Strategic Use of Trade and Investment Agreements for Corporates and Zones

1. 2nd INTERNATIONAL BRIEFING & FORUM with WORLD CUSTOMS ORGANISATION John W. BoscariolPartner, McCarthy Tétrault LLP, Toronto, Canada Day 1 - 5th June 2007 Nationality Planning – How Corporates and Zones Can Benefit From Investment Treaties 5th & 6th June 2007World Customs Organisation Headquarters BuildingRue du Marché 30, Brussels 1210, Belgium

2. Overview • strategic use of trade and investment agreements • benefiting from foreign investment protection agreements or bilateral investment treaties (BITs)

3. International Trade and Investment Agreements • multilateral agreements • agreements of the World Trade Organization • regional agreements • North American Free Trade Agreement • Energy Charter • FTAs • bilateral agreements • bilateral investment treaties • FTAs

4. Why do these agreements matter? • expanding obligations and benefits • enforcement and dispute settlement mechanisms

5. Role in Strategic Decision-Making Process • due diligence mechanism for positive and negative impact on organization • benefits of participation • identifying market opportunities • addressing market access and competitive issues • preparing for negative impact

6. Role in Strategic Decision-Making Process (cont’d) • opportunities for participation in the process • negotiation of trade and investment agreements • enforcement and dispute resolution • government-to-government • U.S. “Section 301” mechanism • EU Trade Business Regulation • Foreign Affairs and International Trade Canada • private investor-state mechanism • bilateral investment treaties • NAFTA Chapter 11 • investment chapters of other FTAs • retaliation consultations

7. Investment Protection Treaties – Key Trends • first BIT signed in 1959 (Germany – Pakistan) • by 1990, 385 BITs signed • by 2005, 2,495 BITs signed • BIT claims • negligible in early 1990s • now at 255 (cumulative)

8. Investment Protection Treaties – Key Trends (cont’d)

9. Investment Protection Treaties – Key Trends (cont’d) • target countries for BIT claims: Total: 255 November 2006Source: UNCTAD

10. Investment Protection Treaties – Key Trends (cont’d) • target countries for BIT claims • 63% developing countries • 18% developed countries • 17% southeast Europe and CIS countries • target sectors for BIT claims • 42% services (electricity distribution, telecom, debt instruments, water, waste management) • 29% primary sector (mining, oil and gas exploration activities)

11. Investment Protection Treaties – Key Elements • private investor-dispute settlement mechanism • investors may sue host country government for losses or damages arising from a breach of the investment treaty • submission of claim before arbitral tribunal under • United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules • International Centre for Settlement of Investment Disputes (ICSID) Convention • Additional Facility Rules of ICSID • other arbitration rules

12. Investment Protection Treaties – Key Elements (cont’d) • basic investor protection obligations • national treatment • most-favoured-nation treatment • fair and equitable treatment (minimum standard) • performance requirements • transfers • expropriation and compensation • potential carve-outs or limitations

13. Investment Protection Treaties – Key Elements (cont’d) • national treatment • 1. Each Party shall accord to investors of the other Party treatment no less favourable than that it accords, in like circumstances, to its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. • 2. Each Party shall accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments of its own investors with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. • 3. The treatment accorded by a Party under paragraphs 1 and 2 means, with respect to a sub-national government, treatment no less favourable than the treatment accorded, in like circumstances, by that sub-national government to investors, and to investments of investors, of the Party of which it forms a part. • Source: Canada Model BIT (2004), Article 3.

14. Investment Protection Treaties – Key Elements (cont’d) • most-favoured-nation treatment • 1 Each Party shall accord to investors of the other Party treatment no lessfavourable than that it accords, in like circumstances, to investors of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. • 2. Each Party shall, accord to covered investments treatment no less favourable than that it accords, in like circumstances, to investments of investors of a non-Party with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory. • Source: Canada Model BIT (2004), Article 4.

