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Legal Opinion on National Reservations to the MAI

Barry Appleton LL.B, LL.M

Appleton & Associates International Lawyers

November 14, 1997

Re:   Reservations to the proposed Multilateral Agreement on Investment

You have requested our legal opinion regarding the making of reservations by the Government of Canada to the proposed Multilateral Agreement on Investment currently being negotiated by the members of the Organization for Economic Cooperation and Development (OECD). In particular, you asked us to answer the following questions:

1.   What are reservations to international treaties, how are they made and interpreted?

2.   How could potential Canadian proposed reservations for healthcare, public education, culture and the environment be interpreted by an international tribunal?

Based on the foregoing and having regard to the legal assumptions and considerations that we deem relevant, we are of the opinion that:

Reservations are unilateral statements made by governments stating that they will not be bound to an international treaty obligation. Reservations to multilateral agreements like the MAI can only be made in the manner specified by the terms of the particular treaty. It is important to note that not all government activities are capable of reservation under international treaties.

Reservations are a form of exception to international treaty commitments and are interpreted narrowly by international courts and tribunals. Great care must be taken in the making of reservations as they will be interpreted strictly by international tribunals.

(a) Canada's proposed reservation to protect social services such as health and public education is inadequate to permit provincial governments to continue to provide these services without compensating affected foreign investors and governments. This reservation contains provisions which may unduly limit the financial ability of governments to provide services such as health, public education and childcare.

(b) Canada has not yet proposed a reservation to protect culture or cultural industries. In light of the decision of recent international trade tribunals, this is an important area for reservation and leaves Canada exposed to challenge from foreign governments and foreign investors.

(c) Canada has not proposed any reservations to the MAI to permit it to take measures to protect or conserve the Canadian environment. Thus, the MAI could reduce the financial capacity of governments to freely engage in these activities.

QUESTION ONE: WHAT ARE RESERVATIONS TO INTERNATIONAL TREATIES, HOW ARE THEY MADE AND INTERPRETED?

Reservations Defined

Reservations to international treaties are a long-established diplomatic custom. Put simply, the making of a reservation allows a country to be bound by an international treaty while attempting to be excused from some specific requirement. Thus, reservations allow a country to rewrite certain treaty obligations as they will affect that country. In essence, reservations are special forms of exceptions to international agreements. A reservation differs from an exception in that an exception applies to all signatories to a treaty and is contained in the treaty's text.⁽¹⁾ By comparison, reservations apply only to the country making them and are generally only found with the "instruments of ratification" of a particular treaty or in an annex to the treaty.

The general rule of treaty law is summarized by the Latin phrase "pacta sunt servanda," which means that treaties must be observed.⁽²⁾ Since a reservation permits a country to not observe a specific treaty obligation, it constitutes a violation of this rule. Traditionally, reservations were therefore only permitted if each and every member of a treaty agreed to the reservation. However, within the last forty years, international practice has changed.⁽³⁾

Reservations are now permitted as unilateral statements made during the negotiation of a treaty. The international treaty that governs the formation and interpretation of treaties, the Vienna Convention on the Law of Treaties, defines a reservation as:

a unilateral statement, however phrased or named, made by a State, when signing, ratifying, accepting, approving or acceding to a treaty, whereby it purports to exclude or to modify the legal effect of certain provisions of the treaty in their application to that State.⁽⁴⁾

Because reservations contemplate a violation of the pacta sunt servanda rule, international law has placed certain limits upon reservations. Article 19 of the Vienna Convention states that:

A State may, when signing, ratifying, accepting, approving or acceding to a treaty, formulate a reservation unless:

(a) the reservation is prohibited by the treaty;

(b) the treaty provides that only specified reservations, which do not include the reservations in questions, be made; or

(c) in cases not falling under sub-paragraphs (a) and (b), the reservation is incompatible with the object and purpose of the treaty.

The May 14, 1997⁽⁵⁾ version of the Multilateral Agreement on Investment ("MAI") is currently under negotiation. While part IX of the MAI is entitled "RESERVATIONS," it currently does not contain a process that permits the making of reservations by its signatory countries. All that is certain is that the current draft contemplates the making of reservations--which is an important factor based on the Vienna Convention.

The MAI does contemplate a process known as standstill and rollback. Standstill refers to governments agreeing not to ever take new measures that would impair the interests of foreign investors and their investments. Rollback refers to a mechanism where existing inconsistent measures, such as reservations, will be reduced and eventually removed over time. Reservation lists provide very convenient starting points for future rollback negotiations and often reservations themselves provide for their own rollback through "phase-out" provisions.

How Reservations Are Made

There are a number of important considerations about the making of the reservations to the MAI that have yet to be negotiated. The MAI lacks a list of obligations that can be reserved against and a process for the making and interpretation of the reservation. This lack of a process is problematic for anyone attempting to understand the MAI as the wording of what can be reserved can often be as important as the wording of the reservations themselves.

