Would you sign a contract for a mortgage if you didn't know how high the interest rates would be?
That's a bit like what the Canadian Parliament may be asked to do regarding the country's free trade agreement with the European Union.
The final text of the Comprehensive Economic and Trade Agreement (CETA) was leaked in early August. The Canadian government wants to officially publish it in late September, and will begin the process of ratification after that.
In some countries, including Canada, parliaments will have a say in that process. Yet they will be working with a text that still leaves many questions unanswered, according to two experts. Some provisions in the current version of CETA refer crucial decisions to a "commission" that doesn't yet exist, making various implications of the treaty uncertain.
That's especially true for the most sensitive chapter in the treaty: the so-called "investment chapter," where investor-state dispute settlements are explained.
This chapter has been criticized in earlier leaks of CETA, as well as similar chapters in other trade agreements, for being undemocratic and giving foreign investors too much power over national and local governments. It allows foreign investors to bypass regular courts and instead go to private arbitration courts if they feel discriminated by governments.
The provision that protects investors
A similar chapter in NAFTA, the free trade agreement between the U.S., Mexico and Canada, has cost Canada so far more than C$170 million in claims, according to Scott Sinclair with the Canadian Centre for Policy Alternatives. Eight-eight per cent of those claims cited a provision in NAFTA which says that foreign investors should receive "fair and equitable" treatment.
The definition of what "fair" means is uncertain. The original intention of the provision was to protect foreign investors from situations where they are discriminated against; for example, if a mayor withdraws an investor's licence for a project because the boss of a local competitor is his best friend.
But it's not always that straightforward. In some NAFTA claims, investors used the provision to fight higher regulatory standards that local or national governments wanted to impose, such as stronger environmental protections. For example, in 2010 the U.S.-owner of a hunting lodge in the Northwest Territories sued Canada because the territorial government introduced conservation measures that were designed to decrease the number of caribou that could be hunted each year. The investor is seeking C$4 million as compensation.
The reasoning behind the lawsuit is that the investor couldn't have expected changes in regulation when he made his investment, so he is entitled to compensation. Lawyers refer to this kind of reasoning as "legitimate expectation."
Sinclair said the provision "poses a clear threat to the rights of governments to regulate, and especially to alter and strengthen regulatory approaches." Governments might be afraid of implementing higher regulatory standards or laws that enhance protection of the environment because they fear major lawsuits from foreign investors.
Right to regulate should be explicit: van Harten
That's why the term "legitimate expectations" is a crucial one when talking about investor rights and CETA. The term appeared in earlier versions of the document as a way to interpret what "fair and equitable" treatment means, but was deleted in the latest leaked version. CETA now more narrowly defines what fair treatment of investors is.
Jan Spangenberg is an associate in Latham & Watkins' international arbitration practice group in Hamburg, Germany, which regularly represents states and investors in investment treaty arbitrations. He acknowledged the more narrow definition of "fair and equitable" treatment in CETA, but points out that the treaty includes a mechanism that could allow for a later modification of the provision by a CETA commission.
"It is unclear how this will work. As a result, significant uncertainty remains," Spangenberg said.
The commission, which does not yet exist, will have the final say in the definition of "fair and equitable" treatment. As of now, nobody can tell what it will decide.
That's why Gus van Harten, associate professor at Osgoode Hall Law School, wants the treaty to be explicit: "The right to regulate should be affirmed clearly and unequivocally as a substantive right in the treaty," he said.
Appeals in question
The commission will also be in charge of the right of governments to appeal the decisions of arbitration courts. Here, the same problem arises: nobody knows who will be on that commission, when it will start and finish its work, and what it might decide. Governments will have to vote on CETA before they have the answers.
How appeals will work is especially worrisome for governments, because they are always the subject of lawsuits brought on by investors. Governments, on the contrary, can't sue investors in arbitration courts. This one-sidedness becomes more acute if appeals aren't possible at all or only in limited ways.
That there is no thorough judicial review of arbitrators' decisions worries experts like van Harten: "This is a fundamental problem and makes the adjudicative process non-judicial," he said.
Good news, perhaps, for transparency
On another note, CETA's requirements for transparency in arbitration courts are much higher than they have been in most other free trade agreements. While many countries do not publish documents used in lawsuits, the treaty requires that documents be "publicly available in a timely manner."
Spangenberg's conclusion is that investor-state arbitrations under CETA will be "even more transparent than any regular lawsuit in, for example, German state courts."
However, the documents may be "subject to the redaction of confidential or protected information," the treaty states. In the end, the level of transparency will depend on how much information each arbitration court wants to make public.
"Increased transparency will make the fundamental flaws [of investor-state arbitration] more evident, but only after it is too late for the public or governments to do anything meaningful about them," said Sinclair.
Spangenberg, who regularly defends states against investor claims, said he doesn't think CETA's critics have much to worry about, despite the vague language.
"CETA does not include any new or unheard of rights for investors," he said. "To the contrary, investor rights seem to be more limited than in Canada's existing bilateral investment treaties," such as those with Hungary and Croatia.
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