A Gold Standard Trade Agreement

When discussing British trade options with the European Union (EU) in the wake of Brexit, Secretary of State for Exiting the European Union David Davis stated Britain wants a trade deal with the European Union that is ‘Canada plus, plus, plus’, referring to the newly minted Canada-European Union Comprehensive Economic and Trade Agreement (CETA). Indeed, highly rated by Canadians and foreign governments alike, CETA is a rare free trade win in a global environment of increasing protectionism and viewed as a “truly gold standard agreement”. While the political fight for ratification ended with CETA provisionally entering into force in September 2017, the judicial battle has just begun. In the same month, Belgium requested the opinion of the European Court of Justice (ECJ) on the compatibility of CETA’s dispute resolution system with EU law. Unless the ECJ finds it to be compatible, the agreement cannot fully enter into force. At the heart of this opposition to CETA is the haunting NAFTA bogeyman – regulatory chill. Exemplified by NAFTA’s Chapter 11, and embedded within CETA, are dispute resolution mechanisms (DRM) that permit foreign companies to challenge the domestic laws of regional and federal governments to change or reduce their regulatory protections for health, safety, the environment and public interests. These disputes are heard by special trade agreement specific panels, operating outside the judicial system with binding decisions. FTA oppositionists fear that these DRMs cast a chill upon governments’ regulations, as to avoid costly litigation governments pre-emptively limit or abandon their protective public policies that are in most instances reasonable and lawful. Yet neither Canadians nor their European counterparts should fear that CETA will set off a Trumpist deregulatory tsunami.

This author had the opportunity to sit with Counsellor Karl Van Kessel in Brussels and explore how concerns of regulatory chill are addressed in CETA, a treaty in which the Counsellor represented Canada in negotiations with several EU institutions. In the interview, cases were discussed such as Ethyl Corporation v. Government of Canada where Ethyl sued Canada for attempting to regulate MMT, a gasoline additive their business was dependant on, through the Manganese-based Fuels Additive Act. Under Chapter 11 of NAFTA, the US company successfully argued Canada breached its investor obligations, resulting in a settlement payment from Canada payment of USD $13 million in damages. It is with such cases – and their USD $170 million to date price tag – that the legal community finds concerns for possible regulatory chill as a result of expansive FTAs. Chapter 11 however should be not be prematurely ruled as an instrument easily used by the caricature of a power hungry investor. Frivolous or weak litigation against governments can backfire, as in Mesa Power Group LLC v. Government of Canada where a claim of over USD $650 million, resulted in the case being tossed out, with Mesa ordered to pay the Canadian government nearly CAD $3 million to cover legal expenses. Of its 35 Chapter 11 challenges, the Canadian government has only either lost or settled six.

Fears of regulatory chill have yet to manifest into government behaviour, as Cases such as Dow AgroSciences LLC v. Government of Canada. The point demonstrated here is regardless of litigious risks, governments continued to regulate in matters of health and safety. The aforementioned Mesa case can be cited as an example of government continuing to regulate environmental requirements, despite the risk of litigation. The councillor also pointed to his experience with NAFTA Chapter 11 included St. Marys VCNA, LLC v. Government of Canada, where a company attempting to sue predicated on expecting zoning changes, had been unsuccessful due to a clause in Chapter 11 only allowing bona fide investors to claim on their own behalf. His experiences were examples wherein federal and provincial governments had not been affected by the threat of litigation, hence regulatory chill had not manifested.

The Potential for Regulatory Chill in New Trade Agreements

But what does the spectre of regulatory chill mean for new trade agreements such as CETA and any potential NAFTA replacements? As explained by Counsellor Van Kessel, the Canadian experience in NAFTA guided how Canada negotiated and designed CETA. The main CETA provision that came as a result of Canada’s long litigious history would be Chapter 8. This investment chapter has been retrofitted with most notably what seems to be a direct response to concerns of potential regulatory chill, especially with stipulations in Article 8.9. Unlike NAFTA’s Chapter 11, CETA’s Chapter 8 expressly states changes in laws and regulations pursuant to health, safety or environmental policy in a way that affects investors’ expectation of profit, does not constitute a breach of investment protection standards. The chapter also includes the “English rule”, meaning parties that bring claim and lose would have to pay the litigation costs of the victor. Appellants under this rule would not be able to commit legal bullying by bringing frivolous and expensive claims in an attempt to intimidate governments into changing health or environment-based regulations, to suit their profit-driven interests. CETA also seeks to encourage a conciliatory rather than adversarial approach through the removal of the statute of limitations in consultation periods. In NAFTA, there is a ceiling limit of 3 years of consultation between potential litigants, that once reached prompts both sides to prepare their cases for court instead of the mediation halls, potentially making it counterproductive to reach any amicable solution. In CETA the statute of limitation (of 3 years) is subject to extensions, predicated on the mutual consent of both state and private bodies.

Canada is the most sued party within NAFTA. This experience however, has shaped the government’s strategies with new entries into FTA with new partners. With the lessons learned from NAFTA, CETA includes provisions which quell even the most obstinate parties, such as Wallonia. The new trade agreement reflects challenges Canada have faced in the past, and in its nascent introduction, Canadians can reasonably expect this free trade agreement to be one far less litigious than NAFTA.