The advent of international agreements concerning investment and services is a relatively recent phenomenon. Prior to this modern era of comprehensive international trade agreements, Canada and other countries were free to fashion domestic social policies as they saw fit. The establishment of binding international obligations under NAFTA and the World Trade Organization has changed all that. Now governments must operate within the constraints imposed by these agreements on pain of retaliatory trade sanctions, or damage awards, should they ignore the limits imposed by these trade regimes on their sovereign authority.
Moreover, the free market objectives of trade liberalization that are expressed by NAFTA and the WTO are fundamentally incompatible with public policies that seek to exclude market forces in aid of serving other societal goals, such as the provision of universal and accessible public health care. The inherent contradictions between these respective agendas explain why Canada needed to take steps to protect its health care system from the full impact of trade disciplines. As we will discuss, the future viability of the Canadian system depends upon maintaining the integrity of those protections.
Before doing so, we begin by providing an overview of the most important provisions of NAFTA rules concerning investment and services for our present purposes.
- NAFTA Investment and Services Rules
- Dispute Settlement
- Interpretation (Uncharted terrain)
The Investment and Services Chapters of NAFTA impose certain broad constraints upon the measures (law, regulation, procedure, requirement or practice) a country can adopt or implement. These include the following obligations:
Article 1102: National Treatment
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.
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.
In other words, Canada must extend the very best treatment it accords its own citizens and companies to US and Mexican investors on a non-discriminatory basis. Article 1202 establishes the same rule for foreign service providers. Therefore unless explicitly excluded, National Treatment would require that foreign investors and service providers be given the same rights and opportunities that Canada makes available to domestic health care service providers and investors.
Article 1106: Performance Requirements
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:
to achieve a given level or percentage of domestic content;
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; ……
Article 1106 prohibits government regulation that would condition the right to conduct business with obligations to support the local economy.
Article 1110: Expropriation and Compensation
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:
for a public purpose;
in a non-discriminatory basis;
in accordance with due process of law and Article 1105(1); and
on payment of compensation in accordance with paragraphs 2 through 6
Because of the far reaching implications of these provisions for the protection of publicly funded health care service delivery we will return to discuss them in further detail below.
Article 1205: Local Presence
No Party may require a service provider of another Party to establish or maintain a representative office or any form of enterprise, or to be resident, in its territory as a condition for the cross-border provision of a service.
Article 1107 imposes similar constraints with respect to the composition and nationalities of Senior Management and the Boards of Directors.
The dispute settlement provisions of Chapter 11 are also of critical importance and are discussed under a separate heading below.
No exception for health care is included among the general exceptions to NAFTA set out in Chapter 21. This contrasts with the approach taken for National Security, Taxation and Cultural Industries which are given broad exemption from the application of NAFTA rules. Rather, to protect health care policy and law from trade disciplines, Canada elected to list only certain health care services as reservations, and then only to some of the provisions of Chapters and 11 and 12.
The authority to do so is set out by Article 1108 for investment, which provides in part:
Article 1108: Reservations and Exceptions
Articles 1102, 1103, 1106 and 1107 do not apply to:
any existing non-conforming measure that is maintained by
a Party at the federal level, as set out in its Schedule to Annex I or III,
a state or province, for two years after the date of entry into force of this Agreement, and thereafter as set out by a Party in its Schedule to Annex I in accordance with paragraph 2, or
a local government;
the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or
an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 1102, 1103, 1106 and 1107.
Each Party may set out in its Schedule to Annex I, within two years of the date of entry into force of this Agreement, any existing non-conforming measure maintained by a state or province, not including a local government.
Articles 1102, 1103, 1106 and 1107 do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors or activities, as set out in its Schedule to Annex II.
No Party may, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective.
Article 1206 establishes a similar regime with respect to services with reference to Articles 1202, 1203 and 1205 of that Chapter.
Thus pursuant to these provisions the ambit of permissible reservations is restricted to the following specific investment and services obligations:
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)
Measures are defined broadly by Article 201 to include “law, regulation, procedure, requirement or practice.”
Both Articles 1206 and 1108 permit two different types of reservations: bound and unbound. The former – Annex I reservations – permit a government to maintain any specific non-conforming measures which it lists. While countries are permitted to amend such a measure at a future date they may “not decrease the conformity of this measure” with the constraints imposed by the listed provisions. In other words, governments are prevented from developing policy and legislation that would be more restrictive of the+ rights of foreign investors and service providers as established by these chapters of NAFTA.
Unbound reservations on the other hand provide much greater latitude for future policy and law reform. Thus governments are entitled to “adopt or maintain” measures that would otherwise violate the constraints imposed by NAFTA provisions. The preamble to Annex II provides:
… the reservations taken by that Party with respect to specific sectors, subsectors or activities for which it may maintain existing, or adopt new or more restrictive, measures that do not conform with obligations imposed be [the listed Articles] ….
This means that governments are entitled to pursue new initiatives that may be more restrictive of the rights of foreign service providers so long as they keep within the parametres of the public policy and legal domain described by the reservation.
Canada has taken advantage of the opportunity to list both Annex I and II reservations that are relevant to the present discussion.
