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Steven Shrybman
Barrister and Solicitor
July 2003

Executive Summary:

The potential impact of Canadas international trade disciplines on government actions concerning Public-Private Partnerships (P3s) is now an important concern for municipalities. On more than one occasion the risks of trade complaints and foreign investor claims have persuaded a municipal government to abandon plans to enter into P3 contracts. The Federation of Canadian Municipalities has also taken up these issues and concerns, establishing ongoing communication with federal trade officials.

To some extent these developments were prompted by detailed legal opinions we prepared for the Canadian Union of Public Employees (CUPE) concerning P3 initiatives for water supply services in the Vancouver region, and sewage treatment services for Halifax. In response, the municipal governments involved, and the Canadian Council for Public-Private Partnerships (C2P3), commissioned their own legal analyses concerning the issues we had raised.

Not surprisingly, C2P3 disagrees with some of the views we have expressed. As its members are the principal beneficiaries of initiatives to privatize or contract out public services, it understandably discounts concerns that might interfere with such initiatives. CUPE, of course, has a competing interest in preserving the integrity of public sector services and believes that there are very good public policy reasons for doing so.

Earlier this year C2P3 published another legal opinion on the subject of international trade agreements which is presented as offering Guidance for Municipalities concerning public-private partnerships (P3s) and trade agreements. We will refer to it below as the C2P3 guidance opinion.

We believe the C2P3 guidance opinion is often inaccurate, and at times simply wrong on key points. Moreover, the manner in which guidance is offered is often misleading even when it is factually correct. To compound these problems, the opinion simply ignores leading and recent arbitral and judicial precedents that squarely refute some of the advice municipalities are being invited to rely upon.

The following is a summary of our response to the key assertions of the C2P3 guidance opinion. For a more complete analysis see Legal opinion on DBO Water Facility Contracts.

Is it true that the provisions of P3 contracts can do much to eliminate any concerns (real or perceived) municipalities may have about the impact of trade agreements?

This assertion is clearly at odds with established principles of international law and has been flatly refuted by a recent ruling of the International Centre for the Settlement of Investment Disputes (ICSID). That ruling arose from a claim for US$300 million by a subsidiary of Vivendi against the government of Argentina concerning a P3 contract for water and sewage services that had gone sour. It is one of several similar claims recently made by the same international conglomerates that are vying for P3 contracts in Canada. These cases couldnt be more relevant to the Canadian context, but arent even alluded to in the C2P3 opinion.

At best, the C2P3 guidance opinion is misleading on this pivotal issue. While good contract drafting can mitigate the risk of disputes arising under any contractual arrangement, it cannot eliminate or even reduce access by foreign investors to NAFTAs dispute machinery, nor can a P3 contract alter in any other way the rights of foreign investors under international law.

Should municipalities take comfort from the fact they cannot be named as parties to trade challenges or foreign investor-claims?

While correct as a matter of strict constitutional law, the fact that municipalities may not be named as respondents in a case challenging or claiming damages in consequence of their actions will do little to shield them from the ultimate consequences of an adverse ruling. Not only is the federal government obliged to use its considerable authority including its spending powers to ensure compliance by provincial and municipal governments, but retaliatory trade sanctions are routinely targeted in a strategic manner to punish offending governments.

It is also absurd to suggest that municipalities would somehow be insulated from the economic impacts of international trade sanctions, which of course often damage Canadas economy at every level. Moreover, not being named as parties to such challenges or claims means that municipalities will not have standing before international tribunals that will be passing judgment on their actions.

Is it true that: In public-private partnerships where municipalities procure goods and services, municipalities are free to act in their best interest, without fear of a Chapter 11 claim?

True, NAFTA investment rules allow municipalities somewhat greater latitude in procurement relationships than is the case for other municipal actions relating to, or that might affect, a P3 contract. But, it is not likely that a P3 contract would be considered procurement under international law because the goods and services being contracted for are not being acquired for the municipalitys own consumption, direct benefit or use. Moreover, even if the P3 contract was considered procurement, NAFTA rules are quite clear that the exclusion for procurement measures applies only to certain NAFTA investment disciplines but not others, including those that have proven to be most problematic.

The guidance opinion offers further erroneous advice by suggesting that municipalities can rely on P3 contract language to define the P3 arrangement as procurement. But investor-state and trade tribunals are obliged to interpret NAFTA and WTO investment and services rules in accordance with international not domestic law, and certainly not the preferences that municipal governments might from time to time articulate.

Are concerns about the risk of investor claims and trade challenges overstated?

The brief history of NAFTA and WTO dispute resolution has already demonstrated the utility of these regimes as instruments for assailing environmental, public health, resource management and other non-commercial public policies and laws. Only by the broadest definition can such government policies and law be considered trade related.

Moreover, no lesser authority than the BC Supreme Court has confirmed that investor-state tribunals are free to interpret NAFTA requirements so broadly as to cast a shadow over the most routine municipal government decisions. According to the Court, the NAFTA tribunal award it upheld accorded the concept of expropriation such a broad interpretation that it would include a legitimate rezoning by a municipality or other zoning authority. It is simply not credible to suggest that this experience and jurisprudence should not cause serious concern.

Are other claims made by the C2P3 guidance opinion reliable?

Several other assertions of the C2P3 guidance opinion are also misleading or incorrect. These include claims (which are underlined) that:

  • municipalities can favour local suppliers in P3 contracts. But NAFTA precludes such local preferences unless the contract is considered procurement a characterization which is doubtful for reasons previously noted;

  • the supply of a service by a municipality, whether achieved through a fully public system or through a public-private partnership would be considered a supply of a service in the exercise of government authority …. and therefore would not be subject to even minimal obligations of the GATS. But even C2P3 now concedes that the application of the GATS is unclear; and

  • lost profits are not recoverable under NAFTA investment rules. But this is precisely what occurred in both the S.D. Myers and Metalclad cases where substantial damages were awarded against Canada and Mexico on account of business losses that were purely prospective.

Given the scale of the financial commitments engendered by many P3 proposals, and in light of the critical importance of the services involved, in our opinion, it is essential that would-be public partners conduct a comprehensive and thorough assessment of the special risks posed by P3 arrangements in the context of international and binding disciplines concerning trade in services and foreign investment.