In the GATT, 1947, there was no specific mention of reservations. As a result, the making of each reservation required the acceptance of every other GATT member.⁽⁶⁾ Nearly fifty years later in the NAFTA, there was a specific process that permitted the making of unilateral reservations.

In the NAFTA, countries were entitled to list reservations from a number of treaty obligations regarding investment, trade in services and financial services. The NAFTA reservation process required that there be a listing of measures within the NAFTA annexes at a specified time⁽⁷⁾ with all reservations proposed after that time being invalid.

Bound versus Unbound Reservations

In the NAFTA there were two different types of reservations permitted against investment obligations: bound and unbound. This terminology comes from the custom of international trade negotiations where a country would be required to reduce tariffs by a specific amount. In this context, each tariff concession became known as a "binding."⁽⁸⁾ Thus a bound reservation permits a government to maintain a specific existing non-conforming measure which would otherwise violate a treaty obligation. Governments are locked into a specific type of conduct and while they are permitted to amend these measures in future, they never can do so in a way that is less "trade-liberalizing." Unbound reservations differ from bound ones as they permit governments to not only maintain the existing non-conforming measures, but they allow the making of new ones in the future. In other words, unbound reservations permit governments the broadest ability to act under an international agreement including introducing measures which are more trade restrictive.

The commentary to part IX of the MAI indicates that there is agreement for having bound reservations to the MAI but there is some debate between counties as to whether there should be unbound reservations permitted as "such a provision might undermine the MAI disciplines to which it applied."⁽⁹⁾

Under either bound or unbound reservations, the type of government activity that can be reserved under the NAFTA is exceedingly broad. The NAFTA defines the term "measures" to include "laws, regulations, procedures, requirements or practices." By comparison, there is no similar definition of the term "measures" under the MAI.

Specific versus Sectoral Reservations

The reservation process within a multilateral treaty will set out how specific a reservation has to be. For example, in the NAFTA, the bound reservations in Annex I were required to be very specific by listing the existing non-conforming government measure. The unbound reservations in Annex II were broader in nature as only sectors of the economy (such as telecommunications) needed to be listed. By using sectoral reservations, negotiators are easily able to preserve a much larger area of government policy authority than if they are required to list every specific government measure in the area.

In the NAFTA, Canada took unbound sectoral reservations for :

• aboriginal affairs;⁽¹⁰⁾
• residency requirements attached to the ownership of oceanfront land;⁽¹¹⁾
• telecommunication transport networks and services, radio-communications and submarine cables (i.e. "basic" telecommunication services);⁽¹²⁾
• minority affairs;⁽¹³⁾ and
• law enforcement, corrections and specific aspects of social services.⁽¹⁴⁾

Reservable Obligations

In the NAFTA, investment reservations could only be taken against the following specific NAFTA investment obligations:

• National Treatment
• Most-Favoured-Nation Status
• Performance Requirements
• Senior Management and Boards of Directors

Thus, under the NAFTA, a government could not make any reservation to the Investment Chapter obligations regarding the payment of compensation on expropriation, the regulation of transfers, meeting international minimum standards of treatment or lowering standards to attract investment. In the MAI, it will be very important to understand against what obligations governments will be entitled to reserve. If the MAI permits reservations against expropriation, there will be a significant difference in coverage between investment agreements like the NAFTA and the MAI. The failure to permit the making of reservations to expropriation obligations, on the other hand, may severely restrict government policy making ability.

In addition, the definition of the types of reservable government action is important. In the NAFTA , governments were entitled to reserve against a broad variety of governmental activity which included laws, regulations, decisions of administrative bodies, policies of governments and even the discretionary actions of officials. The MAI does not contain any definition of what measures will be covered. The commentary to part IX of the MAI indicates that there is disagreement regarding which MAI obligations would be reservable.⁽¹⁵⁾ Without such a definition, it is difficult for governments to be able to make effective reservations or governments may believe that they have effectively reserved policies but later find that such policies are not reservable.⁽¹⁶⁾

Treaty Interpretation

The reservation process must be assessed in the context of how reservations are interpreted. Since the purpose of reservations are to enable a government to maintain non-conforming actions in future, it is essential that the reservation wording be carefully reviewed.

The International Law of Treaty Interpretation.

The international rules of treaty interpretation have been set out in articles 31 and 32 of the Vienna Convention. Article 31 states:

General Rule of Interpretation

1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.

2. The context for the purpose of the interpretation of a treaty shall comprise in addition to the text, including its preamble and annexes:

a) Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;

b) Any instrument which was made by one of more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.

3. There shall be taken into account, together with the context:

a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;

b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;

c) Any relevant rules of international law applicable in the relations between the parties.

