Journal of International Economic Law, 2015, 0, 113

doi: 10.1093/jiel/jgv033
Article

When Does the Exception Become the Rule?

Conserving Regulatory Space under CETA
Armand de Mestral*
ABSTRACT

The Comprehensive Economic and Trade Agreement (CETA) is certainly the most
complex free trade agreement (FTA) ever negotiated by Canada and arguably the
most far-reaching ever negotiated by the European Union (EU). Like North American
Free Trade Agreement 1994 before it, CETA may well become a model for future
mega-regional FTAs. This article explores the seeming paradox that CETA innovates
both by its extensive scope and by its very extensive use of exceptions provisions.
These exceptions both general and specic are examined. It is argued that these exceptions are needed because, while both parties seek much closer regulatory cooperation,
they are also under pressure for legal and political reasons to be seen to preserve regulatory space.

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I. T H E RA N G E O F E X CE P T I O N S I N C E T A
The Comprehensive Economic and Trade Agreement (CETA)1 is in all probability
the most lengthy and complex free trade agreement (FTA) ever drafted. It is being
classed among the new generation of mega-regionals along with the Transatlantic
Trade Investment Partnership (TTIP) and the Trans-Pacific Partnership Agreement
(TPP).2 It is grounded in World Trade Organization (WTO) law and, like a number
of major FTAs signed in recent years,3 it follows the general structure of the North
American Free Trade Agreement 1994 (NAFTA).4 But if the structure is similar the
content is much expanded. Apart from the usual chapters on goods, services and
* Armand de Mestral, C.M., Emeritus Professor, Jean Monnet Professor, McGill University.
1 CETA, available at http://ec.europa.eu/trade/policy/in-focus/ceta/ (visited 1 August 2015).
2 See in this regard the papers published in the context of the conference: Mega-Regionals and the Future
of International Trade and Investment Law, Dresden, 2324 October 2014 (forthcoming).
3 See e.g. the Free Trade Agreement Between Canada and the Republic of Honduras, signed 5 November 2013,
entered into force 1 October 2014, available at http://investmentpolicyhub.unctad.org/IIA/country/35/
treaty/3403; (visited 1 August 2015) the Free Trade Agreement Between the United States and Panama,
signed 28 June 2007, entered into force 31 October 2012, available at http://investmentpolicyhub.unctad.
org/IIA/country/223/treaty/3219; (visited 1 August 2015) the Agreement Between Australia and Japan for
an Economic Partnership, signed 8 July 2014, available at http://investmentpolicyhub.unctad.org/IIA/
country/105/treaty/3487; (visited 1 August 2015) the Free Trade Agreement Between China and New
Zealand, signed 7 April 2008, entered into force 1 October 2008, available at http://investmentpolicyhub.
unctad.org/IIA/country/150/treaty/3243 (visited 1 August 2015).
4 North American Free Trade Agreement (NAFTA), signed 17 December 1992, entered into force 1 January
1994, 32 ILM 289, 605 (1993).
C The Author 2015. Published by Oxford University Press. All rights reserved.
V

Electronic copy available at: http://ssrn.com/abstract=2684576

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Conserving Regulatory Space under CETA

investments, there are whole chapters on different aspects of regulatory cooperation

and extensive new provisions to assist the movement of people engaged in commercial activityeven going to the point of recognizing their professional qualifications.
CETA contains provisions in respect to sustainable development, environmental and
labour standards, and the regulation of e-commerce. Maritime commerce is included
and, for the first time in a Canadian FTA, two new air transport services are
included. There are also new provisions on state enterprises and competition policy.
Conformity assessment procedures of goods are facilitated as well as good manufacturing practices for pharmaceuticals, and there is an important annex presaging
the negotiation of common standards for automobiles. To carry these extensive
commitments forward, there are broad provisions for the establishment of standing
committees to implement and expand the reach of the agreement in future years.
Somewhat paradoxically, these extensive new provisions are accompanied by an
unprecedented number of exceptions. Exceptions of one kind or another are found
in virtually every chapter of the CETA, including its Preamble.5 These exceptions are
expressed in a great variety of ways: exclusions of whole fields such as taxation;6
national security;7 cultural industries;8 and the environment. There are exceptions to
a general principle;9 exceptions to an exception;10 declarations of application which
5 CETA, above n 1, Preamble provides that
[T]he Parties resolve to
...
Recogniz[e] the importance of international security, democracy, human rights and the rule of law
for the development of international trade and economic cooperation.
It also reaffirms the parties commitment to protect and enhance values such as
[L]abour and environmental protection and the enforcement of their labour and environmental
laws and policies, building on their international commitments on labour and environment
matters;
...
the right to regulate within their territories and resolving to preserve their flexibility to achieve legitimate policy objectives, such as public health, safety, environment, public morals and the promotion and protection of cultural diversity; . . . .
6 CETA, above n 1, Chapter 32, Article X.06.
7 Ibid, Article X.05.
8 For the protection of cultural industries see CETA, above n 1, Chapter 10, Article X.1(3) Exclusions
from Dispute Settlement and for the protection of the environment, see CETA, above n 1, Chapter 10,
Article X.02.
9 See e.g. CETA, above n 1, Chapter 10, Article X.43 and Annex X.43.1 (exception to ISA) or Chapter 3
Article 8 (no increase of existing custom duties or creation of new customs duties).
10 See e.g. CETA, above n 1, Chapter 3 Article 8(3) which provides an exception to para 2 of the same
provision which itself is an exception to para 1 of Article 8:
1. Upon the entry into force of this Agreement neither Party may increase any customs duty
existing at entry into force, or adopt any new customs duty, on a good originating in the Parties.
2. Notwithstanding this provision, a Party may:
(a) modify a tariff outside this Agreement on a good for which no tariff preference is claimed
under this Agreement;
(b) increase a customs duty to the level established in its Schedule following a unilateral
reduction; or
(c) maintain or increase a customs duty as authorized by this Agreement or any agreement
under the WTO Agreement.

