Part III: Discussion

The plan of this decision

1. The New Permanence of Health Care Reform
2. The Effectiveness of Canadians Reservations
3. Is Bill 11 consistent with investment and services provisions of NAFTA?
4. The Impact of Alberta’s Plan on Canada

Much of our assessment of the potential consequences of Alberta’s pending health care initiatives turns on our opinion about the likely effectiveness of Canada’s sectoral reservation for health. This issue determines the extent to which Canadian health care programs will be protected from some of NAFTA’s more onerous obligations.

However, some of the consequences that are likely to flow from the application of NAFTA disciplines in this context are far more certain then others. This is particularly true for those provisions of NAFTA from which no reservation has been made. Of these, by far the most important are Articles 1110: Expropriation and Compensation, and Part B of Chapter 11: Settlement of Disputes between a Party and an Investor of Another Party. In fact the impact of these provisions renders significant aspects of the debate about the breadth and application of NAFTA reservations moot.

Because of the seriousness of the consequences that may follow from these NAFTA provisions, we begin with an assessment of the potential impact of these disciplines should Alberta proceed with current plans. We then consider a number of questions, the answers to which depend upon one’s views about the effectiveness of Annex I and II reservations. We address these issues under three headings.

The first concerns the nature of Canadian reservations and the uncertainty that exists about their extent and application. While it may be difficult to estimate how a dispute or arbitral panel will interpret Canada’s reservations, it is much easier to predict the consequences for Canadian health care systems should these reservations be given narrow interpretation. Accordingly the second and third questions we attempt to answer, concern the potential health care related consequences should Annex I and II reservations not apply: first, for the province of Alberta; and then for the rest of Canada.

1. The New Permanence of Health Care Reform

Alberta’s health care initiatives are likely to increase the participation of foreign investors and service providers in the delivery of surgical and other insured medical services. If this occurs, would this or some future Alberta government be able to re-direct the provision of these health care services to not-for-profit public hospitals, should it decide to abandon this experiment?

The evolutionary course of public policy and law will often take false turns. In most cases these errors are soon corrected by parliaments and legislatures which may either choose to retreat, or chart a new course forward. This is no more or less than the iterative dynamic of policy and law reform.

The modern era of international trade agreements has made these course corrections far more difficult to make. Nowhere is this more clear than with respect to the rights of foreign investors under NAFTA. Two provisions of Chapter 11 are key: Article 1102: National Treatment and Article 1110: Expropriation. The latter, as noted, is not reserved under either Annex I or II, and will, in our opinion, represent a very substantial impediment to any derogation of the investor rights that present Alberta proposals would create. In other words, should Alberta’s experiment with private care proceed, it will be very difficult for this or any future Alberta government to interfere with the interests foreign investors are likely to acquire.

Because Canadian reservations may effectively shelter health care measures from the full application of National Treatment obligations, we will address the implications of this rule further below. For the moment we will concentrate on the impact of Article 1110 on future policy and legislative options should Alberta proceed with present proposals.

The Impact of Article 1110

While the premise of Canada’s Annex II reservation would allow governments to retreat from unsuccessful health care measures, this right is almost certain to prove more putative than real when those measures give rise to investments and investor interests under Chapter 11. This is true because in the case of measures which allow such private health care providers to establish or expand their investments in Canada, the cost of re-establishing those elements of the public system that may be lost to private investors would almost certainly be prohibitive.

We appreciate that the cost of compensating individuals and companies adversely affected by the establishment of public sector enterprises has always been an important consideration for governments contemplating such initiatives. However, under NAFTA the cost of compensating foreign investors in such cases is certain to be considerably higher and much less predictable than would otherwise be the case.

The Expropriation and Compensation provisions of Article 1110 will play a key role:

Article 1110: Expropriation and Compensation

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.

Pursuant to these provisions foreign investors are entitled to compensation in every case that a government measure may indirectly expropriate an investment, or be tantamount to expropriation. Neither term is defined, nor is the record of NAFTA negotiations revealing of the intent of the parties in qualifying the term “expropriation” in such a broad and open-ended manner.

