The MAI and Canadian Forestry Products
Barry Appleton LL.B., LL.M.

Appleton & Associates International Lawyers

The Multilateral Agreement on Investment is an international investment agreement currently under negotiation by the 29 member countries of the Organization for Economic Cooperation and Development (OECD) in Paris. The goal of this agreement, known as the MAI, is to impose limits on how governments treat foreign investors and their investments. Indeed, so strong are these protections that the MAI can properly be called the most far-reaching international investment agreement in the world.

What makes the MAI so remarkable is not just its very broad definition of investment but also its unique process to protect the "rights" of investors. What's different is that if these obligations are not met, the individual investors have direct legal rights that can be brought to an international tribunal without the agreement of their home government. The MAI's "investor-state" dispute settlement process provides for a fast and effective means of settling disputes between investors and governments by bypassing domestic courts completely. Designed to provide protection for foreign investors in developing countries, the investor-state dispute process focuses strictly on settling investment disputes between individuals and governments.

The use of arbitration is not new in international law. What is new is that the MAI makes this formerly country-only process available to private citizens and their businesses. What is surprising is that these governments have agreed to accept the decisions of these international tribunals to discipline their conduct. 

The MAI requires that there be some international element involved in an investment dispute. Under the Agreement, any individual or business that is a resident of a MAI country 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 situation results in the bizarre situation where foreign companies or investors are able to access the investor-state process to protect their rights while Canadians are not. In essence, foreigners are treated better than Canadians under these rules. This basic fairness issue was raised by the Canadian Pulp and Paper Association at a recent Parliamentary review of the MAI.

Foreign investors are entitled to dispute governmental acts that harm their investments (see - What Rights Does the MAI Protect?). While provinces and municipalities are not members of the MAI, they often engage in practices to covertly help local business. Under the MAI, their actions are covered and no doubt will be a fertile source for future investor-state disputes.

An Example: The Canada - U.S. Softwood Lumber Agreement

One example of how the MAI will impact the forestry business can be seen from how the MAI's obligations would affect Canada- U.S. Softwood Lumber Agreement. This Agreement was an attempt to bring about trade peace between the two countries by imposing a tax on lumber exports above a certain level from particular provinces. The tax applies only to lumber that is exported from the "listed" provinces of British Columbia, Alberta, Ontario and Quebec. Lumber exported from other provinces is not subject to this tax.

Companies which export lumber from the listed provinces have complained that exporters cutting in non-listed provinces do not face such obstacles. The Softwood Lumber Agreement puts companies operating in non-listed provinces at an advantage over those operating in listed ones. The MAI national treatment obligations require countries to treat investments equally, regardless of their location in the country. The Softwood Lumber Agreement gives an advantage to companies which operate in non-listed provinces while discriminating against those that operate in listed provinces. This difference in treatment may constitute a breach of the national treatment provisions of the MAI.

The Softwood Lumber Agreement also could violate the performance requirement obligation as it restricts the sales of softwood lumber from Canada and it relates sales to the volume of exports, which is another MAI violation. MAI investor-state panels can award compensation to investors that have been harmed by inappropriate governmental action. The awards of these panels are not subject to any appeal.

There is little doubt that this MAI dispute system will play a major role in how business will be done in North America over the next decade. In conferring rights and remedies, the MAI investment provisions have quietly created an economic constitution that protects the rights of foreign MAI investors investing in each MAI country. Faced with ever decreasing amounts of discretionary spending, governments will begin to modify their policies so that they can avoid the high damage awards that panels could assess. With an increased class of people free to make challenges, MAI investor-state disputes are certain to become part of doing business.

Barry Appleton is the Managing Partner of Appleton & Associates in Toronto and Washington DC. He is the author of Navigating NAFTA: A Concise User's Guide to the North American Free Trade Agreement.

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