Electronic copy available at: http://ssrn.com/abstract=2684576

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Conserving Regulatory Space under CETA

implicitly except certain matters11 and limitations of the application of a chapter;12

clarifications;13 caveats;14 as well as provisions requiring priority of one chapter over
another.15 The CETA text also includes: carve outs;16 exclusions of compulsory
dispute settlement;17 and grandfathering clauses of lists of non-conforming
3. Notwithstanding paragraphs 1 and 2, only Canada may apply a special safeguard under
Article 5 of the WTO Agreement on Agriculture . . . .
See also Article X-01(e) of Chapter 11 (Cross-border trade in Services):
2. This Chapter does not apply to measures affecting:
...
(e) air services, related services in support of air services and other services supplied by means
of air transport, other than;
(i) aircraft repair and maintenance services when an aircraft is withdrawn from service;
(ii) the selling and marketing of air transport services;
(iii) computer reservation system services;
(iv) ground handling services
(v) airport operation services
11 See e.g. Articles 2 and 3 of Chapter 22 or Article X.2 of Chapter 26 of CETA, above n 1.
12 See e.g. CETA, above n 1, Chapter 15, Article 1(5):
This Chapter does not apply to measures adopted or maintained by a Party relating to
(a) activities or services forming part of a public retirement plan or statutory system of social security; or
(b) activities or services conducted for the account or with the guarantee or using the financial
resources of the Party, including its public entities,
except that this Chapter shall apply to the extent that a Party allows any of the activities or
services referred to in subparagraph (a) or (b) to be conducted by its financial institutions in
competition with a public entity or a financial institution.
13 See e.g. CETA, above n 1 Chapter 26, Article X.2(6):
The Parties may undertake regulatory cooperation activities, on a voluntary basis. For greater
certainty, neither Party is obliged to enter into particular regulatory cooperation activities, and
either Party may refuse to cooperate or may withdraw from cooperation. However, if a Party
refuses to initiate regulatory cooperation or withdraws from such cooperation, it should be prepared to explain the reasons for its decision to the other Party.
14 See e.g. CETA above n 1, Chapter 15, Article 12:
Under terms and conditions that accord national treatment, each Party shall grant to financial
service suppliers of the other Party established in its territory access to payment and clearing systems operated by a Party or by an entity pursuant to governmental authority delegated to it by a
Party, as well as to official funding and refinancing facilities available in the normal course of
ordinary business. This paragraph is not intended to confer access to a Partys lender of last resort
facilities (emphasis added).
15 See e.g. CETA above n 1, Chapter 10, Article X.2(1):
This Chapter does not apply to measures adopted or maintained by a Party to the extent that the
measures apply to investors or to their investments covered by Chapter [XY] (Financial Services).
See also Chapter 17, Article X.13:
In the event of any inconsistency between this Chapter and another Chapter in this Agreement,
this Chapter shall prevail to the extent of the inconsistency.
16 See e.g. CETA, above n 1, Chapter 15 Article 19 (Chapter X (Dispute Settlement) applies as modified by
this Article to the settlement of disputes arising under this Chapter (emphasis added)) and Article 15
(Prudential Carve-Out).
17 See e.g. CETA, above n 1, Chapter 10, Annex X.43.1 and Chapter 19 (Competition Policy), Article X-03:
Nothing in this Chapter shall be subject to any form of dispute settlement under the Agreement.