15. Investment Protection Treaties – Key Elements (cont’d) • fair and equitable treatment (minimum standard of treatment) • 1. Each Party shall accord to covered investments treatment in accordance with the customary international law minimum standard of treatment of aliens, including fair and equitable treatment and full protection and security. • 2. The concepts of "fair and equitable treatment" and "full protection and security“ in paragraph 1 do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens. • A determination that there has been a breach of another provision of this Agreement, or of a separate international agreement, does not establish that there has been a breach of this Article. • Source: Canada Model BIT (2004), Article 5.

16. Investment Protection Treaties – Key Elements (cont’d) • performance requirements • 1. Neither Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or a non-Party in its territory: • (a) to export a given level or percentage of goods; • (b) to achieve a given level or percentage of domestic content; • (c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory;

17. Investment Protection Treaties – Key Elements (cont’d) • performance requirements (cont’d) • (d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment;(e) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings;(f) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal or authority, to remedy an alleged violation of competition laws or to act in a manner not inconsistent with other provisions of this Agreement; or

18. Investment Protection Treaties – Key Elements (cont’d) • performance requirements (cont’d) • (g) to supply exclusively from the territory of the Party the goods it produces or the services it provides to a specific regional market or to the world market. • A measure that requires an investment to use a technology to meet generally applicable health, safety or environmental requirements shall not be construed to be inconsistent with paragraph 1(f). For greater certainty, Articles 3 and 4 apply to the measure. • 3. Neither Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements:

19. Investment Protection Treaties – Key Elements (cont’d) • performance requirements (cont’d) • (a) to achieve a given level or percentage of domestic content; • (b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory; • (c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or • (d) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

20. Investment Protection Treaties – Key Elements (cont’d) • performance requirements (cont’d) • 4. Nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory. • Paragraphs 1 and 3 shall not apply to any requirement other than the requirements set out in those paragraphs. • The provisions of: • Paragraphs (1) (a), (b) and (c), and (3) (a) and (b) shall not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs;

21. Investment Protection Treaties – Key Elements (cont’d) • performance requirements (cont’d) • (b) Paragraphs (1) (b), (c), (f) and (g), and (3) (a) and (b) shall not apply to procurement by a Party or a state enterprise; and • (c) Paragraphs (3) (a) and (b) shall not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas. • Source: Canada Model BIT (2004), Article 7

22. Investment Protection Treaties – Key Elements (cont’d) • transfers • 1. Each Party shall permit all transfers relating to a covered investment to be made freely, and without delay, into and out of its territory. Such transfers include: (a) contributions to capital; (b) profits, dividends, interest, capital gains, royalty payments, management fees, technical assistance and other fees, returns in kind and other amounts derived from the investment;(c) proceeds from the sale of all or any part of the covered investment or from the partial or complete liquidation of the covered investment;

23. Investment Protection Treaties – Key Elements (cont’d) • transfers (cont’d) • (d) payments made under a contract entered into by the investor, or the covered investment, including payments made pursuant to a loan agreement;(e) payments made pursuant to Articles 12 and 13; and (f) payments arising under Section C. • 2. Each Party shall permit transfers relating to a covered investment to be made in the convertible currency in which the capital was originally invested, or in any other convertible currency agreed by the investor and the Party concerned. Unless otherwise agreed by the investor, transfers shall be made at the rate of exchange applicable on the date of transfer.

24. Investment Protection Treaties – Key Elements (cont’d) • transfers (cont’d) • Notwithstanding paragraphs 1 and 2, a Party may prevent a transfer through the equitable, non-discriminatory and good faith application of its laws relating to: • (a) bankruptcy, insolvency or the protection of the rights of creditors; • (b) issuing, trading or dealing in securities; (c) criminal or penal offences;(d) reports of transfers of currency or other monetary instruments; or (e) ensuring the satisfaction of judgments in adjudicatory proceedings.

