being contemplated for the Seymour project and the provisions of international investment treaties. It makes very clear the fallacy of assuming that a municipal government could rely upon the provisions of a contract with a foreign investor to preclude recourse to international arbitration under NAFTA investment treaties.

The case is also relevant because it is illustrative of the types of disputes that may arise in the present context including those concerning water quality testing, universal service guarantees and rate regulation.

Minimum Standard of Treatment

Another provision of Chapter Eleven which applies to local governments is the obligation under Article 1105 to accord foreign investors a Minimum Standard of Treatment which is defined to mean treatment in accordance with international law, including fair and equitable treatment and full protection and security. To date, in every NAFTA claim decided in favour of a foreign investor the impugned measure was found to violate this requirement.

However, the interpretation accorded this provision by two of the tribunals to have applied it, has now been criticized by the BC Supreme Court in the Metalclad case. It is unclear how the Court’s ruling will be regarded by future arbitral tribunals that are entirely free to ignore it. Moreover a careful reading of Mr. Justice Tysoe’s reasoning indicates that the Tribunal’s broad reading of this provision would have been sustained had it crafted its reasons somewhat differently.

Investor-State Procedures

The provisions of Section B of Chapter Eleven provide foreign investors with the extraordinary right to invoke international dispute resolution processes to enforce their rights under the Chapter. Accordingly, under Articles 1121 and 1122, foreign investors of a NAFTA party have a virtually unqualified right to sue national governments for any alleged breach of the expansive and broadly-worded investor rights they are granted by this trade agreement. These disputes are then decided, not by our courts or judges, but by international arbitration panels [Article 1120] operating under the auspices of institutions such as the World Bank.

Tribunals operate, not in accordance with domestic legal principles and procedures, but under international law and according to procedures established for resolving international commercial disputes. In many ways these procedures are antithetical to the principles of open, participatory and democratic decision-making that are the hallmarks of Canada’s legal system. For example, Article 24 of the ICSID Arbitration Rules (Additional Facility) provides:

The deliberations of the Tribunal shall take place in private and remain secret.

Moreover, the secrecy of these international arbitral processes is often described as one of its most attractive features for the business community.

It is also important for the GVRD to appreciate that in the event that a claim is made concerning the DBO contract, it would have no right to participate in the arbitral proceedings. Indeed even gaining access to the pleadings or evidence of the proceedings may not be possible. As a general matter, claims to confidentiality are taken very seriously by international arbitral tribunals when asserted by disputing foreign investors. So strict is the protection of the confidentiality of the proceedings that Canada was chastised in two cases for sharing information with provincial governments, notwithstanding their direct interest in the proceedings.

It bears emphasis that investor-state enforcement represents a rather significant departure from the norms of international law in two key ways:

  • by providing corporations with the right to directly enforce an international treaty to which they are not parties and under which they have no obligations; and,
  • by extending international commercial arbitration procedures to claims that have no foundation in contract, and which may only obliquely be considered commercial in character.

     

 

Thus, under Article 1122 Canada has unilaterally consented to international arbitration for claims arising under the Chapter, notwithstanding the absence of any contractual relationship with the claimant. Nor do investors have any obligation to exhaust domestic remedies before resorting to international dispute resolution [Article 1121].

Two other significant requirements of Chapter Eleven may also come into play with respect to the Seymour project. These are the National Treatment requirements of Article 1102 and the constraints on Performance Requirements set out in Article 1106. Both apply to local government measures [Article 1108:1(a)(ii)] unless they qualify as existing non- conforming measures on January 1, 1994, or in the case of National Treatment, the measure is one concerning procurement [Article 1108:7]. Given the innovative character of the Seymour undertaking and of the public-private partnership that is being considered for it, it is unlikely in our view that a claim to this reservation could be sustained.

National Treatment
Even should local government measures concerning the Seymour project be exempt from National Treatment obligations, the same would not necessarily be true for provincial and federal measures that may impinge on this GVRD initiative. Without having more information about the nature of federal and provincial participation in the Seymour project it is impossible to assess whether either or both provisions might impact this GVRD initiative. As we shall see, the impact of similar requirements of the GATS is also relevant to the Seymour project because of the explicit extension of these disciplines to local government.

With this qualification in mind, Article 1102: National Treatment provides:

    1

  • 1.Each Party shall accord to investors of another Party treatment no less favorable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation, and sale or other disposition of investments.

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  • 3. The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a state or province, treatment no less favorable than the most favorable treatment accorded, in like circumstances, by that state or province to investors, and to investments of investors, of the Party of which it forms a part.

The interpretation and application of this provision has varied significantly from case to case. However, there is a real risk that by entering into a DBO contract to supply potable water, the Seymour project may establish a new National Treatment benchmark that governments would be obliged to follow for other capital projects. The establishment of preferences for Canadian companies, or non-profit proponents, would then be difficult to reconcile with such new National Treatment obligations.

Performance Requirements

Article 1106 provides in part:

1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory:

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(b) to achieve a given level or percentage of domestic content;

(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory;

3. No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements:

(a) to achieve a given level or percentage of domestic content;

(b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory;

Unless such requirements can claim the unlikely status of non-conforming measures, they would violate the constraints imposed by these NAFTA prohibitions. In this case the GVRD could not impose or enforce contract requirements intended to achieve benefits for the local economy during the design, building or operational phases of the project. This same constraint would apply to provincial or federal requirements along the same lines.

ADF vs. The United States

It is also relevant that a claim based on Article 1106 might be brought by someone other than the primary contractor. This recently occurred in an investor-state claim brought by a Canadian company, the ADF Group Inc., against the U.S.

 

This Quebec-based company subcontracted to provide certain steel products to a highway construction project for the Virginia Department of Transportation through its Florida-based subsidiary. Funding for the project was contingent upon the recipient State complying with the requirements of the Federal Highway Administration, including its “Buy America”provisions. These federal requirements were further stipulated as terms to the contracts that had been negotiated with the Virginia Department of Transportation.

A dispute arose concerning ADF’s plans to do certain fabrication work at its Quebec factory on steel supplied from its U.S. facility. When U.S. officials refused to authorize work outside the country, the company incurred substantial costs and delays in sub-contracting to U.S.-based fabricators. It was also at risk of being sued by the main project contractor should a $U.S. 10 million “no excuse” bonus be lost because of ADF’s default.

In July last year ADF issued a notice of its intention to claim $U.S. 90 million in damages, alleging several breaches by the U.S. of its obligations under NAFTA. The gist of that claim is that the provisions of the U.S.“Buy America” program and the contractual provisions that gave them expression offended the National Treatment, Performance Requirement and Minimum Standard of Treatment provisions of Chapter Eleven. The case has yet to be determined.

While the facts of the ADF case are distinguishable from the those of the Seymour project, the principles are not.