Trade Agreements: How ISDS provisions can undermine domestic public interest regulation

PAPER: Seeking a Regulatory Chill in Canada: The Dow Agrosciences NAFTA Chapter 11 Challenge to the Quebec Pesticides Management Code

Kathleen Cooper, Kyra Bell-Pasht, Ramani Nadarajah, and Theresa McClenaghan, Seeking a Regulatory Chill in Canada: The Dow Agrosciences NAFTA Chapter 11 Challenge to the Quebec Pesticides Management Code, 7 Golden Gate U. Envtl. L.J. 5 (2014).

http://digitalcommons.law.ggu.edu/gguelj/vol7/iss1/4

Seeking a Regulatory Chill in Canada: The Dow Agrosciences NAFTA Chapter 11 Challenge to the Quebec Pesticides Management Code: This insightful and thoughtful 45 page document is well worth reading – below are a series of extracts contained within 7 A4 pages – an attempt to consolidate a lot of the text into a shorter document but to still help people grasp the implications of ISDS arbitration –  with full references to which page information comes from within the original document. The only intent in transcribing sections of the longer document is to facilitate more understanding of how ISDS provisions within trade agreements have the potential to challenge decisions by governments that act with public and environmental welfare as the first priority. RITE's hope is that reading the shorter extracts will lead the reader to consult the complete original document.

Part I Introduction – Extract:

In 2008, NAFTA’s Chapter 11 investor rights provisions intersected with this twenty-year effort to limit cosmetic pesticide use. Dow AgroSciences (Dow), a United States-based chemical manufacturer, gave notice that it would challenge the Québec Pesticides Management Code arguing that Canada was in breach of the minimum standard of treatment and expropriation provisions of Chapter 11. These provisions, and subsequent sections of Chapter 11, allow companies to sue countries if their expected returns on investment are reduced by government actions. (Page 3)

Dow sought $2 million in compensation, based on an alleged lack of due process in the passage of Québec’s law and damage to its investment in Canada. Notably, the Dow claim was focused on its commercial interest in a single pesticide, 2,4-Dichlorophenoxyacetic acid (2,4-D). Though 2,4-D was among the pesticides heavily used for cosmetic purposes the Québec law and many local by-laws in Québec and across Canada, as well as other provincial statutes, had to do with many more pesticides. (Page 3.)

Part II COSMETIC PESTICIDE BANS IN CANADA

RITE note: Outlines the situation in Canada, increasing environmental awareness, the actions of Hudson, Québec in adopting a by-law restricting pesticides in 1991 on public and private property. In 1992 the municipality charged 2 landscaping companies with breach of the by-law. The Québec Superior Court affirmed the ruling restricting pesticides. Nearly ten years later the companies appealed to the Supreme Court of Canada. In 2001 the Supreme Court upheld that the by-law was valid. (Page 8)

After the decision many municipalities across Canada, following public demand, enacted similar by-laws. Today there are over 170 pesticide by-laws in Canada.

In 2008 Québec implemented legislation banning certain pesticide uses on a province-wide basis. (Page 12)

‘More generally, the precautionary foundation of the Québec law derived from the opinion of public health experts who stated in an earlier report from the Québec National Public Health Institute that based on “data which are presently available, the fact that certain aspects remain poorly understood, and the increased vulnerability of certain groups provide ample reason to justify taking a prudent approach and applying the precautionary principle with respect to pesticide use.’ (Page 14.)

‘In May 2008, PMRA finalized its re-evaluation process and allowed the continued sale and use of certain products containing 2,4-D, including those used for lawn and turf…… Despite the results of PMRA’s re-evaluation of 2,4-D, both Quebec and Ontario maintained their approach of banning this pesticide for cosmetic purposes.’ (Page 14/15)

‘In summary, for more than fifteen years diverse civil society groups in Canada sought and obtained precautionary public policy support to reduce health and environmental risks from the non-essential use of pesticides.103 While 2,4-D often received the most attention throughout this debate,104 the bans were never intended to be confined to this single pesticide.’ (Page 16)

‘… in the courts, particularly in Canada’s highest court, procedural rights enabled public interest organizations and citizens to bring much broader considerations of public policy than just the arguments advanced by the pesticide companies in Hudson……the judgment set a precedent in guiding municipalities on how they may legitimately use municipal powers to protect health and environment and, more broadly, incorporated a public interest perspective by interpreting By-law 270 in a manner that was consistent with international law’s precautionary principle.’ (Page 17)

III DOW’S NAFTA CHALLENGE TO QUÉBEC’S PESTICIDES MANAGEMENT CODE Page 17.