25. Investment Protection Treaties – Key Elements (cont’d) • transfers (cont’d) • 4. Neither Party may require its investors to transfer, or penalize its investors that fail to transfer, the income, earnings, profits or other amounts derived from, or attributable to investments in the territory of the other Party. • Paragraph 4 shall not be construed to prevent a Party from imposing any measure through the equitable, non-discriminatory and good faith application of its laws relating to the matters set out in subparagraphs (a) through (e) of paragraph 3. • Notwithstanding the provisions of paragraphs 1, 2 and 4, and without limiting the applicability of paragraph 5, a Party may prevent or limit transfers by a financial institution to, or for the benefit of, an affiliate of or person related to such institution, through the equitable, non-discriminatory and good faith application of measures relating to maintenance of the safety, soundness, integrity or financial responsibility of financial institutions.

26. Investment Protection Treaties – Key Elements (cont’d) • transfers (cont’d) • 7. Notwithstanding paragraph 1, a Party may restrict transfers in kind in circumstances where it could otherwise restrict transfers under the WTO Agreement and as set out in paragraph 3. • Source: Canada Model BIT (2004), Article 14

27. Investment Protection Treaties – Key Elements (cont’d) • expropriation and compensation • Neither Party shall nationalize or expropriate a covered investment either directly, or indirectly through measures having an effect equivalent to nationalization or expropriation (hereinafter referred to as "expropriation"), except for a public purpose, in accordance with due process of law, in a non-discriminatory manner and on prompt, adequate and effective compensation. • Such compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (“date of expropriation”), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value.

28. Investment Protection Treaties – Key Elements (cont’d) • expropriation and compensation (cont’d) • Compensation shall be paid without delay and shall be fully realizable and freely transferable. Compensation shall be payable in a freely convertible currency and shall include interest at a commercially reasonable rate for that currency from the date of expropriation until date of payment. • The investor affected shall have a right, under the law of the Party making the expropriation, to prompt review, by a judicial or other independent authority of that Party, of its case and of the valuation of its investment in accordance with the principles set out in this Article. • The provisions of this Article shall not apply to the issuance of compulsory licenses granted in relation to intellectual property rights, or to the revocation, limitation or creation of intellectual property rights, to the extent that such issuance, revocation, limitation or creation is consistent with the WTO Agreement. • Source: Canada Model BIT (2004), Article 17

29. Investment Protection Treaties – Key Elements (cont’d) • potential carve-outs or limitations • prudential measures • taxation measures • cultural industries • essential security interests (national security) • government procurement • subsidization programs • protection of human, animal or plant life or health • conservation of living or non-living exhaustible natural resources

30. Key Jurisdictional Issues in Benefiting from a BIT • in addition to the substantive protections • when considering potential locations … • ensuring that investment treaty protections apply • assessing the strength of those protections

31. Key Jurisdictional Issues in Benefiting from a BIT (cont’d) • covered investments • the investor’s interest must be considered an “investment” subject to the obligations under the BIT • nationality • claimant must qualify as “national” of a party to the BIT • standing may be denied to a national depending on the nationality of those who own or control it • opportunities may exist for investors to change nationality and rely on provisions of BITs between other countries (Aguas del Tunari)

32. Key Jurisdictional Issues in Benefiting from a BIT (cont’d) • time limits • limitation period may preclude the filing of a BIT claim • potential application to non-conforming measures in existence before the BIT came into force • exhaustion or waiver of local remedies • investors may be precluded from bringing a claim until remedies in local court systems have been exhausted • investors may have to waive right to initiate or continue related domestic proceedings before submitting claim

33. Key Jurisdictional Issues in Benefiting from a BIT (cont’d) • governing law • some BITs provide that the governing law is the law of the jurisdiction in which the investment was made • others are more general and refer to the BIT and “applicable rules of international law” • seat • the place or seat of arbitration selected by the claimant may impact the procedural rules of the arbitration and the law governing the challenge of any award issued by the arbitral tribunal

