By: Adam Ferris

Negotiations to update the North America Free Trade Agreement (“NAFTA”) between Canada, Mexico, and the United States continue into March 2018. While the American President has threatened the termination of NAFTA if the agreement is not “improved,” Canada’s Prime Minister has also indicated a potential withdrawal if a new agreement does not further Canadian economic goals.

When it comes to environmental protection, some claim NAFTA can leave Canada’s interests in a compromised position.  Several provisions under Chapter 11 of NAFTA give investors from any of the three NAFTA countries the opportunity to seek remedies through arbitration if their investment or intended investment is improperly frustrated by unfair domestic practices.

As noted by the Canadian Centre for Policy Alternatives, there is a “deeply concerning trend where foreign investors turn to NAFTA when their proposals for environmentally controversial projects do not receive regulatory approval.” Specifically, of the forty-one NAFTA Chapter 11 claims made involving Canada, 61% have been in regards to an environmental, or resource management claim.

Chapter 11 Environmental Claims

For example, in Bilcon of Delaware et al v. Canada, (2015) an environmental assessment panel determined a quarry and marine terminal project should not proceed due to “significant and adverse environmental impacts on the community’s core values.”  The proponent then commenced, and was successful in an arbitration action against Canada under NAFTA Chapter 11. The arbitration tribunal found that “community core values”, a term that had never previously been used in Canadian environmental assessment and was not known to Canadian environmental law, was improperly and unfairly used by the environmental assessment panel and Canadian government to deny environmental assessment approval for the project. However, one of the three arbitrators dissented, suggesting this approach discounted local decision-making that otherwise might prevent potential significant environmental impacts. The tribunal’s award has been recently appealed in Federal Court.

Ethyl Corporation v. Government of Canada provides another illustration of an inoperable Canadian environmental decision resulting from a NAFTA Chapter 11 challenge. The Ethyl Corporation filed a Chapter 11 claim in 1997 in response to the federal government passing legislation which restricted the movement of Methylcyclopentadienyl Manganese Tricarbonyl (“MMT”) into the country and between provinces. The Canadian government appears to have applied the precautionary principle, as the ban was issued over concerns of the potentially toxic effects of MMT when released as automobile exhaust.  However, after losing a jurisdictional ruling, Canada settled the matter for $13 million and repealed its ban on MMT.

In addition to the noted examples, two law professors, Dayna Scott and Gus Van Harten, have concluded that certain Government of Ontario ministries have introduced an internal vetting process which considers potential Chapter 11 litigation risks as a component of government decision making. Further, a potential chilling effect has been noted in regards to both the Canadian and Mexican federal government’s decision making processes as a result of possible investor claims under NAFTA. A previous Canadian government official has indicated that as a result of many Canadian environmental initiatives having been targeted by American law firms, most of the initiatives “never saw the light of day.” In Mexico, as a result of a Chapter 11 claim, there has been concern over non-responsible environmental policy development in order to avoid legal challenges.

A Way Forward?

Despite calls to scrap the Chapter 11 Investor State Dispute Settlement (“ISDS”) mechanisms in NAFTA completely, others have described the provisions as “designed to give investors’ confidence when they do business […] by providing an impartial tribunal to settle disputes with the government over discriminatory treatment.”  Additionally, similar trade agreements, such as the 2017 Canada–EU Comprehensive Economic and Trade Agreement (“CETA”) are expected to have a $12 Billion annual positive impact on Canadian incomes.  Due to the economic benefits free trade agreements can offer, it is not surprising the federal government continues to support and investigate new free trade relationships.

However, these arrangements need not come at the expense of responsible environmental decision making. There are positive indications that more ecological protections will be implemented in a new NAFTA, as Canada has publicly stated that changes to Chapter 11 allowing governments to “have an unassailable right to regulate in the public interest” would be beneficial. The United States has also stated that NAFTA’s general provisions should include exceptions for “the protection of health and safety.”

In recognition of the concerns raised, Canada has more recently entered into other free trade agreements, containing slightly altered ISDS mechanisms. The Canadian government has called CETA a “gold standard” in terms of its ISDS provisions, including government rights to regulate the environment.  However, the majority of changes to the CETA ISDS provisions seem to address concerns related to arbitrator independence and critics were skeptical of the language used in the original agreement.

As we wait to see the long-term effects of CETA’s provisions, some continue to view NAFTA as a potential lingering threat to environmental protections in Canada. If the federal government is serious about addressing environmental concerns and moving towards the “gold standard” of ISDS provisions,  in contrast to those found in NAFTA Chapter 11, addressing concerns raised over interference with local environmental protections may be an important issue upon which to focus during NAFTA negotiations.

Adam Ferris is in his third year of Osgoode’s Juris Doctor/ Master in Environmental Studies (“JD/MES”) program.