A. INTRODUCTION AND NAFTA CONTEXT

‘The parallel story unfolding in the late 1990s and early 2000s was the use of NAFTA Chapter 11’s ISDS mechanism to make claims challenging environmental and health regulations. Analysts pointed to “the unexpectedly broad and aggressive use of this process to challenge public policy and public welfare measures, including environmental measures.”’ (Page 17)

 ‘Trade scholars commented on the significant imbalance between private investors’ rights and the protection and promotion of the broader public goods under NAFTA’s Chapter 11 regime. 111 They noted that this disparity is exacerbated by the lack of transparency and public access to the process, the limited opportunity for public participation, and the cloud of secrecy over the actual adjudication of arbitration proceedings. (Page 18)

In contrast, investors contemplating initiating a claim face virtually no constraints other than to follow the procedural requirement set out in Section B of Chapter 11.1’ (page 18)

‘Under NAFTA, ISDS claims have proliferated against Canadian public interest measures. By January 2013, thirty-four NAFTA investor claims had been commenced against Canada. Close to half of those claims were related to environmental and health policy measures (see Table 1). Commenting on this trend as early as 1999, analysts noted that “the provisions designed to ensure security and predictability for the investors have now created uncertainty and unpredictability for environmental (and other) regulators.”  (Page 19)

‘There is rich irony here. The ISDS mechanism originated as a means to protect the rights of investors from unfair or arbitrary action by countries with less developed judicial systems. However, in Canada the NAFTA ISDS arbitration mechanism can undermine domestic public interest regulation while providing the public with greatly limited recourse to engage in these disputes when compared to the sophisticated procedural tools available to them within Canada’s modern judicial system.’ (page 19)

1. Adjudication of Chapter 11 Disputes. Critics have charged that Chapter 11 is problematic when issues of public welfare and public policy are placed against private interests. The ability of each Party to choose its arbitrator is also a significant difference between domestic courts and the arbitration process.128 Tribunal members appointed to adjudicate disputes generally tend to have a commercial law background, leading to concerns that arbitrators may lack the necessary expertise to consider the broader public policy implications that arise in the context of Chapter 11. (Page 20)

While there is now a well-established precedent for the public to participate in Chapter 11 arbitration through the amicus process, this right remains subject to the discretion of the panel and is determined on a case-by-case basis. Moreover, the extent to which the public will be able to gain complete access to documents filed by the Parties to the arbitration proceedings is unclear.

Overall, these reforms, and suggested reforms, have not changed the fact that public participation in the Chapter 11 arbitration proceedings remains generally limited to the filing of amicus curiae briefs, at the discretion of the tribunal, in contrast to broader rights and proceedings available before domestic courts. Nor have these reforms changed the fact that public interest, environmental, and health measures continue be targeted by foreign investors under Chapter 11, as illustrated by the Dow claim and other similar claims, as summarized in Table 1. (Page 23)

2. Chapter 11 Overrides Environment and Health Measures in NAFTA. Despite the fact that NAFTA contains provisions that appear to ensure a government’s ability to protect the environment and public health, namely within NAFTA’s preamble and Articles 1101 and 1114, these are trumped by other provisions to protect investor rights…. However, in order to benefit from these provisions’ protection. The measures must be “otherwise consistent with this Chapter [11]. As a result, Articles 1101 and 1114 have not effectively shielded many public interest measures, nor deterred investors from bringing claims. (Page 24)

3. Chapter 11 Minimum Standard of Treatment—Article 1105.  The legal test established for Article 1105 although vague and not easily definable, broadly requires determining whether a government measure was developed according to due process with transparency, in good faith, and according to natural justice. (Page 25)

4. Chapter 11 Expropriation—Article 1110. The provision provides that governments are allowed to expropriate an investment only: (a) for a public purpose, (b) on a non-discriminatory basis, (c) in accordance with due process of law and Article 1105(1), and (d) on payment of compensation…. The expropriation provision covers both direct and in expropriation. (Page 26)