4. A special meaning shall be given to a term if it is established that the parties so intended.

The Ordinary Meaning

Article 31(1) requires a treaty to be interpreted in its ordinary meaning and in light of its object and purpose. The textual approach suggests that the words of the text be given their ordinary meaning, which may be established through the study and analysis of the text. This view was endorsed by the International Court of Justice when it was considering the Charter of the United Nations. The Court held:

The Court considers it necessary to say that the first duty of a tribunal which is called upon to interpret and apply the provisions of a treaty, is to endeavour to give effect to them in their natural and ordinary meaning in the context in which they occur. If the relevant words in their natural and ordinary meaning make sense in their context, that is an end of the matter.⁽¹⁷⁾

Article 31(1) also calls for a teleological interpretation--which means that a treaty must be given a meaning consistent with the object and purposes as a whole.⁽¹⁸⁾

Interpreting the MAI

The MAI does not define its objects and purposes. The MAI, unlike other international agreements such as the NAFTA, does not contain a special section setting out the objectives of the agreement. Thus, the preamble of the MAI became the main vehicle relating the objects and purposes of the MAI. The predominant purpose of the MAI is the fostering of fair, transparent and predictable regulation of foreign investment.

While under the MAI, the preamble language does not create any binding international obligations. The preamble provides an interpretive context for the entire agreement under the international rules of treaty interpretation. Thus, even if the words of the preamble are not binding, they will have an important interpretive effect on the entire agreement. The preamble to the MAI establishes the framework through which this agreement should be interpreted. It reads:

When looked at together, the preamble creates an agreement that is predominantly concerned with the predictable protection of foreign investment and investors. This is the general objective and purpose that a tribunal interpreting the MAI would keep in mind.

Preparatory Works

Article 31(2) of the Vienna Convention provides that one can look to the "preparatory work of the treaty and the circumstances of its conclusion" in order to confirm the textual interpretation of the treaty. It is unknown whether there is any travaux préparatoires being maintained for the MAI, or if one is maintained whether it will be made public. Should it become public, it may be instrumental in interpreting any provision in question. At this point, the commentary to the MAI may provide interpretive assistance as a supplementary tool under Article 32 of the Vienna Convention but it does not constitute a travaux préparatoires.

Subsequent Agreement of the Parties

Article 31(3) allows interpreters to take into account subsequent agreements or practice of the parties after the conclusion of agreements. However, for such practice to apply for a multilateral agreement, it would be necessary to demonstrate that all parties to the MAI shared the practice or assented to the document.

Particular Definitions

Article 31(4) allows the Parties to ascribe a particular definition to a word or phrase used in the treaty.

Supplementary Interpretation

Article 32 of the Vienna Convention which may be employed should there still be any doubt as to the meaning. Article 32 of the Vienna Convention allows for a supplementary means of interpretation when the usual rules of interpretation prove to be inconclusive. Article 32 reads:

Reservations to the MAI will be interpreted in accordance with these complicated rules of international law. In order to reduce this complexity, the NAFTA contained specific rules for the interpretation of reservations. These rules generally provided for an interpretive hierarchy where the descriptive element of a reservation would be used to qualify the actual listing of the measure.

The absence of these rules from the MAI will make it more difficult for governments to be able to effectively use reservations to permit them to maintain otherwise inconsistent measures.

International law has a special interpretive principle for the interpretation of exceptions. This rule is expressed in Latin as exceptio est strictissimae applicationis which means exceptions to treaty obligations are construed restrictively.⁽¹⁹⁾ Similarly, within the decisions of the GATT and the WTO, exceptions to trade obligations have been narrowly interpreted.⁽²⁰⁾ Reservations operate as "mini-exceptions" to a treaty and their use always creates tension between the liberalizing goals of the treaty and the competing goal of maintaining effective government policy tools. These competing goals are likely to lead to disputes as the views of foreign investors may often be different than that of the host government. Despite the protestations of governments when making or when relying upon reservations that they are broad, reservations will be strictly and narrowly interpreted by international tribunals.

In a document entitled "CANADA: DRAFT RESERVATIONS,"⁽²¹⁾ the Canadian 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 however there are significant differences in the effect of the MAI reservations because of the difference in wording between the wording of obligations in the MAI and the NAFTA.

Healthcare, Public Education & Childcare

In this draft reservation document, Canada has made the following sectoral reservation for social services:

Canada's MAI obligations will affect all levels of government in Canada. However, this reservation only permits the federal government to take actions that are otherwise inconsistent with the MAI. Despite the fact that most social services are provided by province and municipal governments, Canada has not taken any measure to protect them against the obligations of the MAI. This would result in making public education provided by provincial and local governments subject to the MAI without any relief. Similarly, provincially-provided health care, child care and training programs would be covered by the obligations of the MAI while federally delivered programs (such as those delivered on military bases or for aboriginal persons) would be covered by the reservation.

