Sold Down the Yangtze: Extended note for chapter 25

In Chapter 25 of my book Sold Down the Yangtze: Canada’s Lopsided Investment Deal with China, I said that I’d post on this blog the full excerpts from my cross-examination in the Hupacasath First Nation’s legal challenge to the Canada-China FIPA, as cited by the federal government to argue that I was a partial expert for the Hupacasath First Nation.

To make the cross-examination readable, I have added additional parts that preceded the portions relied on by the federal government. I have also used square brackets to indicate transcription errors or clarifications.

Hupacasath v Minister of Foreign Affairs, Cross-Examination on Affidavit of Gus Van Harten, April 15, 2013 – page 10 (lines 28-37):

Q [Mr. Timberg] Okay. Thank you. And then over the page at page 2 in the paragraph [of an opinion article on a NAFTA case involving Danny Williams and Newfoundland and Labrador] you state: “Danny wins, above all, because he challenges an illegitimate system. NAFTA Chapter 11 is illegitimate because the arbitrators are not independent like judges.”

And it’s your opinion that the NAFTA Chapter 11 is legitimate — is illegitimate?

A [Mr. Van Harten] It’s my opinion that the investor-state arbitration mechanism, because it lacks requirements of legitimacy for a judicial process including provisions for openness, independence, and accountability, is something that should be criticized, yes. And when I speak of NAFTA Chapter 11 here, my purpose is to highlight that it’s the investor-state arbitration process within NAFTA Chapter 11. That’s my — that’s my aim.

Hupacasath v Minister of Foreign Affairs, Cross-Examination on Affidavit of Gus Van Harten, April 15, 2013 – pages 20 (line 1) to 25 (line 12):

TIMBERG: Q So I’d like to show you another newspaper article. This is still pre the Canada-China FIPA. This is dated August 15th, 2011. It’s published in the Hamilton Spectator. The title is “The Carlisle Quarry and NAFTA Free Trade Agreement Lets International Investors Bypass Laws in Our Courts.” And do you recognize this article?

A Yes.

Q And you prepared this. At page 2, six paragraphs down, you state: More importantly, Canada must stop signing trade deals that allow for investor-state arbitration. If Canadian companies need these protections abroad, they can negotiate them directly in their contract to the foreign governments. No major deal in a developing country would go through today without an elaborate contract that includes its own dispute settlement provisions.

Is it your personal opinion that Canada must stop signing international trade deals that allow for investor-state arbitration?

A Well, this is another op ed. Typically in an op ed you use somewhat colloquial language. I refer to trade deals because typically I find the public has a better understanding of what a trade deal is than, you know, an investment treaty.

But my position is as a principal [sic: principled] position I think investor- state arbitration should be a judicialized process and that it’s inappropriate to continue to consolidate investor-state arbitration until it’s a judicialized process. Others would take a different view and they would say, well, we think it should [sic: “not”] be judicialized. In fact, I find these days it’s increasingly widely accepted that the situations of conflict of interest and overlapping roles and so on with respect to the arbitrators is out of hand and is a serious problem.

I’ll just mention last week I was in Helsinki at a meeting that was attended by various experts, people from various organizations, some who would be conventionally associated with the state position or non-governmental organization or with the investor sort of business perspective, and there was just a widespread acceptance in the room that something needs to be done about the arbitration process.

Now — but the point I was trying to make is that others might have a different gauging of it. They might say, look, there are problems with investor-state arbitration. I think probably Mr. Thomas and I aren’t really that far away from each other on that point, but they would say, but let’s keep going with the existing arrangements and hope that states bring in reforms to address some of these problems in time. I’m just of the view that the reforms are really quite important and the problem serious enough that it’s just necessary to say that states should stop signing up to treaties that provide for investor-state arbitration, and, you know, some states have in recent years adopted that position, others have not.

Canada is one of the ones that have not, and I’m — it would be a good thing, in my view, if Canada, you know, as a point of principle, stopped consolidating the investor-state arbitration mechanism and as a point of sort of national interest didn’t commit to investor-state arbitration especially in any treaties when Canada is host to substantial assets from the other countries in the capital importing position because there seem to be some very important outstanding issues that haven’t been resolved yet as to how those risks and liabilities are going to be handled and how well they’ve been managed.