Conserving Regulatory Space under CETA

legislation.18 Some rules of origin implicitly include certain matters while explicitly
excluding other matters.19 There are statements of a duty to respect national choices
except in limited situations;20 statements of general application of national treatment
(NT) to a sector with certain specific exceptions.21 WTO waivers are protected by
exceptions,22 as are exceptions to the general duty to respect trademark and patent
protections.23 Exceptions cover the duty to respect sustainable development, labour
and environmental standards, and a prohibition against lowering these standards for
trade advantage.24 The principle of freedom not to cooperate in a particular regulation is stated but there is a duty to explain the refusal.25 The general duty to accept
conformity assessment test results is not applicable to phytosanitary standards.26
The CETA dispute settlement chapter provides a right to refer either to WTO or
18 See e.g. CETA, above n 1, Chapter 10, Article X.14(2):
Articles X.4 (Market Access), X.5 (Performance Requirements), X.6 (National Treatment), X.7
(Most-Favoured-Nation Treatment), and X.8 (Senior Management and Boards of Directors) do
not apply to measures that a Party adopts or maintains with respect to sectors, subsectors or
activities, as set out in its Schedule to Annex II.
See also Article 9 of Chapter 15 on Financial Services.
19 See e.g. the Annexes to Chapter 4 on Rules of Origin of CETA, above n 1.
20 See e.g. CETA, above n 1 Chapter 15, Article X.15 and Annex XX of the Financial Services Chapter. In
particular, while Article X.15 provides that nothing in this Agreement shall prevent a Party from adopting
or maintaining reasonable measures for prudential reasons, Annex XX of the Financial Services Chapter
states that such a measure is deemed to meet the requirement of Article X.15.1 if, inter alia, it is not so
severe in light of its purpose that it is manifestly disproportionate to the attainment of its objective.
21 See e.g. CETA, above n 1, Chapter 17, Article X.1(2)(3):
2. This Chapter does not apply to any measure of a Party affecting the transmission by any
means of telecommunications, including broadcast and cable distribution, of radio or television
programming intended for reception by the public, but for greater certainty it would apply to a
contribution link.
3. Nothing in this Chapter shall be construed to:
require a Party to authorize a service supplier of the other Party to establish, construct, acquire,
lease, operate or supply telecommunications networks or services, other than as specifically provided in this Agreement; or
require a Party (or require a Party to compel any service supplier) to establish, construct, acquire,
lease, operate or supply telecommunications networks or services not offered to the public
generally.
22 See e.g. CETA, above n 1, Chapter 10, Article X.14(4) or Chapter 32, Article X.09:
If a right or obligation in this Agreement duplicates one under the WTO Agreement, the Parties
agree that a measure adopted by a Party in conformity with a waiver decision adopted by the
WTO pursuant to Article IX of the WTO Agreement is deemed to be also in conformity with
the present Agreement.
23 CETA, above n 1, Chapter 22, Articles 6.3 (Exceptions to the Rights Conferred by a Trademark) and
9.2(5) para 2.
24 Ibid, Chapters 23, 24, and 25.
25 Ibid, Chapter 26, Article 2(6):
The Parties may undertake regulatory cooperation activities, on a voluntary basis. For greater
certainty, neither Party is obliged to enter into particular regulatory cooperation activities, and
either Party may refuse to cooperate or may withdraw from cooperation. However, if a Party
refuses to initiate regulatory cooperation or withdraws from such cooperation, it should be
prepared to explain the reasons for its decision to the other Party.
26 Ibid, Chapter 27, Article 1(5)(a).

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Conserving Regulatory Space under CETA

CETA dispute settlement but no right to invoke WTO procedures to justify a refusal
to stop the suspension of rights authorized pursuant to CETA dispute settlement;27
and finally, the text excludes the application of CETA to private rights.28
I I. GE N ER A L E X C EP T IO NS P R O V IS I O N S
Apart from these specific exceptions throughout the text, there are three more
general groups of exceptions: (i) in the Definitions chapter;29 (ii) in the general
chapter devoted to Exceptions;30 and (iii) in the chapter on Investments.31
The Definitions chapter creates a free trade area which it affirms to be compatible
with GATT Article XXIV.32 The chapter also affirms the Parties mutual obligations under the WTO Agreement and all other treaties to which they are bound.33
Finally, it contains a declaration that water in its natural state is not a product and,
except as regards obligations concerning the environment or sustainable development, is not covered by CETA.34
Under the Exceptions Chapter 32 Article 2.1, extensive parts of the CETA pertaining to goods and investments . . . GATT 1994 Article XX is incorporated into
and made part of this Agreement. This incorporation presumably incorporates the
chapeau to Article XX. It is also stated in the same paragraph that: [t]he Parties
understand that the measures referred to in GATT 1994 Article XX (b) include
27 Ibid, Chapter 33, Article 14.3(4):
Nothing in this Agreement shall preclude a Party from implementing the suspension of obligations authorised by the DSB. A Party may not invoke the WTO Agreement to preclude the
other Party from suspending obligations under this Chapter.
28 Ibid, Chapter 33, Article 14.16:
Nothing in this Agreement shall be construed as conferring rights or imposing obligations on
persons other than those created between the Parties under public international law, nor as permitting this Agreement to be directly invoked in the domestic legal systems of the Parties.
No Party may provide for a right of action under its domestic law against the other Party on the
ground that a measure of the other Party is inconsistent with this Agreement.
29
30
31
32

Ibid, Chapter 2.
Ibid, Chapter 32.
Ibid, Chapter 10.
Ibid, Chapter 2, Article X.03:
The Parties to this Agreement, consistent with Article XXIV of the GATT 1994 and Article V of
the GATS, hereby establish a free trade area.

33 Ibid, Articles X.04 (Relation to Other Agreements), X.05 (Incorporation of Wines and Spirits
Agreements), and X.07 (Reference to Other Agreements).
34 Ibid, Article X.08 (Rights and Obligations Relating to Water):
1. The Parties recognize that water in its natural state, such as water in lakes, rivers, reservoirs,
aquifers and water basins, is not a good or a product and therefore, except for Chapter XX
Trade and Environment and Chapter XX Sustainable Development, is not subject to the
terms of this Agreement.
2. Each Party has the right to protect and preserve its natural water resources and nothing
in this Agreement obliges a Party to permit the commercial use of water for any purpose,
including its withdrawal, extraction or diversion for export in bulk.
3. Where a Party permits the commercial use of a specific water source, it shall do so in a manner consistent with the Agreement.