B. OVERVIEW OF DOW’S CLAIM (Page 27)

‘Following the Supreme Court decision in Hudson as pesticide bylaws proliferated across Canada and both Québec and Ontario considered enacting provincial statutes, environmental organizations in Québec and Ontario heard persistent rumours of a possible NAFTA challenge. Such a challenge came in 2008 against Québec’s provincial ban, three months after PMRA finalized its decision to allow the continued registration of 2,4-D,173 and two months after Ontario passed legislation to ban cosmetic pesticide use province-wide.’ (Page 27)

First, the specific claimed breaches of NAFTA obligations were with respect to the provisions of Article 1105.197 Canada was accused of failing to treat Dow “in accordance with international law, including fair and equitable treatment and full protection and security.” Further, Dow claimed that Article 1105 was individually and cumulatively breached by Québec’s actions “in improperly imposing the Ban, in failing and refusing to review and repeal the Ban, in breaching the Claimant’s legitimate expectations, in conducting biased and improper reviews and advancing improper conclusions, and in prohibiting the sale and use of 2,4-D.”199 Further, Dow maintained that Canada was “in breach of international law and its obligations under Article 1105 in respect of basic due process, transparency, good faith and natural justice.”

The second claimed breach was with provisions of Article 1110.201 Dow claimed that the effect of Québec’s actions from 2003 to 2009, individually and cumulatively, amounted to measures tantamount to expropriation of Dow’s investment.202 Citing Article 1110, Dow noted that such measures could be justified “only if they are: for a public purpose; on a non-discriminatory basis; in accordance with due process and Article 1105(1); and on payment of compensation on a prescribed basis.” Dow stated that none of these criteria had been met by Québec—“most particularly, no compensation has ever be ne paid or offered”204—and thus Canada was in breach of Article 1110 obligations to avoid direct or indirect expropriation of an investor, except in accordance with the four criteria listed in Article 1110, noted above. (Page 29)

C. INITIAL REACTIONS FROM NONGOVERNMENTAL ORGANIZATIONS AND POLITICIANS

Dow’s action was widely perceived as an attempt to bring a regulatory chill on efforts across Canada, particularly in Ontario, Canada’s most populous province with a government actively considering a sweeping ban on hundreds of pesticide products. As one legal commentator observed, the claim by Dow appeared to be aimed “as much at deterring other governments from taking similar steps to reduce pesticide use for health and environmental reasons, as much as it [was] meant to win compensation of $2 million, as claimed, for the incidental impacts on Dow’s sales in Québec.”

D. TRADE-FOCUSED NOTIONS OF FAIRNESS AND DUE PROCESS: IRONIC CONSEQUENCES

As noted above, ISDS mechanisms originated in agree between developed and less developed nations to provide measures that would protect investors from unfair or arbitrary action by countries with less developed judicial systems.212 The unexpected and ironic consequence of including such mechanisms in NAFTA has been to undermine domestic public interest regulation using a dispute resolution mechanism that denies the public the procedural fairness that exists in their modern judicial system. This consequence is largely due to the narrow purview of NAFTA, with its overall objectives focused on trade and the paramount importance assigned to investor rights by the terms of Chapter 11. (Page 32)

It is also important to note that as specific by-laws were developed and became the subject of legal challenges, the due process that was provided under Canada’s legislative and judicial systems stands in sharp contrast to the NAFTA arbitration process, which has largely been cloaked in secrecy and where public participation, when it is allowed, lacks key aspects of basic procedural fairness. (Page 33)

…despite many years of due process, a tribunal operating within the narrow objectives of NAFTA’s trade focus would make the determination as to whether Québecs pesticide ban amounts to expropriation. As noted above, members of these tribunals have expertise that rarely extends beyond commercial law. Further, their proceedings provide limited opportunity for broader public input as compared to that available under the Canadian legislative and judicial system. (Page 33)

Thus, Article 1110, like Article 1105, provides far greater emphasis on the investor’s legitimate commercial expectations as opposed to the public’s legitimate expectations that their government will enact environmental measures to protect their welfare. (Page 33/34)

Equiterre, a Québec-based environmental group, and the David Suzuki Foundation, a Canadian environmental organization based in Vancouver, British Columbia, expressed these concerns in response to Dow’s Notice of Arbitration.222 They announced their intention to file a joint amicus curiae submission once a tribunal was established.

