The Multilateral Agreement on Investment ( )

The Multilateral Agreement on Investment (MAI) is a proposed multilateral investment agreement being negotiated by the 29 member countries of the OECD in Paris. While the MAI is currently under negotiation, it is a substantially complete work that will impose limits on how governments can treat foreign investors and their investments.

The obligations in the MAI are different, and in some cases broader, than those in the North American Free Trade Agreement (NAFTA). Of particular interest for this Standing Committee is the fact that the MAI will apply to advantages granted by governments. The term "advantage" is a broad term covering any government subsidy or incentive.

The NAFTA specifically exempted subsidies from the application of several parts of the Investment Chapter. Government subsidies that discriminate on the basis of residency or that require local residency could be maintained under that Agreement. The application of the MAI to government subsidies could restrict the traditional ability of governments to provide social services and healthcare under existing delivery mechanisms.

Healthcare as an Investment

Healthcare is a business worth over fifty billion dollars every year in Canada. Healthcare providers are more than service providers; they constitute businesses either as sole practitioners, partners or employees of other entities. The term "investment" is very broadly defined. It encompasses every kind of asset owned or controlled, directly or indirectly, by an investor. This description includes, but is not limited to, enterprises, debt, equity, contract rights, claims to money, intellectual property, rights granted by laws, such as licenses, and any other tangible or intangible property, whether real or personal, and any related property rights. This term is more broadly defined in the MAI than in the NAFTA or the Canada-U.S. Free Trade Agreement.

Under the MAI's broad definition of investment, much of Canada's healthcare delivery vehicles constitute an investment under international trade law and are covered by the MAI.

The MAI is the most comprehensive investment treaty ever negotiated between developed states. The term "investment", widely used in the MAI, applies to every kind of asset owned or controlled, directly or indirectly, including, businesses (incorporated and non-incorporated), shareholdings, loans, real estate, intellectual property and goodwill). Simply put, it obliges its members to protect the investments of foreign MAI nationals and their business entities.

(i) National Treatment

The MAI requires that national treatment be given to investments which are in like circumstances in relation to "the establishment, acquisition, expansion, operation, management, maintenance, use and enjoyment, and sale or other disposition of investments." The national treatment obligation requires governments to grant effective equality of opportunity to investments within its borders. This powerful obligation ends policies that give a preference to Canadians over foreigners in various areas.

The national treatment obligation is fundamentally about preventing discrimination against foreign investors and their investment. However, its very broad terms constrain legitimate government activities to assist their own citizens. For example, government policies that impose differential fees based on residency violate this MAI obligation. Many provinces currently have such policies which come into effect whenever an out-of-province patient uses a provincially-funded medical facility.

The application of the national treatment standard would apply to treatment received by any investment in any part of the country, regardless of which level of government is applying the different standard of treatment. Under NAFTA Article 1102(3), national treatment in a province is based upon the best in-province treatment applied by the province within its territory. Under the MAI, there is no such distinction. If one province treats a certain investment better than another province, a dispute may arise due to the other province's lower standard of treatment. This situation could leave a province vulnerable to challenge after another province has increased its standard of treatment, even though the province did nothing to warrant such criticism.

(ii) Minimum Standards of Treatment

The MAI provides that its member governments must provide the minimum standard of treatment as established by international law to the nationals and investments of other Parties. This minimum standard includes protections regarding due process and fair treatment and it also recognizes important international rights such as freedom of expression and other fundamental human rights.

(iii) Performance Requirements

The freedom of governments to impose a wide variety of restrictions on business practices is severely limited by the MAI. At its very heart, the MAI prohibition on performance requirements prevents governments from imposing certain conditions on the "establishment, acquisition, expansion, management, operation or conduct of an investment in its territory."

MAI governments are prohibited from compelling investors to export a certain level of locally produced goods or services or from requiring that investments use local labour or goods. Parties are prevented from regulating the distribution of services within their borders. This limits the ability of governments to compel a health service provider to provide a service to a specific region.