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environmental measures necessary to protect human, animal or plant life or health.

The Parties further understand that GATT 1994 Article XX (g) applies to measures
for the conservation of living and non-living exhaustible natural resources.
With respect to services, the reservation is even more complex. CETA Chapter 32
Article 2.2 states that a party may adopt measures necessary to achieve the following
goals:

(i) to protect public security or public morals or to maintain public order;

(ii) to protect human, animal, or plant life, or health;
(iii) to secure compliance with laws or regulations which are not inconsistent
with the provisions of this chapter including those relating to:
(a) the prevention of deceptive and fraudulent practices or to deal with the
effects of a default on contracts;
(b) the protection of the privacy of individuals in relation to the processing
and dissemination of personal data and the protection of condentiality
of individual records and accounts; and
(c) safety.
While this provision is not made subject to the GATT Article XX chapeau,
it is completed by the following statement: [t]he public security and public order
exceptions may be invoked only where a genuine and sufficiently serious threat is
posed to one of the fundamental interests of society. These exceptions cover very
large sections of CETA and explicitly incorporate an important dimension of WTO
law dealing with exceptions.
The Exceptions chapter also allows temporary safeguard measures dealing with
capital movements, restrictions to deal with balance of payments difficulties and
other measures designed to protect national security. Article 6 allows parties to adopt
a wide range of taxation measures which might otherwise be deemed discriminatory,
and, in the event that questions arise concerning the scope of the taxation exception,
the parties are empowered to consult and issue joint determinations that the measure
in question is in fact a tax measure subject to the exception.35 These joint determinations will be binding upon dispute settlement bodies. Information which is confidential by law need not be disclosed,36 and no measure taken pursuant to a WTO
waiver can be deemed contrary to CETA. Finally, Chapter 32 Article 8 recalls that
35 Ibid, Chapter 31, Article X.06(7).
36 Ibid, Article X.07:
1. This Agreement does not require a Party to furnish or allow access to information which if
disclosed would impede law enforcement or the disclosure of which is prohibited or restricted
under its law.
2. In the course of a dispute settlement procedure under this Agreement:
(a) a Party is not required to furnish or allow access to information protected under its competition laws;
(b) a competition authority of a Party is not required to furnish or allow access to information that is privileged or otherwise protected from disclosure.

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culture and cultural industries are the object of exceptions found in no less than five
other chapters.
Some of the broadest exceptions are to be found in Chapter 10 dealing with
investments and investor-state arbitration. These provisions, which deal with both
procedure and substance, reflect the approach taken in the Canadian Model Foreign
Investment Protection Agreement (FIPA)37 in light of the 20 years experience of arbitral claims under Chapter 11 of the NAFTA. The NAFTA text followed the Model
BIT of the USA38 current at the time. This Model BIT already gave the States
Parties the right to issue binding interpretations of the text39a right which the
parties exercised in 2001 in the context of the NAFTA.40 The parties also had the
capacitywhich they exercised41to direct that proceedings would be conducted
in a more transparent way than was then current under many BITs and the
Convention on the Settlement of Investment Disputes Between States and Nationals
of Other States (ICSID Convention).42 However, despite the fact that NAFTA
Chapter 11 gave the parties greater control over arbitral proceedings and despite the
fact that states have won the great majority of cases, critics have continued to suggest
that it is inappropriate in a democracy to bypass the regular courts and to submit
claims involving the decision of both private and public issues to arbitrators rather

37 Agreement between Canada and ___________ for the Promotion and Protection of Investments, 2004,
available at http://www.italaw.com/documents/Canadian2004-FIPA-model-en.pdf (visited 1 August
2015).
38 Treaty between the Government of the United States of America and the Government of ___________
Concerning the Encouragement and Reciprocal Protection of Investment, April 1994, in UNCTAD,
International Investment Instruments: A Compendium, Volume III Regional Integration, Bilateral and
Non-governmental Instruments, UNCTAD/DTCI/30 (Vol.III), at 195.
39 Ibid, Article X.
40 See NAFTA Free Trade Commission, North American Free Trade Agreement Notes of Interpretation of
Certain Chapter 11 Provisions, 31 July 2001, available at http://www.international.gc.ca/ (visited 1 August
2015).
41 This was the case for e.g. in Methanex (Methanex Corporation v United States of America, Final Award of
the Tribunal on Jurisdiction and Merits, 3 August 2005, available at http://www.italaw.com/sites/
default/files/case-documents/ita0529.pdf) (visited 1 August 2015). In this regard, see Sofia Plagakis,
Webcasting, in Junji Nakagawa (ed.), Transparency in International Trade and Investment Dispute
Settlement (Abingdon, OX: Routledge, 2013), at 89:
NAFTA tribunals began emphasizing the public interest element inherent in disputes involving
a state in Methanex Corp v. United States. This case was significant in advancing transparency for
several reason: the tribunal ruled that it had authority to accept and consider amicus curiae
briefs; the disputing parties agreed to conduct public hearings (except for one procedural
hearing that was privately held at Methanexs request): and the parties agreed to make public all
the major procedural documents in the case.
42 Both the UNCITRAL or the ICSID Arbitration Rules, which are the most common arbitration rules
under which ISA takes place, have been modified in this respect. The ICSID Arbitrations Rules were
modified and became effective on 10 April 2006. The new Rules include improvements concerning the
transparency of proceedings among which the possibility for tribunals to consider requests from third parties to file amicus briefs (Arbitration Rule 37); the opening of ICSID hearing to the public (Arbitration
Rule 32); and the requirement for ICSID to promptly publish excerpts of the legal reasoning of every
award (Arbitration Rule 48). The UNCITRAL Rules on Transparency in Treaty-based investor-State
Arbitration came into effect on 1 April, 2014 and comprise a set of procedural rules that provide for
transparency and accessibility to the public of treaty-based investor-State arbitration.