However, both groups expressed concerns that even in cases such as Dow, where “matters of the public interest are engaged, NAFTA Chapter 11 only guarantees legal standing to eligible investors, leaving other civil society actors to engage in a limited fashion (in writing only) at the discretion of the arbitrators.”224 Given how the amicus curiae process has developed in Chapter 11 case law, the organizations claimed they had no confidence that even when the panel was established, it would have the discretion to benefit from oral submissions from non-disputing parties with a distinct interest and expertise in the matter. The groups noted that this was in sharp contrast with the rules of practice for intervention before domestic courts such as the Supreme Court of Canada. (Page 34)

E. THE MAIN STICKING POINT: PRECAUTIONARY DECISION MAKING

As described above, Dow’s Notice of Arbitration focused on the contention that Québec had no scientific basis to impose a ban on 2,4-D, and had acknowledged as much. (Page 34)

It can be concluded from a review of Dow’s arguments that a clear assumption is being made that precautionary decision making is not scientific. Further, when the Québec ban on 2,4-D was not reversed after the PMRA and other regulatory agencies concluded that continued registration was acceptable, the arguments made in Dow’s Notice of Arbitration indicate that Dow clearly considered Québec’s prior commitment to review its ban was the same as agreeing to reverse it.

In contrast, environmental organizations disputed the results of the PMRA’s risk assessment of 2,4-D. In this circumstance, these groups note the ability of risk assessment to reach a conclusion as to a chemical’s acceptable risk on the basis of an incomplete consideration of potential health effects.  For example, they pointed out that the European Union Strategy for Endocrine Disruptors had proposed that 2,4-D be considered a Category II chemical on its priority list of suspected endocrine disrupting chemicals, a health outcome not considered in the PMRA risk assessment. Although the PMRA did note that evidence indicated possible endocrine disruption effects of 2,4-D, this evidence was not considered in the re-evaluation decision due to a lack of validated test protocols.

An extensive debate exists, ..:

1. Applying Precaution and Risk Assessment—Both Are Science Based Decision making

…the statement from the Rio Declaration on Environment and Development has been followed sufficiently often that for some, it is the most authoritative version.243 The Declaration states that “[i]n 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 scientific certainty shall not be used as a reason for postponing cost-effective measures to prevent environmental degradation.” (Page 37)

“Uncertainty” in this context means more than speculation,248 and is about the extent of the harm, as well as causation. It is science based because there must be a basis on which to conclude that a threat of harm is serious and perhaps irreversible. While this latter point may con to be disputed, within the precautionary principle debate, most agee that is a tool for bringing science and policy together for effective decisionmaking on difficult subjects where much is at stake. (Page 37)

Closely related, an equally extensive critique exists challenging the notion that chemical risk assessment, as conducted by the PMRA and other regulatory agencies, is a purely science-based exercise. The limitations of risk assessment have been extensively described, including, for example:

·         limits on criteria for the selection of hazards to assess;

·         the practice of leaving out some hazards due to bias or lack of knowledge;

·         the inability to factor impacts of cumulative effects, additive or synergistic effects;  

·         limits on the ability to quantify impacts;

·         the role of professional judgment to assess and/or fill data gaps;

·         the limitations arising from health or other impact endpoints under consideration such as endocrine disruption or other complex conditions involving complex dose-response and/or long latency periods, and lack of data about such impacts

·         lack of data about substances, processes, and ecosystem variables;

·         tendency to make type II errors as a result of designing studies to rigorously avoid type I errors

·         potential for surprise in behaviour of systems and so on                               (Page 38)

2. What Would a Tribunal Have Done?                                 (Pages 39-41)

Legitimate expectations of investors are held to include measures based on scientific studies and international guidelines, not measures based on the precautionary principle, which is often inaccurately conflated by NAFTA tribunals as a political basis.  This focus on a scientific basis underlying the measures in dispute occur the Ethyl and Chemtura cases, which preceded Dow. Page 39

Similarly, in 2010 Canada successfully defended against an investor claim by Chemtura on scientific grounds. Chemtura’s claim was also based on alleged breaches of the minimum standard of treatment and expropriation provisions as a result of a ban on lindane, a pesticide used in the production of canola.261 The tribunal held that the government of Canada’s scientific review of lindane “falls within acceptable scientific parameters,”262 but that it was “not for the Tribunal to review the scientific basis of the PMRA’s decision.”263 As such, the Chemtura decision is an example of adjudicators putting emphasis on the scientific process underlying the risk assessment and regulatory action. (Page 40)