Q Okay. So –

A Did you want me to speak to the contractual? You read to me about the role of contracts, and I could just quickly highlight the —

Q No, I haven’t asked a question about that.

A Oh, I am sorry. I thought that was part of your interest. Q You state at the bottom of this paragraph: “Canada should have abandoned investor-state arbitration then. Following Australia, it should do so now. If not, Canadians need to know that the wrong-headed decision to allow these unfair lawsuits against democratic choice continues to rest squarely with the federal government.”

So just to be clear, it’s your view that the Canadian government should abandon investor-state arbitration? That’s your position?

A My position is in order to support an international judicial process to resolve these sorts of disputes, we need to replace investor-state arbitration with — well, I’ve actually — would call it simply an international investment court, but some kinds of judicialization reforms to allow for international adjudication to protect investors, also, I suggest, to hold them to certain basic responsibilities. I would like to see that happen as well, but I understand this is sort of a long-term — you know, a long-term vision and that it’s going to take some time to get there.

Q All right. So you are acknowledging that that would be a new policy decision to change the means by which international arbitrators are appointed?

A I would accept it would be a change of decision to do what Australia did and come out with a statement that going forward we are not going to include investor-state arbitration in future trade agreements, yes.

Q And it’s your position that the government of — it was wrong — it was wrong-headed of the Government of Canada to include investor-state arbitration provisions in the Canada-China FIPA also?

A I think — actually, I reflected on this issue a bit about the Canada-China FIPA, and my initial reaction was, as I said, I mean, I have this principal [sic: principled] objection to investor-state arbitration, but from a Canadian point of view I’ve always sort of accepted the realist point that for Canada’s other — which applies in relation to Canada’s other FIPAs, that Canada has an economic interest in having these mechanisms in place to provide the maximum protection to Canadian investors abroad that presumably the government wants even though I think the role of investor-state arbitration in that respect is sometimes overstated when you look at the evidence and what some of the alternative options are that are available to protect investors.

And so for that reason, I always sort of thought, well, I’m not — there’s no need for me to say anything about Canada’s other FIPAs, and they are just not very significant agreements from a Canadian point of view in terms of Canada as a host state; Canada as a state that is assuming risk and liabilities like being sued by foreign investors. So when the Canada-China FIPA came along, I really sort of reflected on that and I — I think came down in the view that my position was, with respect to the Canada-China FIPA, different people have different views about this FIPA and the role of investor-state arbitration in it and the decision to be in a sense the leading developed country in the world in terms of locking ourselves into investor-state arbitration when we are in the capital importing position. And I came down on what I think should happen and the position I — you know, I tried to, you know, focus on was that there should be sort of an open and thorough review of all of the issues and the different perspectives before Canada makes the long-term decision to conclude this FIPA. And I was informed in that respect by my knowledge of what the Australian government had done and what the South African government has done before they reached their decisions to re-evaluate the role of investor-state arbitration.

Q So to summarize, when you read about the Canada-China FIPA when it was announced, made public, last September 2012, your position was to call for that it should not be ratified, that there should be a full public debate before it gets put into full force and effect?

A Yeah, I wanted to see more public study of it to allow for a more informed evaluation of the FIPA, yeah. That’s right.

Q Okay.

A Do you want this document back?

TIMBERG: Yeah. Maybe we can get that marked as the next for identification purposes only.

EXHIBIT B FOR IDENTIFICATION: Article from the Hamilton Spectator, August 15, 2011, titled “The Carlisle Quarry and NAFTA Free Trade Agreement Lets International Investors Bypass Laws in Our Courts”.

TIMBERG: Q I’d like to show you another article that you published. This is dated October 26th, 2011, Waterloo Region Record. Its title is “Canada should do a better job negotiating trade deals. Gus Van Harten.” Do you recognize this document? It also states —

A Not off the bat but let me give it a read, and I’m sure it will come back. Okay. I recall now. This op ed was parallel to an article I wrote, a study I did, for the Macdonald-Laurier Institute which talked about Canada’s experience both as a respondent state under NAFTA and the experience of Canadian investors under NAFTA and other — and FIPAs, and sort of highlighted some of the potential concerns that may arise from that record about how the lack of institutional safeguards of independence in the arbitration process might be to Canada’s disadvantage.

