Over thirty years ago, Marshall McLuhan used the term
"global village" to describe a new trend(2).
McLuhans global village referred to how modern technology, like jet air travel,
television and satellite-based long distance telephones, linked remote areas of the world
together in new ways. Decisions made thousands of miles away could have an impact at home
and local actions could have immediate impact abroad.
As we enter a new millennium, few knew then how correct Professor McLuhan would be. We
find ourselves constantly coping with the impact of change. New technology has resulted in
shorter time frames and has extended a global reach for business. We need no better proof
of this development than to see how financial issues half a world away in Asia have had a
direct effect on our domestic stock markets and interest rates. Our new reality is defined
by CNN, the internet and corporations which operate on a global basis. As a result, today
local issues can immediately have international effect and many types of local issues are
now the stuff of global agreements.
Thus, it should not be surprising to find that today the most local of our
institutions, civic government, is now the subject of international agreements. This paper
will look at how global investment treaties can have an impact on the municipal
government. Part I looks at how this change has
occurred, Part II examines the key instrument of
this change, Part III gives examples of this change; and Part IV deals with general conclusions.
I. How this change occurred
The impact of international law on local government has not occurred overnight but
has been influenced by a number of factors over the last fifty years.
The shift away from tariffs
From the late 1940's and onwards, international agreements were pre-occupied with the
issue of reducing tariffs. Since the reduction of tariffs resulted in lower protection for
domestic industries, it took a considerable effort to achieve meaningful agreements. At
first, the focus of international agreements was to local customs duties. By the late
1970's, most duties had been reduced or removed and the focus of attention shifted to new
areas: non-tariff barriers(3). The first
international agreements were concerned with issues such as product standards or
government procurement. However, developed states, like Canada and the United States,
continued to push for controls on a new area: foreign investment.
The creation of investment treaties
After the Second World War, American negotiators began to include clauses in American
treaties that gave protection to the investments owned by Americans abroad. These
clauses usually permitted the U.S. Government to bring a claim before an international
tribunal in order to seek restitution for lost property. Eventually, these investment
protection clauses became codified into a form of treaty known as a Bilateral Investment
Treaty (BIT). The BITs were generally negotiated with developing states and they
guaranteed compensation to American investors in the case of expropriation or a failure to
provide fair and equitable treatment(4) .
The World Banks International Center for the Settlement of Investment Disputes
(ICSID) reports that since 1987 more than eight-hundred BITs have been concluded.(5)
The successful negotiation of the North American Free Trade Agreement (NAFTA) in 1994
created the first broad investment agreement between developed and developing states.
While this agreement also looked at trade issues, it marked the first time that two
developed states ever agreed between themselves to accept the onerous provisions of a
bilateral investment agreement. The NAFTA contains a broad set of investment obligations.
While these obligations applied to all levels of government in Canada, most of the
obligations did not apply to municipalities because of technical exceptions and
reservations. However, some NAFTA obligations still applied to the actions of
municipalities--a fact that the federal government failed to clearly convey to
municipalities across Canada.
The NAFTA was the first multilateral agreement to contain a controversial process that
permitted individuals themselves, rather than governments, to police these agreements. If
a government action violated an obligation in the NAFTAs Investment Chapter, an
individual from another NAFTA Party or its investment could directly challenge that
measure before a fast-track international tribunal without the agreement of its home
"investor-state" dispute settlement process provides for a fast and effective
means of settling disputes between investors and governments by bypassing domestic courts
completely. 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." (7)
Designed to provide protection for foreign investors in developing countries, the
investor-state dispute settlement process focuses strictly on settling investment disputes
between individuals and governments.
While the NAFTA was the first step in this process of creating international
responsibility for municipal governments, the most significant development in this process
is currently at hand--the Multilateral Agreement on Investment.
II. The Instruments of Change
The Multilateral Agreement on Investment,(8)
known as the MAI, is an international investment agreement currently under negotiation by
the twenty-nine member countries of the Organization for Economic Cooperation and
Development in Paris. The goal of the MAI is to establish international standards on how
governments treat foreign investors and their investments. The MAI is built upon the
framework of the NAFTAs Investment Chapter. The MAI, in distinction to the NAFTA, is
a much broader agreement in that its terms apply to all levels of government without
exception(9). As currently
negotiated, the MAIs obligations will directly apply to the acts of all levels of
government, including municipal governments.