This wording of the description part of Canada's MAI reservation is identical to the reservation taken by Canada at II-C-9 in the NAFTA and substantially identical to the Mexican and American reservation at II-U-5 and at II-M-11.⁽²²⁾ On careful review however, it is apparent that Canada's reservation to the MAI for social services is significantly smaller than Canada's reservation under the NAFTA since it only applies to the federal level.

While the failure to exempt provincial programs is an obvious flaw in Canada's reservation, even if the MAI reservation were to be identical to the NAFTA one, there still are significant issues relating to the actual protection provided by this reservation. While the reservation purports in its title to cover social services, it actually only totally covers the provision of public law enforcement and correctional services. All the other areas covered by this reservation are qualified as they are only covered to the extent that they are "social services established or maintained for a public purpose."

These terms are not defined by the MAI. This leaves a significant interpretative question open as to the scope of this reservation. This is particularly important due to differences in approach among governments within the OECD. For example, Canadian provinces have long maintained health care as a public social service. In other OECD jurisdictions, such as Mexico or the United States, these activities are delivered almost exclusively by the private sector or are not accessible to all. Similarly, public education is only delivered at the primary level in Mexico as a public service and as a commercial service after that point.

The concern over the meaning of the term "social service" can be seen from the position of the U.S. government. In a letter advising American state governments on what to reserve as a social service under the NAFTA social service reservation, the U.S. government suggested that social services provided by for-profit providers were not social services.⁽²³⁾ According to the U.S. government, such for-profit providers can transform the service from a "social service" to a commercial service. These American guidelines state:

[NAFTA] Chapters 11 and 12 only apply to the provision of "government services" (i.e. law enforcement, correctional services, social welfare etc.) by NAFTA investors/service providers if the state allows private providers to offer similar services on a commercial basis.⁽²⁴⁾

Since the proposed MAI reservation deals with a sectoral reservation, the adoption of such a definition could render Canada's reservation to be virtually meaningless for health, public education and childcare as each has aspects provided by commercial providers in Canada.

Without having any specified meanings, it is necessary to rely upon the international rules of treaty interpretation to give meaning to this MAI reservation. Such a process would be unpredictable and any government relying only on such a non-specific definition would do so at its peril. For example, one can look to the general usage of the terms used in the reservation. An examination of the definitions of social service and public purpose is instructive of their meaning.

Social Services

This term is capable of a number of different definitions. The Oxford English Dictionary defines the term "social service" as:

A service supplied for the benefit of the community, especially any of those provided by the central or local government, such as education, medical treatment, social welfare, etc.

There is no definition of the term "social service" in the decisions on international courts and tribunals. All that one can surmise from the term is that it refers to services that provide public welfare benefits. The indication from the U.S. Trade Representatives Office that these same social services could change into commercial services if provided by for-profit providers suggests that the term has significant limits.

Public Purpose

The term public purpose is not defined in the MAI but it appears in the expropriation provision as an expropriation may only occur if it is taken for a public purpose. In this context, the phrase public purpose has been discussed extensively, as has the analogous terms public use, public policy or its civil law equivalent, ordre public. The term ordre public was examined by the International Court of Justice in the Boll Case. In the separate opinion of Judge Sir Hersch Lauterpacht, he stated:

Because determination of the public or national interest in any specific situation can only be effected by the State concerned, it is hardly conceivable that it can be reviewed or contested by another organ.⁽²⁷⁾

Thus, one must conclude that the term "public purpose" is very broad and will permit Parliament to decide what is in Canada's national interest. This determination would be very difficult for another country to challenge.

Conclusion

On the basis of the foregoing, we are able to conclude that there is a considerable amount of uncertainty in the meaning to be given to the words of the Social Service Reservation, especially for the phrase social service. Despite the use of the broad term "public purpose" in the Social Service Reservation, this will not extend the scope of coverage of this reservation. The term "social service" is much more limited in scope and it will limit the usefulness of the reservation. The definition of this term will need to reflect the varied backgrounds of OECD members such as Turkey, Mexico, the United States, Germany and Japan. The MAI does not set out any meaning for this term and it has not been the basis of any international court review. Accordingly, we can only be certain of the simple fact that there is no clear definition for this term. This is especially problematic because of the differences in how OECD governments actually provide these social services and the fact that there is a different definition in use by the U.S. Government.

In our opinion the protection for the provision of health, public education and other social services under the MAI is inadequate.  If Canada is to rely upon an MAI reservation that will be identical to its NAFTA Social Service Reservation, then this reservation will not be broad enough to cover important obligations such as expropriation.

1.   The wording of the reservation is ambiguous and qualified. We believe that this reservation could be reworded to provide fuller protection for the social services it wishes to cover.