Clearly however, these rules represent a fundamental departure from the legal rights available to both domestic and foreign investors alike under Canadian law - for unlike the United States, Canada has rejected the notion of entrenching private property rights in our constitution. This means that under Canadian law, parliaments and legislatures are free to determine whether, and the extent to which compensation will be paid when governments act in a manner which may reduce or limit the proprietary interests of individuals and corporations.⁹

A Fundamental Departure from Canadian Law.

When expropriation takes place pursuant to statutory authority that is silent on the subject of compensation, Canadian courts have on occasion read in an obligation to pay compensation when property is taken.¹⁰ In other instances however, the public interest has been seen as over-riding a claim to compensation notwithstanding an adverse impact upon property values or business interests.¹¹

In yet others, our courts have refused to recognize certain interests as being compensable. A case in point is the decision of the Manitoba Court of Appeal rejecting a claim for compensation by a private home care service provider because of a decision by the Manitoba government to deliver the service itself.¹² The impact of that decision effectively terminated the plaintiff’s business. Nevertheless, the court held that because the plaintiff’s entitlement existed only because of a decision by government to contract out the services in the first place, it fell short of the proprietary interest needed to give rise to a claim for expropriation.

It is very unlikely in our view that this reasoning would be followed by an arbitral panel called upon to resolve a claim under Article 1110, because of the expansive way in which expropriation is defined. Moreover, by establishing this protection with respect to “investments,” NAFTA significantly expands the domain of compensable interests that Canadian courts have been willing to recognize.¹³

Another way in which the provisions of Article 1110 represent a fundamental departure from Canadian and the common law is by removing from Canadian governments their authority to determine whether to award compensation and how much to pay. Therefore where a public health care measure is considered to expropriate a foreign investment, pursuant to the requirements of Article 1110 (1), compensation is mandatory in every case, and is fixed by Article 1110(2) at “fair market value”. This effectively removes from Canadian governments their prerogative to weigh the public interest against the rights of private investors.

Fair Market Value

But for this constraint, a government might decide to limit compensation to the monetary loss actually suffered by a private health care provider in consequence of a public health care measure. Under the “fair market value” provision of Article 1110, such a company would also be entitled to compensation for future business losses even where these far exceed the actual investment made in the enterprise. It is this provision that explains the enormous damages that foreign investors have sought in bringing investor-state suits - which are now routinely in the order of hundreds of millions of dollars¹⁴.

Alternatively a government might decide not to compensate a private health care provider, where the loss to the investor is only prospective or where the loss is simply in keeping with the normal business risks associated with establishing new ventures. Or, a government might conclude, as the federal government did in the case of victims of the Canadian blood system, to cap compensation at a certain level. None of these options are available under Article 1110 constraints.

Another point which should be made here concerns the application of international legal principles to NAFTA disputes. Article 1131 stipulates that a Tribunal convened pursuant to an investor-state claim shall decide the issues in dispute in accordance with this Agreement, and applicable rules of international law. There are several points at which international legal principles diverge significantly from those established under Canadian law. A pertinent example concerns the matter of expropriation, where international norms are likely to accord greater protection to property rights than would be the case under Canadian law.

Unpredictable and Potentially Unbounded Damage Awards

A further disincentive to re-establishing public health care service delivery can be found in the unpredictable nature of investor-state dispute resolution. As noted, the absence of any requirement that arbitral panels follow the decisions of other tribunals on similar or identical points, greatly adds to the uncertainty that abounds in this domain. Moreover the absence of any formal right of appeal or judicial review, denies crucial judicial oversight that might ultimately impart some consistency to the approach adopted by such panels.¹⁵ As it now stands, the failure of a claim before one panel would not prevent a similar complaint from succeeding before another tribunal which might come to very different conclusions on the same matter.

One final dimension of the consequences that are likely to flow from NAFTA’s expropriation rule should be noted: investor-state enforcement is only available to foreign investors. This distinct advantage may well create an incentive for Canadian companies to attract foreign investors or restructure their companies to claim these extraordinary rights as well.

Before leaving this issue, we should also mention the other provisions of Chapter 11 and 12 with respect to which no reservation has been taken. These include: Minimum Standards of Treatment [Article 1105]; Performance Requirements [Article 1106] (under Canada’s sectoral reservation); and, Licensing and Certification [Article 1210]. Similarly, and as implied by the foregoing discussion, no reservation was permitted, nor taken, from investor-state dispute settlement. This means that all matters arising under Chapter 11, including the effect of a listed reservation, are vulnerable to challenge pursuant to these enforcement rules.

