A set of leaked documents obtained by The Canadian Press show Canada and the European Union are still far apart in deciding how much power investors should have under their pending free-trade agreement.

A Feb. 7 draft of the investment text shows Canada and the EU are proposing ways to ensure foreign investors don't use the agreement to launch frivolous lawsuits against governments demanding compensation for any old measure that cuts into their profits.

But the EU and Canada can't agree on wording that determines how much leeway governments should have to pass laws that may inadvertently infringe on the activities of investors.

The investment chapter is central to the free-trade talks, since both sides have vowed to make the agreement as broad and all-encompassing as possible.

"An ambitious (agreement) would lead to greater two-way investment, creating jobs and prosperity right here at home," said Adam Taylor, a spokesman for International Trade Minister Ed Fast.

"Putting predictable investment rules in place and guaranteeing access to EU markets will help create a level playing field for Canadian investors and help them manage the risks of investing abroad."

Broad agreement, specific disputes

At first glance, both countries are heading generally in the same direction. But the text is riddled with competing blocks of text dealing with everything from what constitutes expropriation to what kinds of actions governments can take without risking a lawsuit.

"Consistent with the provisions of this section, each party retains the right to regulate, and to take measures necessary to achieve legitimate public policy objectives," the EU proposes near the beginning of the investment text.

But then the EU also goes on to say that governments' public policy moves should be "subject to the principle of proportionality" — giving independent arbitrators big dollops of flexibility to order large payments from governments if they do something that tramples on foreign firms.

While Canada also wants to be able to regulate and make public policy, both those sections of EU text are in blue, meaning Canada does not agree. Instead, Canada has its own proposals for making sure governments can still act in the interest of their people.

Plus, both sides have competing lists of general exceptions and include conflicting wording throughout the chapter.

Every word in the investment chapter is crucial because companies around the world have increasingly been turning to such investment pacts as grounds for seeking hundreds of millions of dollars in compensation from governments.

"This could well turn out to be the most investor-friendly investment treaty Canada has ever signed," said Howard Mann, an Ottawa-based lawyer specializing in international law and sustainable development.

The way he sees it, Canada has a model investment treaty that it put together in 2004 — a treaty that was carefully crafted to balance investor rights and government room to manoeuvre. The European Union, pushed by some of its member states such as Germany, would prefer to give less leeway to governments and more to investors.

The Canada-EU agreement "could create the absurd situation where European companies have more rights in Canada than Canadian law allows, and give Canadian companies the same supra-legal rights in Europe," added Stuart Trew, trade campaigner for the Council of Canadians.

Precedent for future deals?

The European Commission is under pressure from some of its member states to have the investment part of deal with Canada serve as a blueprint for other free trade negotiations, explained Jan Kleinheisterkamp, a senior lecturer in the law department of the London School of Economics, who follows the investor-protection discussions closely.

Those states want to see the Canada agreement closely reflect other European bilateral investment agreements that have very few strings attached.

But Europe also faces other competing internal pressures to scope out greater leeway for governments to regulate in favour of the environment.

The push and pull of domestic politics may well explain why there are so many sections of the investment text that remained up in the air: the scope of the chapter, basic definitions of investors and enterprises, whether countries can determine the nationality of directors on a corporate board, what constitutes direct expropriation or indirect expropriation, and how to make sure countries are not trying to disguise their barriers to investment.

Still, the documents also show both sides are close to agreeing on what limitations they are not allowed to impose on each other's investors.

Governments won't be allowed to impose capital requirements, set employment targets, restrict investors to joint ventures only, or set quotas for production.

What the documents do not show, however, is how the Investment Canada Act that vets major new investment will comply with the larger trade agreement. Europe has lobbied for an exclusion to that act, but Canada has resisted, since the legislation is the key tool the federal government has to ensure foreign investment benefits Canadians.

Both Canada and the EU had hoped to have their agreement finalized by the end of 2012, but investment issues along with a lack of agreement on pharmaceuticals, beef, autos, procurement and financial services still stand in their way.