The Investment Protection Provisions of the MAI

by: Ken Traynor
Canadian Environmental Law Association

The more closely you examine the draft text and consider its implications, the more concerns arise. The MAI goes well beyond simple "non- discrimination" in several respects. One of the most important of these is in its "Investment Protection" provisions under section IV, which are intended to protect investors against "expropriation without compensation" and other "unreasonable [and/or] discriminatory measures by government.

It is true that within almost all OECD countries investors already enjoy high standards of investment protection. (Why then, one might reasonably ask, is the MAI needed at all?) Corporations, as "legal persons" constituted under the law of a country, can sue governments on the basis of domestic law. But under the MAI, like NAFTA chapter 11 before it, foreign-affiliated investors will have the right to sue governments before international arbitral panels for violating not domestic law, but the terms of MAI. These international arbitral panels will have the authority to award monetary damages and these awards will be binding, enforceable as if they had been made by the domestic courts of the government complained against.

Why is this, specifically, a concern? First, the definition of "investment" in the MAI is extremely broad. It covers "every kind of asset owned or controlled, directly or indirectly, by an investor," including real property, moveable and immovable property, tangible and intangible property, intellectual property, claims to money and performance, contracts, and more. Under domestic law, certainly under Canadian domestic law, different types of property enjoy different standards of protection and these property interests must be weighed and balanced against other legitimate interests.

For example, if, in the public interest, the government physically takes possession of your land to build a highway, you are clearly and unequivocally entitled under domestic law to prompt and adequate compensation for the fair market value of that land. However, not all cases of alleged expropriation without compensation are so clear-cut. If, for example, a government, in the public interest, decides to zone land for conservation uses only, create a park, revoke a natural resource permit, postpone or cancel a development project or ban a harmful substance a property owner's title is not extinguished. But their ability to profit from their property interest may be adversely affected. Despite the injury to the investor, the level of compensation may be limited, or the investor may receive nothing at all. An injury to business or to trade resulting from a government regulation taken in the public interest is usually treated as simply a foreseeable commercial risk that is not subject to compensation. The MAI covers every kind of asset and makes no distinction between different kinds of investment interests -- it extends the same "high standard" of protection to them all. (Intellectual property rights may be one exception because business lobby groups want special rules to ensure that the MAI does not adversely affect monopoly protection for patent holders.)

Issues around alleged expropriation and compensation can be complex -- legally, politically, and ethically. These are usually decided under domestic law with full public disclosure, where interested parties have a right to intervene, there is a right to appeal, and governments have the right to amend or create new laws as countries learn from experience. Investors (both domestic and foreign-owned) can and, frequently do, sue for damages alleging that government measures are equivalent to expropriation without adequate compensation. Investors, especially large international ones, can afford the best legal representation, have the same standing as domestic enterprises and are far from defenceless. But courts and governments have the ability and responsibility to weigh the public interest and other values (resource conservation, consumer protection, health and safety, etc.) against any alleged injury to an investor and claims for compensation.

By contrast, MAI arbitral panels will enforce the provisions of the MAI, not domestic law. Even if an arbitral panel were inclined to give weight to values such as environmental or public health protection, there is no legal basis for doing so in the MAI text. There is no general exception for environmental protection, or for anything other than "essential security interests" and possibly "public order." The panel proceedings are secret, interested citizen groups have no right to intervene, there is no appeal procedure, and if a party decided to withdraw as the result of a bad panel decision, MAI rules would continue to apply to existing investments for at least 15 years.

The MAI also expands the meaning of expropriation to include "direct and indirect" expropriation and "measures having equivalent effect." In addition, the Section IV of the draft text reads that "A contracting Party shall not impair by [unreasonable or discriminatory] [unreasonable and discriminatory] measures the operation, management, maintenance, use, enjoyment, or disposal of investments in its territory of investors of another Contracting Party." Combined with the extremely broad definition of investment, these broadly worded protections would expose governments and the public to considerable financial liability. As others have noted, damage awards aside, the "chilling effect" alone on government regulation would be considerable.

It is also important to recognise that no country-specific reservations (exemptions) are to be permitted against these "investment protection" provisions (Section IV of the MAI). These core protections against direct and indirect expropriation, measures of equivalent effect, and unreasonable and/or discriminatory measures are unconditional. Country- specific reservations may be negotiated only against certain other provisions of the MAI (such as national treatment or most favoured nation.) Furthermore, these core protections exceed national treatment: even if a government measure applies equally to domestic and foreign investors it could still be challenged by a foreign investor as a violation of the MAI's provisions against "expropriation without compensation."

Because some of these elements already "exist under NAFTA" is not adequate justification. We should learn from our policy mistakes not repeat and magnify them. In fact, there are important differences between the MAI and NAFTA. The MAI includes many "NAFTA-plus" elements and even a few "NAFTA-minus" ones.

At the very least, the impact of the NAFTA investment chapter should be evaluated carefully before copying and expanding one of NAFTA's most extreme features. The bite of NAFTA's investor-state dispute provisions is just beginning to be felt. In two unrelated disputes, U.S. investors are suing Mexican state and local authorities for refusing to give permission for the establishment of toxic waste dumps. In the first NAFTA investor-state dispute against Canada, Ethyl Corp. is challenging the Canadian federal government's ban on the trade of MMT, a manganese-based gasoline additive. One of Ethyl's legal arguments is that this regulatory policy is "tantamount to expropriation" without compensation. They are seeking damages of more than three hundred and fifty million dollars for the reduced value of their manufacturing operations in Canada and "loss of goodwill." Because NAFTA chapter 11 contains no meaningful exceptions for environmental protection reasons, it may well be (legally ) irrelevant whether Environment Canada acted for legitimate environmental protection reasons or not. As the Canadian international trade lawyer representing Ethyl describes it "Rather than having the polluter- pays principle, we now have "Pay the polluter." (MacLeans Magazine, September 1, 1997).

The combined impact of binding investor-state dispute settlement, extremely broad definitions and the sweeping nature of the investment protection provisions of the MAI are not to be underestimated or minimised. These features of the MAI would go beyond NAFTA chapter 11, which is already a problem. They would seriously weaken the ability to regulate in the public interest, expose the public to considerable financial liability, frustrate government regulators that are trying to respond to community pressure to regulate in the public interest and strengthen those in governments and the corporate world who are trying to resist this pressure.

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Ken Traynor
Canadian Environmental Law Association
#401-517 College St.
Toronto ON M6G 4A2
tel:416-960-2284 fax:416-960-9392