Might an Unsuccessful Tender Bid Give Rise to Claim Under Article 1110?

One qualification should be added to this assessment. This concerns foreign investments which are established in consequence of government procurement and granting programs. These are specifically exempted from Chapter 12 and certain provisions of Chapter 11. However no exemption from the application of Article 1110 is made.

The allocation of contracts or funding by regional health authorities would clearly fall within the NAFTA definitions of procurement and grants.¹⁶ This gives rise to the question: would an investor who was unsuccessful in bidding for contract tendered by a regional health authority have a claim to compensation under Article 1110?

We believe that it would not. The right to participate in a competitive bidding scheme to provide insured health care services would not, in our view, rise to the status of a compensable proprietary interest, notwithstanding the broad meaning of expropriation delineated by Article 1110. Were this to be otherwise, every foreign investor that bids successfully on a contract with a regional health authority would have a guaranteed right to succeed with future tender bids. The same would be true for any investments that were established in consequence of being awarded a contract pursuant to such a tendering process, should a subsequent tender fail to garner ongoing or new business.

However we believe that a different outcome would result in a situation where the right to bid on a tender is withdrawn by government because of a change of policy or law. For example, after having established a regime to tender insured health services to private providers, including US investors, the province decides that its experiment has been a failure. It then decides to abandon the project and reallocate the delivery of insured surgical services to not-for-profit hospitals.

In this case we believe that a foreign investor could claim under Article 1110, arguing that by taking away the right to compete for the delivery of health services, the province has effectively expropriated the investments it established in consequence of having that opportunity. Indeed this situation is analogous to a claim now proceeding under NAFTA’s investment provisions, in which a US company is seeking approximately $10 billion in damages because of a decision by the government of BC to reverse its policy on bulk water export licenses.¹⁷

It might still be argued that the exemptions for procurement under Chapter 10 and 12 should prevail, notwithstanding Article 1110. However, we believe that a dispute panel would likely conclude that a change of policy or law restricting the rights of foreign investors to bid for surgical care contracts would fall outside the ambit of the actual procurement process itself, and therefore not be entitled to the exceptions set out in these Chapters.

To summarize:

The unbounded nature of Canada’s reservation with respect to health services would theoretically allow a government to retreat from health care initiatives that result in the privatization of health care services. A government may conclude for various reasons, that its experiment with private sector delivery was unsuccessful, unpopular, too costly or all three.

But while a theoretical right to retrace its steps may exist, the unpredictable and potentially unbounded costs of compensating foreign investors that have established or expanded operations under the failed regime, are likely to be prohibitive. This would effectively secure in perpetuity whatever terrain a private health care provider may have been successful in occupying once the opportunity to do so is presented. In other words, investments by US or Mexican providers under any privatization scheme are almost certain to become permanent fixtures of the Canadian health care system. Moreover for reasons we discuss elsewhere, once the door is open to such foreign private investment, it would be very difficult to shut.

The effect of these constraints then is to very substantially increase the risks of proceeding with any amendments to Canadian health care regimes that might give rise to additional foreign investment and consequent investor rights.

2. The Effectiveness of Canadian Reservations

Would the implementation of Alberta’s plans to allow greater private sector participation in delivering certain insured medical services undermine the integrity of either Annex I and/or II reservations?

An assessment of the efficacy of Canada’s reservations concerning the health sector is essential to estimating the potential consequences that may follow should Alberta proceed with present proposals. As described above, Canada has listed reservations to certain provisions of Chapters 11 and 12 which pertain to:

• National Treatment (Investment and Services)

• Most Favoured-Nation Status (Investment and Services)

• Performance Requirements (Investment)

• Senior Management and Boards of Directors (Investment)

• Local Presence (Services)

Even for those matters specifically reserved, the ambit of the protection afforded for non-conforming measures is limited by several factors, including: the inherent vulnerability of the reservations to erosion and narrow interpretation; and the qualified and ambiguous language that is used to describe the sectoral reservation for health services set out in Annex II C-9.

We have already discussed the general problems that attend the interpretation of reservations given the inherent biases of treaty interpretation. Here we consider the specific problems associated with estimating the effectiveness of Canada’s Annex I and II reservations. We will begin with Annex II C-9, which is by far the more important of the two.