I don’t want to make strong claims about this because there’s really not enough data to make — you know, draw any conclusions. But Canada’s experience, especially the experience of Canadian investors, has been very, very negative, and, in fact, there’s even information on the record that in some cases the arbitrators, you know, have sort of — well, in one case in particular which I talk about — I’ll just say I talk about this in that article, longer article, for the Macdonald-Laurier Institute. And as I recall the Macdonald-Laurier Institute drafted an op ed which — I’m not sure if I drafted it, or they drafted it, but they certainly promoted it. And, in fact, I think that — yeah, they would have published this on Troy Media, and it would have been picked up in this newspaper, the Waterloo Region Record.

And I want to stress, by the way, in no op ed that I’ve ever written have I ever had any responsibility in the title of the op ed. That’s always — I’ve never asked about that. I always assume that was editorial discretion. So I’ve never done anything to write the titles.

Q All right. So you recognize this now?

A Yes, I do recognize this article, yes.

Q Okay. So I’d just like to go to the very last paragraph. You state: “Canada should seek to reform investor-state arbitration under NAFTA Chapter 11 and adopt a revised model and ongoing trade negotiations with the European Union.”

So is it your opinion that Canada should reform the investor-state arbitration provisions in NAFTA Chapter 11?

A Well, what I was recommending in the Macdonald-Laurier Institute article was that Canada take what it did in the Canadian agreement on internal trade and do the same thing in the Canada EU free trade agreement if that agreement were to provide for investor-state arbitration because my understanding is that the reforms that were made to the person to government arbitration process in Canada’s agreement on internal trade were adopted after federal provincial discussions. The arbitration mechanism itself is based on the arbitration mechanism in Chapter 11 of NAFTA, but Canada’s agreement on internal trade is actually a really good example of how you can bring in reforms oriented at judicialization that are pragmatic, that are doable, and you could actually put them in one bilateral treaty without having to go so far as to create a whole new court and all the rest of it. So –

Q So that’s a different — that would be a different option, a different mechanism, that could be promoted in your opinion?

A Yeah. To adjust investor-state arbitration to model it on the reforms that Canada adopted internally in the agreement on internal trade, and I was sort of trying to highlight Canada’s own experience as something that might be appealing to the federal government if you would look at, you know, Canada has already done this internally. It’s not like we would — we would be, you know, trailblazing per se.

Q Right. But so is it your opinion that Canada should reform the investor- state arbitration provisions in NAFTA Chapter 11?

A It’s my opinion that Canada should adopt a reformed approach to investor-state arbitration to ensure that it’s a judicialized process like other international courts and tribunals that deal with these kind of disputes. This investor-state arbitration process really stands out as very different from other international courts and tribunals for that judicialization reason.

Q And then you’ll also agree that — is it your opinion also that Canada should not ratify the Canada-China FIPA due to your concerns about investor-state arbitration provisions contained therein?

A Well, again, I tend to approach this in two ways: First of all, I think about it from the sort of principled point of view that I’ve elaborated as an academic for a number of years, and it is increasingly accepted that states need to look at the investor-state arbitration mechanism. It’s a problem. Model it on the W2 [sic: WTO] appellate body. Model it on some other international judicial body, but look at this arbitration mechanism and fix some of these problems because it is getting embarrassing, some of the — you know, some of the situations that unfortunately come to light, and so that is my principal [sic: principled] position, and I try to maintain that principal [sic: principled] position for all states because I write to an international audience and so on.

But when I’m in Canada, when I think of Canada’s interests, it’s a little bit different. And I do agree that it’s not a good idea for Canada even from the sort of Canadian perspective. Not speaking of the international perspective here. From the Canadian perspective it’s a very — you know, it’s an issue that deserves serious attention before we take this step of locking ourselves in long term to investor-state arbitration while in the capital importing position, while being a host to substantial foreign-owned assets under the treaty.