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Conserving Regulatory Space under CETA

than to domestic judges.43 Environmentalists in particular have focused on cases

involving environmental protection measures in Ethyl;44 S.D. Myers;45 Methanex;46
Metalclad;47 Crompton;48 Waste Management;49 and Dow Chemical50 suggesting that
the claims constituted an improper private challenge to legitimate public policies.
Criticisms came from other sources also. The Chief Justice of Massachussetts, subsequent to the Mondev arbitration, professed to be shocked that a decision of her court
might subsequently be the object of an international arbitral claim.51 Similarly, defenders of the civil jury system in the USA have responded very negatively to suggestions in the Lowen arbitration52 that a civil jury might have acted in an illegitimate
fashion. Defenders of the integrity of the Canadian patent system have expressed
concern over the Eli Lilly claim.53 Opponents of hydraulic fracking for shale gas in
the Province of Quebec have voiced strong criticism of the claim made by Lone Pine
Resources54 following the imposition of a general moratorium on fracking imposed by
the Provincial Government in 2012. It is fair to say that neither the USA nor the
Canadian governments have been entirely comfortable defending the NAFTA
Chapter 11 investor-state claims system, although it must also be said that they have
pursued the negotiation of investor-state provisions in many BITs with developing

43 See generally Gus Van Harten, Investment Treaty Arbitration and Public Law (Oxford: OUP, 2007) and
Gus Van Harten and David Schneiderman, Public Statement on the International Investment Regime
31 August 2010, available at http://www.osgoode.yorku.ca/public-statement-international-investment-regime-31-august-2010/ (visited 1 August 2015).
44 See Ethyl Corporation v The Government of Canada, available at http://www.international.gc.ca/
trade-agreements-accords-commerciaux/topics-domaines/disp-diff/ethyl.aspx?langeng
(visited
1
August 2015).
45 S.D. Myers, Inc. v Government of Canada, Partial Award, 13 November 2000, available at http://
www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/myers-18.pdf
(visited 1 August 2015).
46 Methanex Corporation v United States of America, above n 41.
47 Metalclad Corporation v The United Mexican States, ICSID Case No. ART(AF)/97/1, Award, 30 August
2000, available at http://www.italaw.com/sites/default/files/case-documents/ita0510.pdf (visited 1
August 2015).
48 Chemtura Corporation (formerly Crompton Corporation) v Government of Canada, Award, 2 August 2012,
available at http://www.international.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/dispdiff/chemtura-14.pdf (visited 1 August 2015).
49 Waste Management, Inc. v United Mexican States, ICSID Case No. ARB(AF)/00/3, Award, 30 April 2004,
available at http://www.italaw.com/sites/default/files/case-documents/ita0900.pdf (visited 1 August
2015).
50 See Dow AgroSciences LLC v Government of Canada, http://www.international.gc.ca/trade-agreementsaccords-commerciaux/topics-domaines/disp-diff/agrosciences.aspx?langeng (visited 1 August 2015).
51 See Adam Liptak, Review of U.S. Rulings by NAFTA Tribunals Stirs Worries, The New York
Times, 18 April 2004, available at http://www.nytimes.com/2004/04/18/us/review-of-us-rulings-bynafta-tribunals-stirs-worries.html (visited 1 August 2015).
52 See Loewen Group, Inc. and Raymond L. Loewen v United States of America, ICSID Case No. ARB(AF)/
98/3, available at http://www.italaw.com/cases/632 (visited 1 August 2015).
53 See e.g. Jeff Gray, Eli Lilly NAFTA challenge without merit, Ottawa says, The Globe and Mail, 14 July
2014, available at http://www.theglobeandmail.com/report-on-business/industry-news/the-law-page/
lilly-nafta-challenge-without-merit-ottawa-says/article19602896/ (visited 1 August 2015).
54 See Lone Pine Resources Inc. v The Government of Canada, available at http://www.international.gc.ca/
trade-agreements-accords-commerciaux/topics-domaines/disp-diff/lone.aspx?langeng (visited 1 August
2015).