Like the NAFTA, the MAI includes a special process to protect the "rights" of
foreign investors by allowing them and their companies to challenge local measures that
violate their international rights. The Investor-State dispute settlement process allows a
foreign investor from an MAI country (both individuals and 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 MAIs 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 all acts attributable to governments, including
regulations, governmental policies and practices. Not only are the national governments
covered by this Agreement, but so are state, provincial, territorial and local
governments. An example of the scope of application of the Investor-State process is
described by American trade lawyers, Gary Horlick and Alicia Marti as follows:
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.(10)
The MAI requires that there be some international participant involved in an investment
dispute. Any individual resident in an MAI country, or a business owned by that
individual, can launch a claim against the government of another MAI country. For example,
Canadian investors are not eligible to bring disputes against the Government of Canada;
however, American or Japanese investors can. A major 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 Canada.
This results in the situation foreign investors and their investments in Canada have
access to the investor -state dispute process while other Canadians may not. In essence,
foreign investors are provided with a better legal remedy than Canadians under these
The MAI deals with a number of important government obligations. Among these
obligations are the following:
The concept of national treatment is one of the cornerstones of the MAI. It requires
governments to treat all investors the same, irrespective of their nationality. This
obligation ends government policies that favour local business. For example, national
treatment prohibits the imposition of differential fees based on the residency of an
investor, such as out-of-district levies for services such as garbage pick-up or
The MAI restricts the ability of governments to impose a wide variety of practices
known as performance requirements. For example, governments cannot require a foreign
investor to purchase local goods or services. Governments may also not require an investor
to hire local residents as a condition for receiving any benefit, such as a tax
concession. Thus, common investment incentives provided by municipalities on the condition
that a foreign business locate in the area are effectively removed by the MAI.
Minimum Standards of Treatment
This obligation requires governments to provide due process to foreign investors and
their investments. Even if a country treats foreigners as well as locals, this obligation
sets a minimum standard of conduct that no country can fall below.
The expropriation provisions of the MAI are perhaps the agreements most
controversial element. The MAI forces governments to pay compensation whenever there is an
expropriation or "a measure equivalent to an expropriation."(11)
Under international law, the term "expropriation" is very broad and it applies
to any act where a governmental authority denies a person or company some benefit of
property.(12) The government does
not need to take title to the property; all it has to do is deny the benefit of the
investment to the investor.(13). This
international definition of expropriation is not the same as the definition of
expropriation under Canadian law--it is far wider.
The MAI is a very generous treaty when dealing with quantifying investor compensation.
An investor must receive fair market value for its expropriated property(14) . 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.
The impact of these MAI obligations is made greater on account of the absence of key
limitations in the MAI that are found in other international investment agreements, like
the NAFTA. For example, the MAI applies to all advantages granted by governments.
The term "advantage" is a broad term which may cover any government subsidy,
concession or incentive. The NAFTA specifically exempted subsidies from the application of
several parts of the Investment Chapter(15).
Provincial and municipal government subsidies that discriminate on the basis of residency
or that require local residency could be maintained under the NAFTA, but may be prohibited
by the MAI.
A similar expansion of the MAI occurs because of the broad definition of the term
"investment." Under the MAI, the term "investment" encompasses every
kind of asset owned or controlled, directly or indirectly, by an investor.(16)
This term is more broadly defined in the MAI than in the NAFTA or the Canada-U.S. Free
While municipalities are not "parties" to the MAI, they are subject to
the full extent of the obligations in the MAI although they have absolutely no right to
participate in any investor-state dispute hearings that would question their actions.
Public Health and Safety
The MAI contains no public policy exception to the requirement to pay compensation in
the event of an expropriation. Thus, if a civic government takes an action to shut down a
local business for dumping harmful waste into the local water supply, this action would
not relieve the civic government from liability for compensation. The federal government
has not included any wording in the MAI that would permit actions to conserve and protect
the Canadian environment, public health or safety. Except for a very specific exemption
from the performance requirements obligations, the MAI does not have any environmental
exceptions. This single limited environmental exemption in the MAI only permits
governments to require domestic content or provide a preference to local goods or services
the measure is not arbitrary or unjustifiable;
is not a disguised restriction on investment; and
is necessary to protect human, animal or plant life or is necessary for the
conservation of living or non-living exhaustible natural resources.
