Canada-China investment deal allows for confidential lawsuits against Canada

Concessions on secrecy in investor-state arbitration reverse Canada’s policy since the early days of NAFTA.

Prime Minister Stephen Harper arrives at the signing ceremony for a Foreign Investment Promotion and Protection Agreement with China. (Sept. 9, 2012)

By: Gus Van Harten Published on Sat Sep 29 2012

The Harper government is very keen on Chinese investment. On this there is little doubt, now that the Canada-China investment deal has been released.

The deal will tie the hands of Canadian governments, especially in the resource sector, once Chinese firms buy Canadian assets. It allows Chinese companies to sue Canada outside of Canadian courts. Remarkably, the lawsuits can proceed behind closed doors. This shift to secrecy reverses a long-standing policy of the Canadian government.

Under the deal, Chinese firms can sue in special tribunals to protect themselves from Canadian government decisions. Canadian companies can do the same against China. The technical name for this is “investor-state arbitration.” In Canada, it has been in operation since NAFTA.

In turn, any decision by any state entity in Canada — from federal or provincial legislation to a Supreme Court of Canada decision — can be challenged by a Chinese investor. The arbitrators, if they conclude that the decision violates flexible standards of investor protection, can issue orders and award damages against a country.

On the other hand, no one in Canada including the government will be able, under the deal, to sue a Chinese investor for breaking any laws. The claims are one-way. Also, only the federal government can participate in the arbitrations. Provincial governments, Canadian companies and other constituencies have no right of standing even if their interests are affected directly.

There is reason to doubt the independence of the arbitration process. Unlike judges, the arbitrators do not have secure tenure and set salaries. They depend for business on investors (to bring the claims) and on arbitration houses (to choose the arbitrators when the disputing parties disagree). Further, the arbitrators’ decisions on legal issues are not subject to judicial review.

So, it is prudent to ask, who are the arbitrators more likely to see as the major country, Canada or China?

Canada has a mixed record in investor-state arbitration. We have lost about half of the decided cases against the government, all by U.S. companies under NAFTA. Canada has had to pay about $160 million in compensation, with another award pending in a case involving research and development rules for the Hibernia and Terra Nova offshore projects.

Worse, Canadian investors have sued other countries, usually the U.S., 16 times and lost every case. We have lost on softwood lumber, cattle and gold mining. We have lost on gasoline additives, hemp and funeral homes. We have lost on a lot of things.

It is reasonable to expect that Chinese investors will use the Canada-China deal to pressure governments in Canada, especially in the resource sector. About one in five investor lawsuits involves a resource dispute. At least nine of the U.S. lawsuits against Canada under NAFTA have related to resources.

Most surprisingly, the Chinese lawsuits can be kept secret. This is in stark contrast to other treaties signed by Canada. Under NAFTA, since 2001, Canada and the U.S. have ensured that investor-state arbitrations were open.

Under the Canada-China deal, the arbitration hearings and all documents, except an actual award, can be kept confidential at the discretion of the country that is sued. This suggests that China objected to disclosure of Canadian lawsuits against it. More importantly for Canadians, the Harper government did not insist on disclosure when Canada is sued by the Chinese.

By implication, we shall have to assume in time that there are hidden Chinese lawsuits against Canada. We will not know why we have been sued or who is deciding the case. We will not know what the government is arguing on our behalf. And we will not know if Canada has been ordered to change government decisions.

Confidentiality is fine in commercial arbitration where the disputes do not affect the public. It is noxious in investor-state arbitration, which often involves matters of public importance. Incidentally, the secrecy has little to do with encouraging settlements; investors can and often do pursue confidential settlements before bringing a claim.

The turn to secrecy is an about-face for the government. Canada was until now a champion of openness in investor-state arbitration. As countries like Australia, India, and South Africa pull away from investor-state arbitration, we are embracing it in a virulent form.

The Canada-China deal undermines basic Canadian principles of public accountability and open courts. It raises dramatically the stakes of Chinese takeovers in the resource sector. If ratified, it will tie the hands of future elected governments for at least 31 years.

Gus Van Harten is a professor at Osgoode Hall Law School where he specializes in international investment law. His research on investor-state arbitration is available at www.iiapp.org and http://ssrn.com/author=638855.