Hupacasath v Minister of Foreign Affairs, Cross-Examination on Affidavit of Gus Van Harten, April 15, 2013 – pages 24 (line 26) to 25 (line 12):

Q Yeah. I just — but your concern [in writing an open letter about the CCFIPPA] was that you wanted to put your view on the record, and you were concerned that in the future if there’s a public inquiry that you would have —

A Yeah.

Q — made a public statement and that someone would have to answer some awkward questions.

A Yeah, I recall — my recollection is — first of all, you may or may not know I worked on a couple of public inquiries in the past.

Q M’mm-hmm.

A And early on when I looked at the FIPA one of the things that came to mind was we just had the Occidental Petroleum Number 2 case against Ecuador with the award of, you know, about $2 billion. That was recent, very recent. There were other things. The Ping An lawsuit against Belgium for — you get different reports of the amount, but it’s, you know, 2 or $3 billion by a Chinese investor. It’s the first really significant Chinese investor claim under one of these treaties, and it’s also significant because obviously China has only emerged as a major capital exporter since about 2008 or 2009. And so one of the things that I thought of was, in fact, this kind of Danny Williams-type scenario that we were speaking about earlier, this constitutional conundrum that is still latent under NAFTA.

It has never really been resolved to my knowledge, at least on the public record, who is actually going to be responsible if a province is found by its actions to have breached one of these treaties, and the federal government — because let’s say it’s for $2 billion – says, well, we are not going to pay. What is going to happen then? That was on my mind, and I thought to myself that is a situation that could very well lead to a public inquiry and having worked on a public inquiry, I sort of had thought to myself, wouldn’t it be helpful for the staff to have someone pop up and say, this is part of the record. I let decision-makers know what at least some of the concerns are when there was still time to reconsider whether to ratify the treaty and trigger the long-term lock-in period of the treaty because — and I should just add one other point.

I’m sorry if I’m going on, but just to add one other point is, in the literature in this field I would highlight in particular work by Lauge Poulsen and Emma Aisbett. They talk about why states enter into these kinds of treaties, and they talk about it from the point of view of bounded rationality as a concept, meaning the decision-making of states, when they enter into the treaties, often doesn’t carry the full awareness of the treaties’ risks and liabilities at the time. Their awareness of the risks and liabilities occur when there is an acute event that’s very serious, and that is typically the bringing of a major claim by one of these companies, and we see — by a foreign company and by a foreign investor under the treaty. And we can point to the experience of some countries like South Africa when it was sued for its black economic empowerment legislation. All of a sudden a light seemed to have gone on in the government as to what they’d agreed to.

I’ve been told anecdotes about one country when it was sued for the first time had to ask for a copy of the treaty from the lawyers for the foreign investor. Not to say that that is necessarily the widespread situation that states were not fully aware of what they were doing when they lined up these treaties going back to about 1990 before any of the claims had really come and awards were on the public record. Other than one award, the awards don’t really start coming until the late 1990s. That’s all reflected in that literature, that awareness, that the states tend to realize what kind of risks and liabilities they have assumed almost when it’s too late, when they can’t change their decision because they find out, my goodness, we’ve concluded one of these treaties, and then they look closely at the terms of the treaty, and they find it has a 15-year minimum term and then even after that, it continues to apply for another 10 or 15 years to existing investments.

And when I looked at the Canada-China FIPA it was the first time — I mean, as I mentioned, the Canada-China FIPA and NAFTA are distinct because they apply to substantial amounts of incoming investment and thus carry a level of risk and liability that Canada’s other treaties that provide for investor-state arbitration — the 24 or so FIPAs and the three free trade agreements — do not carry. But the Canada-China FIPA is actually unique because it combines that effectiveness of the international legal obligations because of the position of Canada as the capital importing country with a long-term lock-in period of 15 years plus one year’s notice after the first 15 years prior to termination and then the continued, you know, survivor – or sometimes they are called “hangover clauses,” or after termination continues to apply to existing investors.

So it’s those — those features that I think led me to say, well, I almost feel like there aren’t that many specialized researchers who know this field really well in Canada who are outside of the government and outside of the big law firms who are really in a position to go on record about this. I sort of felt to myself I’m going to go on record about it, and I would like to ensure that at least the decision-makers know what they are doing before they get into this decision.

I have reproduced above the portions of my cross-examination that were cited by the federal government to support its argument that I was partial.