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countries55 and recently with China56 with complete conviction. Among the NAFTA
parties, only Mexico has responded with relative equanimity to investor-state claims
against it under Chapter 11.57
As a result of the experience with investor-state claims under NAFTA Chapter 11
both the USA58 and Canada59 continued to modify their Model BITs with a view to
correcting perceived problems. The result is that both models are now very lengthy
and complex documents60 containing many modifications of a procedural and
substantive nature designed to make the investor-state arbitral procedure much more
transparent, so that the public can judge what is going on, and to clarify the meaning
of various controversial terms and protect the regulatory space of governments. All
this has been done in response to public concerns that governments may have
allowed foreign investors too much scope to challenge governmental decisions.
Whether this concern is entirely justified is a matter of ongoing debate. The CETA
Chapter 10 text reflects the approach taken in the Canadian Model FIPA. It allows
governments to challenge frivolous and legally unfounded claims61 as well as to
55 For Canada, see e.g. the Agreement Between the Government of Canada and the Government of the Republic
of Benin for the Promotion and Reciprocal Protection of Investments, signed 9 January 2013, entered into
force 12 May 2014, available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/438
(visited 1 August 2015) and the Agreement Between Canada and the Republic of Cameroon for the
Promotion and Protection of Investments, signed 3 March 2014, not yet entered into force, available at
http://investmentpolicyhub.unctad.org/Download/TreatyFile/3163; (visited 1 August 2015) for the
USA, see e.g. Treaty Between the United States of America and the Oriental Republic of Uruguay Concerning
the Encouragement and Reciprocal Protection of Investment, signed 4 November 2005, entered into force 1
November 2006, available at http://investmentpolicyhub.unctad.org/Download/TreatyFile/2380 (visited
1 August 2015) and the Treaty Between the Government of the United States of America and the Government
of the Republic of Rwanda Concerning the Encouragement and Reciprocal Protection of Investment, signed 19
February 2008, entered into force 1 January 2012, available at http://investmentpolicyhub.unctad.org/
Download/TreatyFile/2241 (visited 1 August 2015).
56 Agreement Between the Government of Canada and the Government of the Peoples Republic of China
for the Promotion and Reciprocal Protection of Investments, signed 9 September 2012, entered into
force 1 October 2014, available at http://investmentpolicyhub.unctad.org/IIA/country/35/treaty/
778 (visited 1 August 2015).
57 See generally NAFTA claims available at http://www.naftaclaims.com (visited 1 August 2015).
58 In this regard, the USA revised their Model BIT in 2004, available at http://www.state.gov/documents/
organization/117601.pdf (visited 1 August 2015) and 2012, available at https://ustr.gov/sites/default/
files/BIT%20text%20for%20ACIEP%20Meeting.pdf (visited 1 August 2015).
59 In this regard, Canada revised its model FIPA in 2004, above n 37.
60 See Andrew Newcombe, General Exceptions in International Investment Agreements, Draft Discussion
Paper Prepared for BIICL Eighth Annual WTO Conference, 13 and 14 May 2008, London, available at
http://www.biicl.org/files/3866_andrew_newcombe.pdf/, (visited 1 August 2015) at 2 (while the typical BIT runs 8-10 pages, ( . . . ) new models run over 50 pages). In this regard, the new Canadian Model
FIPA (2004), above n 37 that is 49 pages long or the CanadaChina BIT 2012, above n 56 that is 45
pages long, provide extensive exception clauses, in sharp contrast with the first BIT entered into between
Pakistan and Germany in 1959 that is 8 pages long (Pakistan and Federal Republic of Germany Treaty for
the Promotion and Protection of Investment, signed 1 December 1959, entered into force 28 April 1962,
available at http://www.iisd.org/) (visited 1 August 2015).
61 CETA, above n 1, Chapter 10, Article X.29(1) provides that
The respondent may, no later than 30 days after the constitution of the tribunal, and in any
event before the first session of the Tribunal, file an objection that a claim is manifestly without
legal merit.
CETA, above n 1, Chapter 10, Article X.30(1) provides that

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challenge the jurisdiction of a tribunal. It also allows the States Parties to consult and
to issue binding interpretations of the Investment chapter in particular62 and elsewhere the scope of the taxation exemption.63 Proceedings are to be fully transparent
at all stages64 except the deliberations of the arbitral panel. To deal with the
Maffezini65 claim that the standard most favoured nation (MFN) clause embraces
both substantive and procedural rights, it is stated that,
4. For greater certainty, the treatment referred to in Paragraph 1 and 2 does
not include investor-to-state dispute settlement procedures provided for in
other international investment treaties and other trade agreements.
Substantive obligations in other international investment treaties and other
trade agreements do not in themselves constitute treatment, and thus cannot
give rise to a breach of this article, absent measures adopted by a Party
pursuant to such obligations.66
The most significant exceptions are made with respect to the concept of fair
and equitable treatment and full protection and security and the concept of expropriation. In both cases, the situation of, state is considerably strengthened. Thus, with
respect to fair and equitable treatment the Article 9 of CETAs Investment chapter
sets out what appears to be a very significant limitative definition by stating:
A Party breaches the obligation of fair and equitable treatment referenced in
paragraph 1 where a measure or series of measures constitutes:
(a) Denial of justice in criminal, civil or administrative proceedings;
(b) Fundamental breach of due process, including a fundamental breach of
transparency, in judicial and administrative proceedings.
(c) Manifest arbitrariness;
(d) Targeted discrimination on manifestly wrongful grounds, such as gender,
race or religious belief;
(e) Abusive treatment of investors, such as coercion, duress and harassment; or
(f) A breach of any further elements of the fair and equitable treatment obligation adopted by the Parties in accordance with paragraph 3 of this Article.
Without prejudice to a tribunals authority to address other objections as a preliminary question
or to a respondents right to raise any such objections at any appropriate time, the Tribunal shall
address and decide as a preliminary question any objection by the respondent that, as a matter
of law, a claim, or any part thereof, submitted pursuant to Article X.22 (Submission of a Claim
to Arbitration) is not a claim for which an award in favour of the claimant may be made under
this Section, even if the facts alleged were assumed to be true.
62 See CETA, above n 1, Chapter 10, Articles X.27(2), X.42(1), and the Declaration to Investment Chapter
Article X.11 Paragraph 6.
63 CETA, above n 1, Chapter 32, Article X.06(7).
64 Ibid, Chapter 10, Article X.33.
65 Emilio Agustn Maffezini v The Kingdom of Spain, ICSID Case No. ARB/97/7, Award, 9 November 2000,
available at http://www.italaw.com/sites/default/files/case-documents/ita0481.pdf (visited 1 August
2015).
66 CETA, above n 1, Chapter 10, Article X.7, para 4.