Without the inclusion of broad easily accessed environmental or public health and
safety exceptions or reservations, the MAIs broad investment rules may result in new
limits on the ability of governments to freely meet environmental challenges.
The MAIs obligations extend to the governmental allocation of concessions and
licenses. Thus, issues regarding the awarding of licenses can be the basis of an
investor-state dispute. Indeed, the refusal of a municipal government in Mexico to issue a
civic license for a waste facility is currently the basis of a $90 million NAFTA
Land Use Regulation
Municipal policies respecting land use regulation regularly impose costs upon
investors. Changes in zoning that could restrict the use of land, even including historic
designation, could result in effective claims under international law definitions of
expropriation. While under domestic law, there can be no compensation for losses caused by
changes in land use regulation; this is not true under international agreements such as
the NAFTA or the MAI.
Subsidies and Investment Incentives
The MAI national treatment obligation applies to all government measures(17) including subsidy programs and
other "advantages" provided by the government. This is a significant expansion
of the national treatment requirement in the NAFTA. Because of the national treatment
requirement, any advantage provided by a civic government must be offered to any other
foreign investor. The only discrimination that is permitted is against Canadian citizens.
The MAI requires that any investment incentives offered to local persons must be made
equally available to foreign persons(18).
These incentives cannot be based on performing specified requirements. Since small
businesses are predominately local, programs that assist them must be equally available to
foreign investments, even if they are larger.
The MAI, as currently drafted, contains no exemption for municipal government
procurement policies. At a minimum, the MAI performance requirements obligations would
severely restrict procurement policies at all levels of government. This could harm the
ability of governments to assist community-based suppliers. As currently drafted, the MAI
could require municipal governments to provide "transparent" procurement
procedures for procurement bids. These bids could be subjected to potential investor
claims alleging a violation of national treatment or minimum standards of treatment. The
coverage of municipal procurement into the obligations of the MAI would result in
increased paperwork and cost for municipal procurement.
In summary, a broad range of municipal functions would be affected by the MAI. In
addition, there are existing implications of the NAFTA for the municipal sector. While the
NAFTA does not apply to subsidies or to municipal government procurement, it applies to
new expropriation, national treatment and performance requirement measures applied made
after January 1, 1994.
Reservations are special forms of exceptions to international agreements which permit a
member to be excused from meeting a specific obligation in a specific way. Because a
reservation is a deviation from the objectives of the international agreement,
reservations are interpreted very narrowly by international tribunals.
In a document entitled "CANADA: DRAFT RESERVATIONS,"(19)
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(20). No reservations were taken to
exempt municipal governments from the obligations of the MAI. In addition, no exceptions
were included in the text of the MAI to otherwise exempt municipalities.
Even if reservations were to be made to the MAI for municipalities, it must be pointed
out that under the "rollback" provisions of the MAI, these reservations could
become subject to eventual negotiation for elimination.
Canadian businesses claim that their investments abroad will be able to obtain
advantages from the strong investment protections provided by the MAI(21).
Canadian governments, at all levels, will be forced to comply with these protections in
Canada. Canada has shown itself to be an attractive place for foreign investors to do
business. As a result, Canada has become the host state to a significant amount of foreign
investment. With the countrys existing base of foreign investors from the United
States, Japan and Europe, the implications of the MAI will immediately have effect
throughout the county.
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 have 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 system throughout the
worlds most-developed nations, this trend will only continue to grow.
The MAI investment provisions have quietly created a looming economic constitution that
protects the rights of foreign MAI investors investing in each MAI country. The need to
take policies that are consistent with these rights will have a number of implications for
1. The rules of the game are changing. Municipal governments will find that the
rules that apply to them have changed. Appreciating these changes will be even more
difficult for municipalities as they traditionally do not have experience interpreting
international investment agreements.
2. "Governments would rather switch than pay." Faced with budget
restraints and lacking expertise in international investment law, civic governments will
need to modify their policies to avoid the high damage awards that panels could assess.
However, the simple fact that large damage awards can be assessed for
internationally-inappropriate behaviour could leave municipalities unwilling to take
actions that could leave them susceptible to later international tribunal review.
3. If a government persists in its goal of implementing MAI-inconsistent actions, that
government may be forced rent back jurisdiction. Governments are able to function
freely, however, they may have to pay compensation to do what they were elected to do.