Although NAFTA’s text does not explicitly preclude a public interest precautionary measure from being considered as a legitimate measure, tribunals have not upheld such an interpretation. Rather, they have held such measures to be legitimate on the basis that they were supported by a scientific study, or by an established international guideline, rather than a precautionary approach.(page 40)

F. STALEMATE: ALL SIDES CLAIM VICTORY

In May 2011, almost three years after Dow brought its Notice of Arbitration claim, no further filings occurred and a settlement was reached without the case proceeding before a NAFTA tribunal. The Settlement Agreement269 refers to an exchange of letters between the Government of Canada and the Government of Québec wherein the parties agree to the terms of the Settlement Agreement,270 including that Québec’s ban on 2,4-D be upheld,271 the withdrawal of Dow’s Notice of Arbitration,272 and that no compensation be provided. (Page 41)

As well as a ‘full and final settlement,”274 the Government of Québec also acknowledged several ‘agreed principals that essentially restate the reality of the tri-level regulatory regime that exists in Canada to regulate pesticides 276 as this was enumerated by the Supreme Court of Canada in  Hudson. (Page 41/42)

The first principle includes the definition of “acceptable risk” as it is stated in the federal Pest Control Products Act. It then specifies that the Government of Québec acknowledge the results of this determination of acceptable risk for 2,4-D in the 2008 PMRA re-evaluation decision, namely that the risk is acceptable if label directions are followed. The second principle enumerates the nested authority of provinces to regulate pesticides in a manner more restrictive than the PMRA.279 The third notes that, subject to applicable laws, municipalities may also apply a pesticide regulation that is more restrictive than the PMRA or the provincial government, in this case, the government of Québec.280 (Page 42)

IV. CONCLUSION

In hindsight, early warnings were prescient about two issues addressed in this Article: the threat of key NAFTA provisions to public interest environmental law 289 and the need for precautionary responses in the face of widespread exposure to low levels of multiple toxic substances.

The wisdom of the latter continues to be confirmed by extensive and credible scientific evidence, notably, but not limited to multiple challenges of low-level exposure to endocrine disrupting chemicals. (page 43)

Despite varied perspectives on the outcome, the Dow case others like it, illustrates how NAFTA’s Chapter 11 ISDS mechanism can be, and have been, used to try and reverse, and arguably similar domestic public interest measures.

Under Chapter 11, investor rights can trump public interest rights, chiefly on account of provisions concerning the legitimate expectations of investors in Articles 1105 and 1110, the singular trade focus in NAFTA overall, and the arbitral procedures with their lack of accompanying judicial safeguards.302 (Page 44)

In the unlikely event that Chapter 11 were removed from NAFTA, it would be in keeping with recent steps taken in Australia where, in April 2011, the Australian government refused to enter into any further international investment agreements with developed countries containing ISDS provisions on the basis that they:

[do] not support provisions that would confer greater legal rights on foreign businesses than those available to domestic businesses. Nor will the Government support provisions that would constrain the ability of Australian governments to make laws on social, environmental and economic matters in circumstances where those laws do not discriminate between domestic and foreign businesses.

This recognition by the Australian government underscores the problem illustrated by the use of ISDS provisions under NAFTA, including the rich irony in the Dow case.304 Such investor rights originated in ISDS mechanisms intended to protect investors from the vagaries of less developed legislative and judicial systems.305 Yet,, those same mechanisms can be used to undermine domestic public interest regulation that, in this case, was the result of many years of due process in Canadian lawmaking and the Canadian courts.306 Moreover, the procedural mechanisms to protect these investor rights under Chapter 11 also deny the public the same rights to fully participate in the arbitration process.307 The Dow case illustrates that Chapter 11 investor rights are misplaced within an investment agreement between nations that have equally sophisticated legislative and judicial systems. (Page 49)

END TRANSCRIPT.

Kathleen Cooper, Kyra Bell-Pasht, Ramani Nadarajah, and Theresa McClenaghan, Seeking a Regulatory Chill in Canada: The Dow Agrosciences NAFTA Chapter 11 Challenge to the Quebec Pesticides Management Code, 7 Golden Gate U. Envtl. L.J. 5 (2014).