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The article also states that, [f]or greater certainty, full protection and security
refers to physical security of investors and covered investments. In this way, what
has been seen by critics as an open-ended invitation to companies to challenge
domestic regulation has been severely restricted.
Similarly, the definition of expropriation in general67 and indirect expropriation in
particular has been significantly restricted in the CETA text. Indirect expropriation is
defined in the following terms:
[I]ndirect expropriation occurs where a measure or series of measures of a
Party has an effect equivalent to direct expropriation, in that it substantially
deprives the investor of the fundamental attributes of property in its investment, including the right to use, enjoy and dispose of its investment, without
formal transfer of title or outright seizure.68 The European Commission, responding to criticisms very similar to those experienced by the Governments
of Canada and the USA after the adoption of NAFTA Chapter 11, has chosen
to accept the Canadian Model FIPA approach to investor-state arbitration.
Could they have acted otherwise? Could they have dropped investor-state arbitration from Chapter 10, as Canada and the USA did in the Canada-United
States Free Trade Agreement (CUFTA) in 1988?69 This appears to be the will
of a majority of Members of the Trade Committee of the European
Parliament with respect to the EUUnited States TTIP.70 Will this approach
have to be adopted with respect to the existing CETA text also? In principle, is
it possible for the EU and Canada to abstain from recourse to investor-state arbitration between developed democracies? To do so would probably not entail
any major difference in the treatment of foreign investors in either jurisdiction.
In certain cases injustice would be done but the results would probably not
cause insuperable harm to trade relations between the two parties. But how
would the rest of the world respond? Europe invented investor-state arbitration and European countries have concluded at least 1200 BITs with investorstate arbitration clauses. By what sleight of hand could Europe and North
America avoid their existing treaty commitments, including the Energy
67 Ibid, Article X.11(1):
1. Neither Party may 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:
(a) for a public purpose;
(b) under due process of law;
(c) in a non-discriminatory manner; and
(d) against payment of prompt, adequate and effective compensation.

68 Ibid, Annex X.11 (Expropriation) para 1(b).

69 Canada United States Free Trade Agreement, signed 2 January 1988, available at http://www.interna
tional.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/cusfta-e.pdf (visited 1 August 2015).
70 See EurActiv, European Parliament Committee Signals Opposition to ISDS, 13 January 2015, available
at http://www.euractiv.com/sections/trade-society/european-parliament-committee-signals-opposition-isds311189 (visited 1 August 2015). See also European Parliamentary Research Service, TTIP & ISDS, 10
February 2015, available at http://epthinktank.eu/2015/02/10/ttip-isds/ (visited 1 August 2015).

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Charter Treaty,71 and convince the rest of the world that while investor-state
arbitration is good for the poor and undemocratic states of the world it is not
necessary for developed democracies?72
Much is made in the European Parliament and also in Japan today of the alleged
danger of allowing American corporations to sue governments under the future
TTIP73 and TPP.74 The fear is often expressed publicly that these corporations will
seize the opportunity to attack various regulatory measures protecting consumers
and the environment. The experience under NAFTA Chapter 11 does not entirely
bear out this fear. There have been 31 cases taken by American foreign investors
against Canada in the last 20 years, many by small- and medium-sized foreign investors. One of these cases involved environmental policies which enjoy strong public support where there the complaining company had already lost a case before the
Supreme Court of Canada.75 Many cases have been abandoned. One case involved
outright fraud perpetrated to claim the status of foreign investor.76 Canada has lost
or settled only four cases, of which only one result77 is questionable in law. Critics
seldom note the nuance that under investor-state arbitration the complainant can
only sue for damages, unlike the WTO where the complaining government calls
upon the other to withdraw the measure78surely a far more invasive result.
CETA, like NAFTA before it, rejects the possibility of granting private rights to citizens of the parties. The right of foreign investors to lay investor-state arbitration claims
against states in CETA and in an increasing number of FTAs, as opposed to self standing
BITs,79 is the only exception to this principle. It is possible that this fact serves to exacerbate the objections that have been raised against the investor-state arbitration procedure.