The MAI establishes a special category of obligations in situations where governments offer a subsidy or other benefits made in connection with an investment in its territory. These benefits cannot be based on the use of local goods or services. Thus a government cannot require, or encourage, a private hospital to purchase locally produced medical supplies. The NAFTA has reduced the widespread use of performance requirements as a form of economic development tool and the MAI would end the use of this tool.

(iv) Expropriation

A fundamental obligation contained in the MAI relates to compensation whenever there is a government expropriation. The MAI states:

1. A Contracting Party shall not expropriate or nationalise directly or indirectly an investment in its territory of an investor of another Contracting Party or take any measure or measures having equivalent effect (hereinafter referred to as "expropriation"), except:

(a) for a purpose which is in the public interest;

(b) on a non-discriminatory basis;

(c) in accordance with due process of law; and

(d) accompanied by payment of prompt, adequate and effective compensation in accordance with Articles 2.2 to 2.5 below.

The MAI does not define the term expropriation. Under international law, however, expropriation is any act by which governmental authority is used to deny some benefit of property. This denial can be actual or constructive.

More specifically, for there to be an expropriation under international law it is necessary to establish that a government has interfered unreasonably with the use of private property. The expropriating government need not take formal title to the property. An expropriation occurs when the property of an individual or business has been substantially interfered with by a governmental authority.

The terms of the MAI itself have broadened the types of activity that will be considered as expropriations by including the words a measures having equivalent effect. Any substantial interference with a property right is likely an activity in the nature of expropriation and almost certainly a measure tantamount to expropriation.

The American Law Institute's Restatement (Third) on the Foreign Relations Law of the United States comments upon the obligation to pay compensation for an expropriation. It provides that compensation for an expropriation:

applies not only to avowed expropriations in which the government formally takes title to property, but also to other actions of the government that have the effect of "taking" the property, in whole or in large part, outright or in stages ("creeping expropriation"). A state is responsible as for an expropriation of property under Subsection (1) when it subjects alien property to taxation, regulation, or other action that is confiscatory, or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment of an alien's property or its removal from the state's territory.

(§ 712 Comment (g))

This comment underscores the fact that an expropriation can take place whenever there is a substantial and unreasonable interference with the enjoyment of a property right. The action of a government to provide services in a sector where there is existing commercial competition could well be seen as a government measure harming the property of a MAI investor. If governmental action harmed an investor's property (such as market share or goodwill), that investor could make a claim for expropriation under the MAI. Thus, whenever government leaves an area of healthcare to the private sector, its return will invariably be costly.

The MAI is a very generous treaty when dealing with the quantum of investor compensation. The Agreement specifically sets out that an investor will receive fair market value for its expropriated property. This valuation basis provides compensation at levels that could be higher than those established under Canadian domestic law. This generous compensation standard augments the broad definition of what constitutes an expropriation under the MAI. As governments begin to appreciate their international obligations, and understand the costs of their violation, these two factors will act to limit the range of public policy options available to governments.

Investor-State Dispute Settlement

The MAI contains a powerful remedy that can be used by MAI investors where a government has harmed their MAI "investor rights." The Investor-State dispute settlement process allows a MAI resident (persons or corporations) to directly bring a compensation claim against another MAI government. These claims are heard before a special international arbitration panel that can award financial compensation to investors that have been harmed by governmental action which infringes the MAI's investment obligations. The panels cannot strike down MAI-infringing measures but the threat of paying enforceable damage awards can be chastening to government policy initiatives.

MAI investors are entitled to dispute government measures. These measures are not limited to legislation but extend to regulations, governmental policies and practices. Not only are the national governments covered by this Agreement, but so are state, provincial, territorial and local governments. Actions that these governments do can thus trigger a MAI action.