2.   The reservation does not extend protection to provincial or local governments who primarily provide social services such as health care, primary and secondary education or child care.

All that we can conclude is that there is significant uncertainty in this term and that governments should take prudent measures to best protect themselves from any future narrow reading of this term by a panel.

Culture

The Government of Canada did not make any reservations in its proposed reservations for the area of culture. Culture and cultural industries are an area that would be significantly affected by the obligations of the MAI. Government measures that attempted to maintain, develop or foster made-in-Canada culture would be inconsistent with the goals of the MAI. Any policy or program⁽²⁸⁾ that advantaged Canadian culture or content directly or indirectly, would run afoul of the national treatment or performance requirements obligations. Examples of the government policies that would conflict with the MAI include:

1. Policies taken to create a Canadian film distribution policy that would link domestic sales to domestic film production would contravene the performance requirement provisions of the MAI.

2. Policies that support Canadian movie and television productions by requiring the involvement of a Canadian broadcaster or distributor.

3. Programs that look at the prior use of Canadian programs as a criteria for accessing future benefits.

4. Advantages to print publications containing Canadian content such as the postal subsidy.

5. Requirements compelling a specific percentage of Canadian content in programming for television, radio or cinema.

6. Licensing decisions that favour Canadians for telecommunications services, broadcasting access or preferential channel line-ups.

Each of these specific examples would require coverage by a specific reservation to the MAI or by an exception. Otherwise, the Government of Canada would be liable to compensate foreign investors who were denied access to Canada or were otherwise harmed by these "MAI-illegal" policies to promote and preserve Canadian culture.

The recognition that the principle of free trade is inconsistent with the goal of cultural protection has been recognized by the Government of France. Contained in an Annex to the MAI is a proposal from the Government of France entitled "INTRODUCTION OF AN EXCEPTION CLAUSE FOR CULTURAL INDUSTRIES."⁽²⁹⁾ This exception reads:

Nothing in this agreement shall be construed to prevent any Contracting Party to take any measure to regulate investment of foreign companies and the conditions of activity of these companies, in the framework of policies designed to preserve and promote cultural and linguistic diversity.

This proposed exception differs from the "cultural exemption" contained in the Canada-U.S. Free Trade Agreement which reads:

1. Cultural industries are exempt from the provisions of this agreement, except as specifically provided in Article 401 (Tariff Elimination), paragraph 4 of Article 1607 (divestiture of an indirect acquisition) and Articles 2006 and 2007 of this Chapter.

2. Notwithstanding any other provision of this Agreement, a Party may take measures of equivalent commercial effect in response to actions that would have been inconsistent with this Agreement but for paragraph 1.⁽³⁰⁾

The NAFTA incorporated this earlier bilateral exemption by incorporating it into NAFTA Annex 2106 and providing that the rights and obligations under the earlier agreement were the same as the ones in the NAFTA. Thus, new NAFTA obligations such as the protection of intellectual property rights or investor-state dispute settlement cannot be invoked for cultural industries.

Investment issues abound in the area of culture. Obligations within the MAI such as national treatment, performance requirements and expropriation all can be used to prevent governments from creating or maintaining culture policies to enhance distinctive domestic cultures. Indeed, on the basis of the WTO appellate decision on Canadian magazines, Canadian cultural policies such as the postal subsidy would violate the national treatment rules proposed in the MAI. Similar concerns could also arise from policies over the creation of a national film distribution scheme or by the widespread practice of basing arts funding on previous local activity. Trade tribunals have come to the conclusion that Canadian cultural products are fungible and interchangeable with products from other countries. To an international tribunal, Macleans magazine is considered to be the same as American publications such as Newsweek. Thus, international trade agreements have viewed domestic policies which encourage domestic cultural products to be impediments to global trade.

Conclusion

The exception proposed by the Government of France seems to be broad enough to provide protection for Canadian culture, however, any reduction in the scope of this exception would leave Canadian culture at risk. Powerful lobbies in OECD countries do not support this exception as it would mark a retreat in the level of international protection for global cultural industries from the NAFTA.

If Canada were to find a less extensive cultural exception, it would need to make a number of reservations to the MAI in an attempt to protect Canadian cultural policies and programs. It has been the public position of the Government of Canada that it will take actions to protect Canadian culture from the effects of the MAI. Given this position, it is surprising not to find a proposed listing of general unbound reservations for culture in Canada's MAI reservations to provide specific acknowledgment that culture is fully protected from the effects of the MAI.

The Environment

The tension between free trade and environmental protection has never been greater as governments have been forced to deal with the seemingly conflicting goals of accommodating environmental concerns while still expanding trade liberalization. Attempts by states to address environmental issues have often run into two problems: either the measure taken by the government has been accused of constituting an arbitrary means of discriminating against non-nationals; or in dealing with a problem that extends beyond the geographic borders of the country, the measure has attempted to impose burdens upon foreign entities as well as on domestic ones.