Annex II C-9

The key elements of this reservation provide as follows:

Canada reserves the right to adopt or maintain any measure with respect to the provision of public law enforcement and correctional services, and the following services to the extent that they are social services established or maintained for a public purpose: income security or insurance, social security or insurance, social welfare, public education, public training, health, and child care. [emphasis added]

Therefore, unlike the reservations listed for public law enforcement and correctional services, health services are reserved only to the extent that they can claim the status of “social services established or maintained for a public purpose.” Accordingly, to qualify, government measures with respect to health must satisfy a two-fold test: they must not only qualify as “social services,” but must also have been established or maintained for a “public purpose.” These terms are not defined in NAFTA nor have they been considered by any trade dispute or arbitral panel convened pursuant to its provisions.

The Rules of Treaty Interpretation

The rules of international treaty interpretation offer general guidance about the approach that a panel or tribunal will adopt if called upon to interpret the meaning of this reservation.¹⁸

Article 31.1 of the Vienna Convention articulates the core obligation that a treaty is to be interpreted in good faith in accordance with the ordinary meaning to be given to terms in their context and in the light of [the treaty’s] object and purpose. [emphasis added]

As to the ordinary meaning of “social service”, The Oxford English Dictionary defines the term as:

A service supplied for the benefit of the community, especially any of those provided by the central or local government, such as education, medical treatment, social welfare, etc.

This definition raises the question of whether a service delivered by a private company on a for-profit basis would qualify as a social service. We will return to discuss this question further below.

The term “public purpose” isn’t defined in the Oxford Dictionary but it does appear in Article 1110 with reference to expropriation. In this context the term may be considered as having broad application. For example an American text on the subject of expropriation under international law, comments that the “concept of public purpose is broad and not subject to effective reexamination by other states.”¹⁹ But caution is needed to not take this view out of context. The interpretation of “public purpose” might understandably be more liberal in the context of expropriations law because of the requirement that compensation be paid even where the taking is for public purpose. A trade panel or tribunal might be more circumspect where the result would be to deny rights altogether.

Article 102 of NAFTA defines its objectives to include “the elimination of barriers to trade … in services, the (promotion) of conditions of fair competition, and the goal of increasingly substantially investment opportunities in the territories of the parties.” Article 102(2) further provides that:

The parties shall interpret and apply the provisions of this Agreement in the light of its objectives set out in paragraph 1 and in accordance with applicable rules of international law.

Unfortunately NAFTA makes no reference to the importance of preserving the integrity of the Parties’ social and cultural programs. Nor is there any other reference that would prove helpful in supporting an interpretation of Annex II that is otherwise inherently difficult to reconcile with the stated goals on NAFTA concerning services and investment.

The Tenor of Trade Jurisprudence

It is also important to appreciate that the fora within which these matters would be resolved - international trade dispute or arbitration proceedings - are not conducive to the consideration of the diverse perspectives that Canadian courts routinely solicit when issues of broad public importance are being determined. The dispute resolution processes established by NAFTA exist to serve the essential objectives of trade and investment liberalization and have consistently failed to accommodate competing public policy objectives.

In the years since NAFTA was negotiated, we have been able to observe the norms of international trade dispute resolution when nations seek to rely upon carve-outs or exceptions to the trade disciplines their domestic measures may offend. Several of these cases have required NAFTA and WTO panels to parse the meaning of the exceptions set out in GATT Article XX concerning the measures “necessary to protect health, animal or plant life of health, or relating to the conservation of natural resources.”²⁰

It is beyond the scope of this opinion to review this jurisprudence, however it is relevant to note the consistently narrow interpretation given these provisions by trade panels. In case after case, the impugned national measure has been found to fall outside of the parameters afforded by Article XX exceptions.²¹ We believe these cases reveal a significant bias to further trade liberalization objectives at the expense of other societal goals.