To use the Investor-State dispute settlement process, the MAI requires that there be some international element involved in a dispute. For example, Canadian investors are not eligible to bring disputes against the Government of Canada; however, French or Japanese investors can. A glaring exception to this rule is that Canadian corporations "owned or controlled directly or indirectly" by a citizen of another MAI country can bring a claim against the Canadian government. The term "investor" is defined broadly to include an individual or enterprise. By the term "enterprise," the MAI means any entity constituted by law and includes companies, partnership, joint ventures or other associations.

The MAI Investor-State process has been used at least four times since the MAI came into force. The first known dispute was brought by a Mexican chemical manufacturer that complained of Canadian regulations which unfairly prevented the sale of its joint venture products in Canada without fair process. A second case involved an American company that had its imported products banned and domestic distribution business destroyed by Canadian government statements and legislation. The third and fourth disputes were brought by American investors against the Mexican government for allegations of expropriation of their investment.

Another example of the scope of application of the Investor-State process was described by American trade lawyers, Gary Horlick and Alicia Marti. The example used is:

If Arlington County, Virginia was to deny a zoning variation to Goldstar U.S., while granting a similar one to Micron (or Sony U.S.), could Goldstar Mexico bring the U.S. to an arbitration panel under Chapter 11B? An important issue would be whether Goldstar Mexico had incurred loss or damage by reason of the denial.

This illustrates the extent of the consequences of the Investor-State process. The Investor-State dispute settlement process established in the NAFTA has been described as "an untapped source of extensive private investor rights, including guaranteed access to a NAFTA panel for a private party." Without suitable reservations to the obligations of the MAI, governments may find themselves subject to challenge by investors who have suffered damages.

The MAI creates an entirely new multilateral dispute process, vastly different from the GATT or WTO. The ability to allow individuals to directly bring cases against governments (even without the consent of their home government) will result in unpredictable results. What is clear is that the MAI creates a speedy and enforceable process to settle disputes with governments. This is likely to result in investors carefully scrutinizing government practices to find a MAI provision on which they can base a claim. Thus, policing of the MAI will move from governmental channels over to businesses with enforcement done through the use of international tribunals. With the expansion of Investor-State dispute settlement throughout the world's most-developed nations, this trend will only continue to grow.

Canada's Reservations

In a document entitled "CANADA: DRAFT RESERVATIONS," the federal government proposed to make a number of reservations to the MAI. These reservations appear to be identical to reservations made by Canada under the NAFTA; however, there are significant differences in the effect of the MAI reservations because of the difference in wording between the obligations in the MAI and the NAFTA.

Healthcare

In this draft reservation document, Canada has made the following sectoral reservation for social services:

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.

This wording of the description part of Canada's MAI reservation is identical to the reservation taken by Canada at II-C-9 in the NAFTA and substantially identical to the Mexican andAmerican reservation at II-U-5 and at II-M-11. There are significant issues relating to the

actual protection provided by this reservation. While the reservation purports in its title to cover social services, it actually only totally covers the provision of public law enforcement and correctional services. All the other areas covered by this reservation are qualified as they are only covered to the extent that they are "social services established or maintained for a public purpose."

The terms "social services" and "public purpose" are not defined by the MAI, which leaves a significant interpretative question open as to the scope of this reservation. This is particularly important due to differences in approach among governments within the OECD. For example, Canadian provinces have long maintained healthcare as a public social service. In other OECD jurisdictions, such as Mexico or the United States, these activities are delivered almost exclusively by the private sector or are not accessible to all.

The concern over the meaning of the term "social service" can be seen from the position of the U.S. government. In a letter advising American state governments on what to reserve as a social service under the NAFTA Social Service reservation, the U.S. government suggested that social services provided by for-profit providers were not social services. According to the U.S. government, such for-profit providers can transform the service from a "social service" to a commercial service. These American guidelines state:

[NAFTA] Chapters 11 and 12 only apply to the provision of "government services" (i.e. law enforcement, correctional services, social welfare etc.) by NAFTA investors/service providers if the state allows private providers to offer similar services on a commercial basis.