The conflict between trade and the environment is complicated by a lack of international consensus on environmental measures. This lack of international consensus has often resulted in countries taking unilateral measures to deal with environmental issues that are critical to them.⁽³²⁾ Against the backdrop of countries finding an increasing need for taking environmental measures, one finds an ever expanding framework of international trade agreements.

Except for a very specific exemption from the performance requirements obligations, the MAI does not contain any environmental exceptions. Further, Canada has not included any reservations within the MAI that would permit governments to take measures to conserve and protect the Canadian environment. The environmental exemption in the MAI permits a government to require domestic content or provide a preference to local goods or services only if:

• 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.

The MAI does not contain any general exception clause that would clearly permit governments to take environmental measures that could otherwise offend the many other obligations in the MAI. Without the inclusion of broad easily accessed exceptions or reservations, the MAI's broad investment rules may result in new limits on the ability of governments to freely meet environmental challenges. There are a number of types of environmental measures that could trigger liability on the part of governments under the MAI. Some of these measures might include:

Remediation orders to prevent toxic seepage.

Changes to existing concession licenses to protect fisheries, flora or fauna.

Changes to land use regulations that would reduce the value of property for a foreign investor.

Preventative measures taken to protect public safety that caused loss or harm to foreign investors.

Requirements that only environmentally-acceptable resource extraction techniques be used that would increase the cost of extraction.

The Experience of Environmental Exceptions in Trade Agreements

It has been suggested that there will be no need to make reservations to the MAI for the environment because the agreement may contain a number of environmental exceptions. However the use of environmental exceptions in international trade agreements has demonstrated that they are not an effective means for governments to take measures to protect the environment.

GATT panels have interpreted these GATT exceptions narrowly. One of the key concerns over the use of GATT exceptions is their effect which can lead to the distortion of international trade. Thus, measures taken by a country which arguably overshoot their purpose have not been accepted to fit within the trade law exceptions.

For example, to justify an environmental measure governments must prove the "necessity" of a measure. This term was examined in some detail during the GATT Panel on Section 337 of the U.S. Tariff Act. The panel held that a party could not justify its measure as being "necessary" if there could be an alternative measure which could reasonably be expected to be used and which was not inconsistent with GATT obligations. Furthermore, if no GATT-consistent measure was reasonably available to the government, it would be necessary to choose a measure that had the "least degree of inconsistency with other GATT provisions."⁽³³⁾ In essence, the GATT established that in order to rely on a GATT exception, it is up to the justifying party to establish that the measure was the least-trade burdensome alternative available.

The necessary test was examined when Thailand attempted to rely on GATT Article XX(b) to ban foreign cigarettes. The Thai Government imposed an import ban, quantitative import restrictions and discriminatory internal taxes on foreign cigarettes. This issue was raised to a GATT panel which ruled that these broad measures were not consistent with the GATT Article XX(b) exception.⁽³⁴⁾ The Panel accepted the fact that smoking constituted a serious risk to human health, however the panel did not find that the Thai actions were necessary.⁽³⁵⁾

A similar situation was considered in the Canada-U.S. Free Trade Agreement panel on Herring and Salmon,⁽³⁶⁾ where Canada argued that its export prohibition was made effective in conjunction with restrictions on domestic production, namely, strict domestic production controls limiting the amount of fish caught. The Panel agreed that Canada's fish harvest limitations constituted a restriction on domestic production within the meaning of the GATT Article XX(g). However, in this case, the Panel ruled that the measure was not reasonable as it put too onerous a burden on American fishery workers who had to land their entire catch in Canada for inspection. The panel did suggest that a landing requirement of 20-30% of the catch would have been reasonable under the circumstances.

Finally, in the American Tuna-Dolphin case,⁽³⁷⁾ a GATT panel dealt with the issue of extra-territoriality. In this case, the U.S. Government passed a law, the Marine Mammal Protection Act,⁽³⁸⁾ which imposed a ban on all tuna caught by countries using nets that incidentally killed dolphins at a rate 1.25 times higher than the rate of American boats operating in the same waters at the same time.⁽³⁹⁾ The Government of Mexico challenged this measure as being an import ban that was contrary to GATT Articles XI and XX. Mexico also protested the measure as an extra-territorial regulation of its fishing industry.

The GATT panel hearing this case agreed with Mexico in that the U.S. measure attempted to impose American jurisdiction in areas outside of its jurisdiction. Based on the drafting history of the GATT Article XX exceptions, the Panel held that the GATT Article XX(b) exception could not be used to protect the environment outside of U.S. territory.

Furthermore, the panel also ruled on the "necessary" requirement of the GATT Article XX exceptions. They held that the measure had to be necessary to the product and not to its production process. In other words, the United States could ban all tuna, but not tuna captured by a certain method.