71 Energy Charter Treaty (ECT), signed 17 December 1994, entered into force 16 April 1998, 2080 UNTS
95, 34 ILM 360 (1995).
72 This question is the object of a major conference to be organized by the Centre for International
Governance Innovation (CIGI) in Ottawa Canada on 25 September 2015.
73 TTIP, for up-to-date information concerning the TTIP, available at http://ec.europa.eu/trade/policy/infocus/ttip/ (visited 1 August 2015).
74 TPP, for up-to-date information concerning the TPP, see TPP, Office of the United States Trade
Representative, available at http://www.ustr.gov/tpp (visited 1 August 2015).
75 The Dow AgroSciences claim, above n 50, for instance, took place in the aftermath of the decision of the
Canadian Supreme Court in Hudson (114957 Canada Ltee (Spraytech, Societe darrosage) v Hudson (Ville),
28 June 2001, [2001] 2 RCS 241) finding the bans at stake in the NAFTA claim to be constitutional.
76 See Vito G. Gallo v The Government of Canada, Award, 15 September 2011, available at http://www.inter
national.gc.ca/trade-agreements-accords-commerciaux/assets/pdfs/disp-diff/gallo-11.pdf
(visited
1
August 2015).
77 See the decision in Bilcon (William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel
Clayton and Bilcon of Delaware, Inc. v Government of Canada, PCA Case No. 200904, Award on
Jurisdiction and Liability, 17 March 2015, available at http://www.international.gc.ca/trade-agreementsaccords-commerciaux/assets/pdfs/disp-diff/clayton-12.pdf) (visited 1 August 2015).
78 WTO, Understanding on Rules and Procedures Governing the Settlement of Disputes, 1869 UNTS 401, 33
ILM 1226 (1994), Article 3(7).
79 Since the conclusion of NAFTA Chapter 11 more than 300 international investment agreements (IIAs) have
been signed, available at http://investmentpolicyhub.unctad.org/IIA/MostRecentTreaties#iiaInnerMenu (visited
1 August 2015).

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II I . E X P L AI N IN G T H E E X C EPT IO NS
If the EU has accepted the Canadian FIPA approach to the treatment of foreign
investments, Canada in return has chosen to accept the general EU approach to drafting trade agreements by adopting many references to respect larger societal values80
as well as placing much greater emphasis on transparent forms of regulation.81 The objective of these provisions appears to be to reach a very high level of bilateral cooperation in trade regulation, but at the same time to preserve regulatory space for
governments to adopt the policies they deem conducive to the protection of the public
interest. They do this by using very detailed and explicit treaty exceptions and positive
measures rather than remitting such decisions to a supranational legislative procedure,
as is done within the context of the EU treaties. They are forced to take this approach
by the FTA model. The FTA model is inherently much more rigid than a customs
union. It is much harder to adapt to supranational decision-making and requires that
subsequent changes be made by specific consent of the parties and almost always rules
out granting of standing to private citizens. It is not impossible to include direct citizens rights in FTAs but it has very seldom been done. The inclusion of investor-state
provisions in investment chapters since the adoption of NAFTA Chapter 11 in 1994 is
one example. The right of litigants in administrative proceedings involving anti-dumping and countervailing duty disputes under NAFTA Chapter 1982 to call for the creation of a binational panel is another notable example. Other examples are the
European Economic Area Agreement,83 certain aspects of the Australia-New Zealand
Closer Economic Relations Trade Agreement (ANZCERTA)84 as well as the rights of
individuals to seize the trade courts of the Caribbean Community (CARICOM) and
other South American and African regional trade agreements.85 Thus, citizens rights
may be creeping slowly into regional trade agreements, especially those which contain
elements of supranational authority and especially those providing for regional trade
courts.
As lamented by Petersmann86 in his companion article in this issue, CETA
explicitly rules out granting rights to private parties, as was done in NAFTA and
apparently is contemplated in the draft unofficial TTIP text.87 This is inherently a
more rigid and less satisfactory approach to international trade regulation than that
which is possible within a customs union. But this is the approach preferred by
governments in the overwhelming majority of trade agreements and, for better or for
80 See CETA, above n 1 Chapters 23 (Trade and Sustainable Development); 24 (Trade and Labour); 25
(Trade and Environment).
81 Ibid, Chapters 26 (Regulatory Cooperation) and 31 (Transparency).
82 NAFTA, above n 4, Chapter 19, Article 1904.
83 Agreement on the European Economic Area (EEA), entered into force 1 January 1994, OJ No L 1,
3 January 1994, p. 3, Article 3(4). See also Protocol 33 to the EEA Agreement that contains provisions
on arbitration procedures.
84 ANZCERTA, entered into force 1 January 1983, available at http://wits.worldbank.org/GPTAD/PDF/
archive/CER.pdf (visited 1 August 2015).
85 See generally Karen Alter, New Terrain of International Law: Courts, Politics, Rights (Princeton: Princeton
University Press, 2014).
86 See generally Ernst-Ulrich Petersmann, Transformative Transatlantic Free Trade Agreements without
Rights and Remedies of Citizens?, in the present issue.
87 Ibid.

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worse, there does not seem to be any likelihood that this will change. The EU has
pushed regulatory cooperation and cooperation through joint committee procedures
to the limit in CETA,88 and this is certainly welcome. But this cannot alter the
inherent rigidity of the FTA model. It would seem that as long as states maintain
FTAs as the principal vehicle of trade liberalization, outside the WTO, recourse to
exceptions and public policy exclusions will remain the order of the day.

88 CETA, above n 1, Chapter 10, Article X.42.