Annex II C-9 provides, with respect to the Social Services Sector, the following:
Type of Reservation:
National Treatment (Articles 1102, 1202)
Most-Favored-Nation Treatment (Article 1203)
Local Presence (Article 1205)
Senior Management and Boards of Directors (Article 1107)
Cross-Border Services and Investment
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]
It should be noted that Canada’s sectoral reservation doesn’t apply to Article 1106: Performance Obligations, notwithstanding the authority provided by Articles 1108 and 1206 for it to do so. Because of uncertainty about the adequacy of federal reservations to shelter all provincial measures, including those that pertain to health care, the following Annex I reservation was also listed pursuant to Articles 1108 and 1206 with respect to all sectors:
Type of Reservation:
National Treatment (Article 1102, 1202)
Most-Favored-Nation Treatment (Article 1103, 1203)
Local Presence (Article 1205)
Performance Requirements (1106)
Senior Management and Boards of Directors (1107)
Level of Government: Provincial
Measures: All existing non-conforming measures of all provinces and territories.
Reservations vs. Exceptions
Canada’s decision not to include health care among the general exceptions to NAFTA has significant implications for public policy and law in this domain. Quite apart from their more limited ambit, reservations have less weight and permanence than exceptions such as those concerning cultural industries (Article 2106) and national security interests (Article 2102). Without reviewing the international law on this point, there are key distinctions that should be noted between these two approaches.
Exceptions apply to all signatories to an agreement and are included in the treaty’s text. For example, the broad and unqualified carve-out for National Security offers a good example. On the other hand, a reservation applies only to the country declaring it, and is usually found in an annex or supplementary document to the main text, as is the case for health under NAFTA.
Exceptions such as those set out in Chapter 21 are included as permanent features of the agreement, while reservations are often subject to agreement about standstill and rollback. Standstill precludes the development of law and policy that would be more restrictive of the rights established by the treaty, and the principle of rollback anticipates the gradual reduction of the protection afforded by particular reservations. An apt description of the combined effect of such rules was offered in the commentary to a draft text for the Multilateral Agreement on Investment, which as we know, was patterned on NAFTA’s investment rules:
Rollback is the liberalisation process by which the reduction and eventual elimination of non-conforming measures to the MAI would take place. It is a dynamic element linked with standstill, which provides its starting point. Combined with standstill, it would produce a “ratchet effect,” where any new liberalisation measures would be “locked in” so they could not be rescinded or nullified over time. (3)
While there are significant differences with respect to the application and permanency of reservations and exceptions, both approaches share the common characteristic of being given narrow interpretation under international law. Thus where ambiguities exist concerning the effect or extent of a particular reservation, the interpretation that gives broadest application to the substantive provisions of the main text would, as a matter of legal interpretation, be preferred. (4)
In simpler terms, given a contest between the provisions of the main text, and the language of a country specific reservation, the former will be given broad and liberal interpretation while the latter will be construed narrowly.
The provisions of Section B of Chapter 11 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. (5)
Moreover, panels operate, not in accordance with domestic legal principles and procedures, but under international law and according to procedures established for resolving international commercial disputes. (6) 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. (7)
Indeed the rules of international arbitration might even preclude the publication of an arbitration award but for the explicit authority to do so provided by Article 1137 and Annex 1137.4. Even in this case however, Canada is under no obligation to make an award public, and would be free to negotiate terms of settlement that bar publication.
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 neither parties, nor under which, they have any obligations; and,
by extending international commercial arbitration 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].
We should also note, that with the solitary exception of the Investment Canada Act (8), Canada has taken no reservations from the application of these dispute resolution provisions.
We have taken some time to describe the enforcement procedures of Chapter 11 because an understanding of the risks that NAFTA poses to Canadian health care policy and programs must appreciate the character of the quasi-judicial processes that will be invoked to judge any challenge or claim that may be made to them. Simply put, in the event that Canada’s NAFTA partners or their investors initiate disputes or claims concerning Canadian measures relating to health care, these will be resolved behind closed doors, without the benefit of interventions by parties other than the federal government and the disputing party, and by arbitrators chosen by the parties or appointed by international institutions and who need have no familiarity with Canadian law, or health policy.
As one final preliminary matter, and following our discussion of investor-state litigation, we should point out the inherent difficulty of making confident predictions about the outcome of disputes or claims arising from the provisions of Chapters 11 and 12. There are several factors that compound the difficulty of this task.
Several key terms set out in these chapters are left undefined by NAFTA. Examples include “social services,” “public purpose,” “direct or indirect expropriation,” or “in like circumstances.”
Similarly there has been no formal interpretation of these same terms and phrases. The few precedents which exist for NAFTA’s investment and services rules are themselves recent innovations in the area of international treaty law and have not yet been considered by trade dispute panels, arbitral tribunals or by the courts.
The principle of binding precedent (stare decisis) does not apply in the area of international commercial arbitration or trade adjudication. This means that dispute panels are not bound by previous interpretations offered by other panels or arbitration tribunals. Articles 1131 and 1132 empower the NAFTA Commission to issue binding interpretations of contentious provisions to ensure some measure of consistency among panel and tribunals. But, this authority has not been exercised to clarify the ambiguity that surrounds many key terms in these two NAFTA chapters.
See Shaw, International Law (4th ed.) pp. 641-649, See the Belilos case before the European Court on Human Rights, 39ICLQ, 1990, pp 18-2, and J. K. Koh, Reservations to Multilateral Treaties, Harvard International Law Journal, 1982, p71. Also see discussion infra under Question 2.
For example, the International Center for the Settlement of Investment Disputes (ICSID) was established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States and is overseen by an Administrative Council and a Secretariat. The Administrative Council is chaired by the World Bank’s President and consists of one representative of each State which has ratified the Convention.
These are the regimes established pursuant to the ICSID convention, and UNCITRAL Arbitration Rules, recourse to which is provided by Article 1120.
Personal communication with officials of the Department of Foreign Affairs and International Trade