In our view a similar tendency can be observed in the trade jurisprudence to which Canada has been a party. Indeed the federal government’s record in defending trade challenges directed at Canadian law and policy has been very poor. Casualties now include the Auto Pact, measures to regulate split-run magazines, aspects of Canada’s supply management for dairy commodities, and the Technology Partnerships Fund. Of course it is possible to consider these cases as simply vindicating the effectiveness of international trade disciplines to confront unfair trading practices and policies. But a more considered assessment often reveals legitimate domestic policy goals in conflict, sometimes only tangentially, with those engendered by free trade agreements. When this occurs, in virtually every case, the former is expected to give way.

Canada’s Arguments in Support of a Broad Reading for Annex II

It isn’t that Canada would not be able to muster substantial arguments to defend its health care system as representing a “social service for a public purpose”. The extent of public funding support, the strength of the regulatory controls built into federal and provincial legislation, and the five principles of public health care that represent the cornerstones of federal health policy and the Canada Health Act, provide strong support for this contention.

Notwithstanding the merit of these arguments, it is hard to be confident about the prospects of persuading a trade panel or arbitral tribunal of the need to give Annex II a broad and liberal reading regardless of the impact on foreign investors and service providers. It is also clear that a panel or tribunal convened to address this issue will be confronted by some forceful arguments to the contrary. We turn to these next.

Canadian and US Views of the Sectoral Reservation for Health Differ Sharply

Article 32 of the Vienna Convention states that:

where an interpretation under Article 31 leaves the meaning ambiguous or obscure, then recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion.

We are aware of no letters that were exchanged between Canada, the US or Mexico with respect to the meaning of Annex II. However there was correspondence and debate between the Parties and their respective sub-national governments that exposes very different views about the meaning and ambit of this sectoral reservation.

Indeed significant differences can be found among the pronouncements offered on this subject by representatives of our own federal government. For example, responding to concerns articulated by Canadian provinces, Senior Deputy Minister and NAFTA co-ordinator John Weekes assured the provinces that Annex II C-9 would receive the broadest possible interpretation. Mr. Weekes also indicated that the term “public purpose” was left indefinite to allow precisely for such broad interpretation.²²

But within a matter of weeks, Mr. Weekes’ successor had issued a qualification of that assessment advising the provinces that not all measures relating to the provision of health care would necessarily be covered by its Annex II reservation. Accordingly he advised the provinces to consider listing such measures under Annex I.²³

If the differences between Canadian negotiators are troubling, they are modest by comparison with those that appear to separate the views of Canada and the US on this crucial subject. For example, consider the opinion expressed by the US Trade Representative in responding to the concerns of state governments regarding the need to protect social services at that level. Describing the meaning of an identical reservation to that set out by Annex II C-9, the USTR put it this way:

The reservation in Annex II (II-U-5) is intended to cover services which are similar to those provided by a government, such as child care or drug treatment programs. If those services are supplied by a private firm, on a profit or not-for-profit basis, Chapter Eleven and Chapter Twelve apply. If a private firm provides those services on contract to the government, then it is considered government procurement.²⁴ [emphasis added]

We will return to consider the issue of procurement under Question #3. For the time being, suffice it to say that should the US view on this matter prevail, the consequences for Canada’s health care system would be very problematic.

Canada’s Mixed Health Care System

Canada’s health care system is a mixture of public and private sector service delivery. Most physicians providing insured medical services operate private for-profit businesses subject to certain regulatory controls, eg. licensing and extra billing. On the other hand, most hospitals in Canada delivering insured medical services are not-for-profit institutions, and many are operated by religious or charitable foundations. A number of private hospitals and clinics also exist in Canada providing services that fall both within and outside of the Medicare funding umbrella.

Moreover, the landscape of Canadian health care continues to evolve, but often in ways that are hardly conducive to maintaining a robust and durable public health care system. The Honourable Monique Bg0069n, who is one of the architects of the present regime, recently described the gradual erosion of our health care system this way:

Surreptitious de-listing or de-insurance of services by provincial governments; private clinics operating both in and out of provincial plans for “medically necessary services” (and their medical practitioners keeping hospital privileges and having it both ways); treating GPs or specialists directing their patients to private labs and clinics for regular procedures for the full out-of-pocket cost; hospitals charging partial costs for exams because these might not be “medically necessary” (wanting a MRI is not like choosing to have a hair colouring!) - these are all erosions of Medicare. People started losing all sense of their entitlements to health care²⁵.

The allegation implicit in this assessment is that Canada has been complicit in allowing the foundations of the health car