The second GATT Article XX exception that could relate to the environment is Article XX(g). This exception permits Parties to take measures "relating to the conservation of exhaustible natural resources." The 1988 GATT panel on Herring and Salmon ⁽⁴⁰⁾ held that the term "relating to" meant that the measure had to be primarily aimed at conservation. While this appears to be less strenuous than the "necessary" test contained in Article XX(b), it still imposes a significant burden.

Precautionary Principle

The MAI may include a reference to the Rio Declaration on Environment and Development and Agenda 21 in its preamble. Incorporated in the Rio Declaration is the precautionary principle which states:

In order to protect the environment, the precautionary approach shall be widely applied by States according to their capabilities. Where there are threats of serious or irreversible damage, lack of full scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.

In order to comply with the precautionary principle, a government measure must:

(i) be in response to a threat of serious or irreversible damage to the environment;

(ii) be cost-effective;

(iii) be for the purpose of preventing environmental degradation;

(iv) involve some degree of scientific certainty; and

(v) be within the capabilities of the government.

The Rio Declaration is not legally binding. It is a statement of principles based on Agenda 21 and according to which Agenda 21 is to be carried out.⁽⁴¹⁾ As a mere declaration, it has not been signed by any country. Agenda 21 is not legally binding as it states its intention "[t]o promote, through the gradual development of universally and multilaterally negotiated agreements or instruments, international standards for the protection of the environment . . . [and] . . . to ensure the effective, full and prompt implementation of legally binding instruments."⁽⁴²⁾

The Permanent Court of International Justice has held that a treaty provision must take precedence over a general rule of international law.⁽⁴³⁾ This principle was reflected in the recent WTO Panel Report on EC Beef Hormones. In this decision, the Panel held that the precautionary principle could not be used to override the explicit wording of the treaty obligations.⁽⁴⁴⁾ Thus, without a clearly stated broad exception or reservation, the investment obligations of the MAI will override environmental measures taken by governments.

Conclusion

The goal of environmental protection has suffered from every decision taken by international trade tribunals. This history of loss, including cases involving Canada, clearly indicates that the present wording of environmental exceptions in the WTO Agreement is inadequate. The MAI fails to even meet the same level of environmental exceptions as the WTO.

Canada has failed to propose reservations to protect the ability of governments to take environmental measures that would otherwise violate the MAI. As a result, Canada has chosen to voluntarily bind itself, its provinces and its municipalities to obligations which protect investments over the environment.

Assumptions

In coming to our opinion, we have consulted the provisions of the North American Free Trade Agreement ("NAFTA"), the May 14, 1997 English version of the MAI and other relevant international and municipal legal materials. This opinion relates only to the laws of Canada and to international law applicable in Canada as such laws existed at the time of the writing of this opinion. While we have tried to be as accurate and comprehensive as possible, this opinion is subject to the following qualifications:

Final Conclusions

Based on the foregoing and having regard to the legal assumptions and considerations that we deem relevant, we are of the opinion that:

Yours very truly,

Appleton & Associates



Barry Appleton LL.B., LL.M.

Managing Partner

©Appleton & Associates International Lawyers, 1997, 1998 All rights reserved.
Please note the terms under which this information is provided to you

1. An exception to an international treaty is a provision which permits all the signatories to an international agreement to take actions that would otherwise conflict with the treaty.

2. This rule is set out in Article 26 of the Vienna Convention on the Law of Treaties.1155 U.N.T.S. 331[hereinafter Vienna Convention].

3. See discussion on this topic in Ian Brownlie. Principles of Public International Law (4^th ed.) (Oxford: Oxford University Press, 1990) at 608 - 611.

4. Article 2(1)(d).

5. DAFFE/MAI (97) 1/REV 2.

6. John Jackson. World Trade Law and the Law of the GATT (Charlottesville: Michie, Publishing, 1969) at pp 71 - 72.

7. For example, on the entry of the Agreement into force.

8. See John Jackson. The World Trading System: Law and Policy of International Economic Relations (Cambridge, MA., MIT Press; 1989) at 118 - 119.

9. MAI p. 154 par. 4.

10. NAFTA annex II, Schedule of Canada at II-C-1.

11. NAFTA annex II, Schedule of Canada at II-C-2.

12. NAFTA annex II, Schedule of Canada at II-C-3 and II-C-5.

13. NAFTA annex II, Schedule of Canada at II-C-8.

14. NAFTA annex II, Schedule of Canada at II-C-9.

15. MAI p. 154 par. 6.

16. For example, a government may wish to reserve a measure that came into law after the MAI came into force but that reflected an earlier government policy. Without a definition of the term "measure," it may not be possible to effectively reserve such a policy.