Clearly municipal governmental concerns have not been an important factor in shaping
the MAI. Instead, the desire of investors to obtain protection from municipal regulation
has been reflected. While there is still time to change the MAI, the basic structure and
content of this Agreement appears to be complete. There is little doubt that this MAI and
its investor-state dispute system will play a major role in how business will be done in
North America over the next decade. Municipalities are directly affected by this proposed
agreement and it appears that there has been little thought by national governments in
finding ways to exempt them. Indeed, some participants in the MAI negotiations have made
it clear that they are opposed to any blanket reservations or exceptions for
"sub-national" governments as they fear that they will be used as a loop-hole to
provide local preferences for local business.
Agreements like the MAI can be helpful in assuring foreign investors that their
investment is safe in Canada. However, at the same time, this Agreement will impose
significant restraints on all levels of governments. These restraints include the costs of
paying compensation awards of foreign investors and new limits on how civic governments
can operate respecting foreign businesses. Change is here whether municipalities are ready
or not. Professor McLuhans global village has come to your village, leaving
municipalities with the burden of coping with the change that is before them.
©Appleton & Associates, 1998. All rights reserved
Associate International Lawyers MAI
1. Barry Appleton is the
Managing Partner of Appleton & Associates in Toronto and New York City. He is the
NAFTA: A Concise User's Guide to the North American Free Trade Agreement. This
short paper is based on an address made to the Annual Civic Night Dinner for the Simcoe
County Kiwana's Club on January 19, 1998.
2. Marshall McLuhan, Understanding
Media: The Extensions of Man (1964).
3. See John Jackson. The World
Trading System: Law and Policy of International Economic Relations (Cambridge, MA.,
MIT Press; 1989) at 52-57 .
4. A full examination of BITs can be
seen in Rudolf Dolzer & Margrete Stevens. Bilateral Investment Treaties (International
Centre for the Settlement of Investment Disputes: Washington D.C., 1995).
5. Bilateral Investment Treaties 1959
- 1996: Chronological and Country Data Bibliography (International Centre for the
Settlement of Investment Disputes, Washington D.C., 1997) Doc. ICSID/17 at p. v.
6. This process is contained in Section
B of NAFTA Chapter 11.
7. Gary Horlick & Alicia Marti,
"NAFTA Chapter 11B, A Private Right of Action to Enforce Market Access Through
Investments," Journal of International Arbitration, Vol. 14 No.1, March 1997,
8. All references in this submission are
to the May 14, 1997 text. DAFFE/MAI (97) 1/REV 2 unless otherwise noted.
9. Governments are currently negotiating
country-specific reservations to the MAI but the scope and impact of these reservations is
still under negotiation.
10. Gary Horlick & Alicia Marti,
"NAFTA Chapter 11B" at 53.
11. Any direct or indirect
expropriation of an investment must satisfy all of the following requirements. The MAI
provision requires that it must be:
for a purpose which is in the public interest; on a non-discriminatory basis; in
accordance with due process of law; and accompanied by payment of prompt, adequate and
12. The expropriating government need
not take formal title to the property in order for there to be an expropriation. The
Iran-U.S. Claims Tribunal gave the following definition of expropriation:
It is well settled in the practice of the Tribunal, as
elsewhere, that property may be taken under international law through interference by a
State in the use of that property or the enjoyment of its benefits amounting to a
deprivation of the fundamental rights of ownership.
Sola Tiles Inc. v. Iran (1987), 14
Iran-U.S. C.T.R. 223 at 231-232, par. 29.
13. For example, see Harza
Engineering Co. v. Iran, (1982) 1 Iran-U.S. C.T.R. 499 at 504.
14. MAI Part IV: Investment Protection:
Expropriation Articles 2.2 - 2.5.
15. NAFTA art. 1108(7)(b).
16. 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.
17. The national treatment obligation
does not apply to revenue taxes (such as income taxes), but it does apply to other taxes
such as capital taxes.
18. MAI: III: Treatment of Investors
and Investments: Special Topics: Investment Incentives, page 44.
19. DAFE/MAI/RES(97)15 dated February
20. It is important to note that 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.
21. For example, see the Press Release
of the Canadian Alliance of Manufacturers and Exporters of December 5, 1997 endorsing the
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