34. Application to Customs and Trade Issues • examples of using investment treaties to address harmful customs and trade measures • Antoine Goetz and Others v Republic of Burundi • Burundi’s withdrawal of tax and customs exemptions granted to companies involved in the extraction and sale of ore considered to deprive the investor of expected benefits of the investment • arbitral tribunal required Burundi to either pay compensation equal to the market value of the investment just before impugned measure was taken or to reinstate the tax exemptions

35. Application to Customs and Trade Issues(cont’d) • Pope & Talbot v Canada • challenge to Canadian authorities’ verification process for allocation of export quota • tribunal found that Pope & Talbot was subjected to threats, denied its reasonable requests for pertinent information, forced to incur unnecessary expense and disruption in meeting authorities’ requests for information, forced to expend legal fees, and suffered a loss of reputation in government circles • considered to be a denial of fair and equitable treatment and tribunal awarded damages to Pope & Talbot

36. Application to Customs and Trade Issues (cont’d) • Marvin Roy Feldman Karpa v United Mexican States • an excise tax exemption applied by Mexican authorities to exported cigarettes was denied to Feldman who sourced cigarettes from retailers and exported them out of Mexico • tribunal awarded damages to Feldman on grounds that Mexico had violated national treatment obligations by denying rebates to Feldman’s company while granting rebates to domestic companies

37. Application to Customs and Trade Issues(cont’d) • Ethyl Corp. v Canada • Canadian ban on importation and inter-provincial transportation of gasoline additive MMT • challenged as inconsistent with national treatment, expropriation, and performance requirement obligations • settled on payment of $20 million to Ethyl and repeal of MMT ban

38. Application to Customs and Trade Issues(cont’d) • S.D. Myers, Inc. v Canada • claimant challenged Canadian ban on exportation of PCB waste • tribunal found that the ban violated Canada’s national treatment and fair and equitable treatment obligations, and awarded damages

39. Application to Customs and Trade Issues(cont’d) • Doman, Canfor, Tembec, and Terminal Forest Products v United States • Canadian lumber companies challenging application of the United States of anti-dumping and countervailing duties on Canadian softwood lumber • alleging violation of U.S. national treatment, fair and equitable treatment, performance requirement, and expropriation obligations • pending

40. Application to Customs and Trade Issues(cont’d) • Canadian Cattlemen for Fair Trade v United States • Canadian cattlemen and feedlot owners seeking compensation for U.S. ban on importation of live cattle after discovery of a case of BSE • alleging violation of national treatment obligations • pending

41. Application to Customs and Trade Issues(cont’d) • Sun Belt v Canada • U.S. water company challenging moratorium by British Columbia on bulk water exports from Canada • Corn Products International, Inc. v United Mexican States • Mexican tax on soft drinks containing high fructose corn syrup challenged on grounds of violating national treatment obligations, prohibition on performance requirements, and prohibition against indirect expropriation without compensation • pending

42. Application to Customs and Trade Issues(cont’d) • Merrill & Ring Forestry L.P. v Canada • challenge of export restrictions on timber harvested from private lands in British Columbia • alleged violation of national treatment, most-favoured-nation treatment, fair and equitable treatment, expropriation and compensation, performance requirement obligations • pending

43. Application to Customs and Trade Issues(cont’d) • GL Farms LLC and Carl Adams v Canada • challenge to restrictions on exportation of milk to the United States • alleging violation of national treatment and fair and equitable treatment obligations • pending

44. Conclusion • when deciding location of operations and facilities … • political climate • taxation regime • environmental and labour laws • customs and trade regime • available investment protection, including BITS

45. Conclusion (cont’d) • incorporating investment treaties and international trade agreements into the organization’s strategic decision-making process and due diligence

46. John W. BoscariolPartner McCarthy Tétrault LLPSuite 4700Toronto Dominion Bank TowerToronto-Dominion CentreToronto, Ontario M5K 1E6www.mccarthy.caDirect Line: 416-601-7835 E-mail:jboscariol@mccarthy.ca