17. Competence of the General Assembly For The Admission Of A State To The United Nations, [1950] I.C.J. Rep. 4 at 8 (Advisory Opinion).

18. This approach has been referred to as the Principle of Effectiveness.

19. Interpretation of Article 79 of the 1947 Peace Treaty (French/Italian Conciliation Commission) XIII, UNRIAA 397. Case Concerning Certain German Interests in Upper Silesia PCIJ, Series A, No. 7, p. 56 and Free City of Danzig case, PCIJ Series A/B, No. 65 at 71.

20. For example see the restrictive positions taken by GATT/WTO panels in United States - Restrictions on Imports of Tuna DS21/R and United States - Standards for Reformulated and Conventional Gasoline. WT/DS/9.

21. DAFE/MAI/RES(97)15 dated February 24, 1997.

22. It should be noted that the Mexican and American reservations, unlike Canada's, do not extend to reserving against most-favoured-nation treatment.

23. Inside NAFTA, Nov. 29, 1995.

24. Draft USTR Guidelines for U.S. States' NAFTA Service Reservations: Guidelines for NAFTA Non-Conforming State Measures, published in Inside NAFTA, November 29, 1995 at 18.

25. Case concerning the application of the Convention of 1902 governing the Guardianship of Infants (Netherlands v. Sweden), [1958] I.C.J. 55.

26. R. Dolzer & M. Stevens, Bilateral Investment Treaties (The Hague: Martinus Nijhoff, 1995) at 104.

27. Abi-Saab, "Permanent Sovereignty over Natural Resources and Economic Activities," in International Law: Achievements and Prospects, ed. M. Bedjaoudi (1991) at 609.

28. Other than tax incentives such as tax credits or accelerated depreciation.

29. MAI p. 167.

30. Canada-U.S. Free Trade Agreement Article 2005. These articles detail obligations regarding retransmission rights and print-in Canada publishing requirements.

31. Canada - Certain Measures Relative to Periodicals, Doc. WT/DS31/AB/R, June 30, 1997 at 28.

32. For example, in 1995, Canada extended its maritime jurisdiction to the entire Grand Banks in order to conserve fish stocks in the wake of extreme fragility. In 1970, Canada also unilaterally asserted jurisdiction to the environmental protection of Arctic waters that were beyond its then-100 mile jurisdiction.

33. United States - Section 337 of the Tariff Act of 1930, adopted Nov. 7, 1989, BISD 36S/345.

34. Thailand - Restrictions on Importation of and Internal Taxes on Cigarettes. GATT Doc. DS10/R, adopted Nov. 1990, BISD 37S/200.

35. In coming to this conclusion, the panel relied on a report from the World Health Organization that found that non-trade discriminatory measures such as product labeling or advertising bans could limit the health risk. Relying on the GATT Panel's interpretation on the term "necessary" in the American dispute on Section 337, the panel in the Thai cigarette case decided that since there was a way of protecting health in a less-trade distorting manner, the panel held that the Thai measures were unnecessary and thus GATT-inconsistent.

36. In the Matter of Canada's Landing Requirement for Pacific Coast Salmon and Herring, Final Report of the Panel under Chapter 18 (Oct. 16, 1989).

37. United States - Restrictions on Imports of Tuna, GATT Panel Report No. DS21/R, (Sept. 3, 1991).

38. Codified in part at 16 USC 1371(a).

39. Trade and the Environment, ECONOMIST, Feb. 27, 1993, at 25, cited in Kelly Jude Hunt, International Agreements in Conflict with GATT-Greening GATT after the Uruguay Round Agreement, 30 International Lawyer, Spring 1996, at 179.

40. Report of the Panel in Canada - Measures Affecting Exports of Unprocessed Herring and Salmon, adopted Mar. 22, 1988, BISD, 35S/114.

41. Report of the United Nations Conference on Environment and Development, A/CONF.151/26 (Vol. I), Chapter 1 - "Preamble" (adopted 12 August 1992) at para. 1.6. See also, M.F. Strong, "Beyond Rio: Prospects and Portents" 4 Colo. J. Int'l Envtl. L. & Pol'y 21 (1993), in which the author characterizes the Rio Declaration as no more than a statement of principles, providing a basis for voluntary cooperation and paving the way for the negotiation of binding agreements. Mr. Strong was UNCED Secretary-General at the Earth Summit, June 1992.

42. A/CONF.151/26 (Vol. III), Chapter 39 - "International Legal Instruments and Mechanisms," at paras. 39.3 (d) and (e).

43. Wimbledon (1923), P.C.I.J. Rep., Ser. a, No. 1.

44. EC Measures Concerning Meat and Meat Products (Hormones), WTO Panel Report No. WT/DS26/R/USA (18 August 1997) at page 202.

©Appleton & Associates International Lawyers, 1997, 1998 All rights reserved.
Please note the terms under which this information is provided.