Since the proposed MAI reservation deals with a sectoral reservation, the adoption of such a definition could render Canada's reservation to be virtually meaningless for health, public education and child care as each has aspects provided by commercial providers in Canada.

Without having any specified meanings, it is necessary to rely upon the international rules of treaty interpretation to give meaning to this MAI reservation. Such a process would be unpredictable and any government relying only on such a non-specific definition would do so atits peril. For example, one can look to the general usage of the terms used in the reservation. An examination of the definitions of social service and public purpose is instructive of their meaning.

• Social Services

This term is capable of a number of different definitions. The Oxford English Dictionary defines the term "social service" 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.

The Webster's American Encyclopaedic Dictionary gives a much narrower definition:

organized welfare efforts carried on under professional auspices by trained personnel.

There is no definition of the term "social service" in the decisions on international courts and tribunals. All that one can surmise from the term is that it refers to services that provide public welfare benefits. The indication from the U.S. Trade Representatives Office that these same social services could change into commercial services if provided by for-profit providers suggests that the term has significant limits.

• Public Purpose

The term "public purpose" is not defined in the MAI but it is used in the expropriation provisions. In this context, the phrase "public purpose" has been discussed extensively, as has the analogous terms "public use," "public policy" or its civil law equivalent, "ordre public." The term "ordre public" was examined by the International Court of Justice in the Boll Case. In the separate opinion of Judge Sir Hersch Lauterpacht, he stated:

[I]n the sphere of private international law the exception of ordre public, or public policy, as a reason for the exclusion of foreign law in a particular case is generally-or, rather, universally-recognised. It is recognised in various forms, with various degrees of emphasis, and, occasionally, with substantive differences in the matter of its application. ... On the whole, the result is the same in most countries-so much so that the recognition of the part of ordre public must be recognised as a general principle in the field of private international law ...

Thus, one must conclude that the term "public purpose" is very broad and will permit Parliament to decide what is in Canada's national interest. This determination would be very difficult for another country to challenge.

On the basis of the foregoing, we are able to conclude that there is a considerable amount of uncertainty in the meaning to be given to the words of the Social Service Reservation, especially for the phrase "social service." Despite the use of the broad term "public purpose" in the Social Service Reservation, this will not extend the scope of coverage of this reservation. The term "social service" is much more limited in scope and it will limit the usefulness of the reservation. The definition of this term will need to reflect the varied backgrounds of OECD members such as Turkey, Mexico, the United States, Germany and Japan. The MAI does not set out any meaning for this term and it has not been the basis of any international court review. Accordingly, we can only be certain of the simple fact that there is no clear definition for this term. This is especially problematic because of the differences in how OECD governments actually provide these social services and the fact that there is a different definition in use by the U.S. government.

The protection for the provision of health and social services under the MAI is inadequate for the following reasons:

• If Canada is to rely upon a MAI reservation that will be identical to its NAFTA Social Service Reservation, then this reservation will not be broad enough to cover important obligations such as expropriation.

• The wording of the reservation is ambiguous and qualified. We believe that this reservation could be reworded to provide fuller protection for the social services it wishes to cover.

• The reservation does not extend protection to provincial or local governments who primarily provide social services such as healthcare, primary and secondary education or child care.

All that we can conclude is that there is significant uncertainty in this reservation and that governments should take prudent measures to best protect themselves from any future narrow reading of this reservation by a panel.

Specific Recommendations

The Government of Canada should totally exempt all government-sponsored services for health or social benefit from the MAI.

Canada should revise its current social service reservation to clearly and unambiguously protect all government sponsored health or social benefit programs.

This reservation should apply to all MAI obligations and speak to existing and future government measures.

Canada should only apply the MAI to the federal level of government or permit provinces to voluntarily be bound to the MAI and make unbound reservations to its obligations when they become bound.

Respectfully submitted,

Barry Appleton, LL.B., LL.M.

Appleton & Associates International Lawyers