News in Brief

More legal woes for Canada’s Feed-in Tariff program for renewable energy

Canada could soon be faced with arbitration for alleged breach of its obligations under the North American Free Trade Agreement (NAFTA). On 6 July 2011, a Texas-based company, Mesa Power Group LLC, served Canada with a Notice of Intent to Submit a Claim to Arbitration under NAFTA Chapter 11 in connection with the Province of Ontario’s Feed-in Tariff (FIT) program.

Under Ontario’s Green Energy Act of 2009, the FIT program was created to encourage the production of renewable energy. The program, through long-term fixed price contracts with the Ontario Power Authority, guarantees electrical grid access to renewable energy producers. A successful applicant under the FIT program secures a set purchase price over a twenty-year period.

Mesa, which participated in Ontario’s renewable energy production program through four of its wind-farm projects in Ontario, alleges that the Ontario Power Authority made last-minute changes to the regulatory framework for awarding the Wind Power Purchase Agreement contracts under the FIT program. The new set of rules had the effect of allowing wind projects to move from one region to another and interconnect with long transmission lines, which disadvantages Mesa’s wind-farm investments.

Mesa argues that the changes were made in an arbitrary and non-transparent manner, without notice and due process. The company alleges that Canada breached its obligation under Article 1105 of NAFTA by failing to accord treatment to Mesa and its wind farm investments as required by the international law standard of treatment.

Mesa also challenges the various Canadian and Ontario content requirements and “buy local” performance requirements, which were imposed as a “precondition” to obtain approval of commercial contracts under the FIT program, under Article 1106 of NAFTA, which sets rules on performance requirements.

Additionally, Mesa has brought claims under Articles 1102 and 1103 of NAFTA for providing more favorable treatment, in like circumstances, to a domestic company and to a non-NAFTA party respectively.

Mesa has claimed damages of not less than 775 million Canadian dollars in compensation.

Canada is already facing a challenge against these measures from Japan at the World Trade Organization (WTO). The European Union also recently requested consultations with Canada at the WTO, in connection with its measures related to the FIT program. Both countries allege that Ontario’s requirement that projects meet local content requirements in order to qualify for the contracts under the FIT program violates international trade rules.

EU Council’s Trade Policy Committee drafts negotiating directives for investment protection  

The European Union’s General Affairs Council has approved negotiating directives for investment protection provisions in free trade agreements with Canada, India and Singapore.

The directives to the European Commission call for agreements that provide “the highest possible level of legal protection and certainty for European investors in Canada/India/Singapore …”

The negotiating directives, approved on 12 September 2011, come at a time of tension between the European institutions responsible for the EU’s international investment policies. While the 2009 Lisbon Treaty added Foreign Direct Investment (FDI) the EU’s common commercial policy, the European Parliament (elected by EU citizens), the European Council (ministers from EU Member States) and the European Commission (the EU’s executive body) have offered competing visions on the future shape of the EU’s international investment agreements.

As detailed by Marc Maes in the July 2011 issue of ITN, the Member States want the EU’s investment agreements to remain in line with their bilateral investment treaties (BITs).[1] In contrast, the European Parliament has expressed concern with a number of the provisions that are standard in the Member States’ BITs, on the grounds that they do not strike the appropriate balance between public and private interests, and give too much discretion to international arbitrators.

This has placed the European Commission, which negotiates FTAs for the EU, in a difficult situation. While it receives its negotiating directives from the European Council, the European Parliament must consent any deal it negotiates.

The General Affairs Council, which is a configuration of the European Council, calls for an approach that follows “the Member States’ experience and best practice regarding their bilateral investment agreements,” including “unqualified most-favoured nation treatment”, “fair and equitable treatment”, and “other effective protection provisions, such as ‘umbrella clause’”.

Notably, the directive also states that some areas of investment protection remain “mixed competence” (i.e., negotiating authority is shared between the European Commission and the Member States). These are “portfolio investments, dispute settlement, property and expropriation aspects”.

While the General Affairs Council directives focus on investment protection provisions in EU FTAs that are under negotiation, the European Parliament and Council must also resolve their differences over what to do with the existing BITs of Members States. Many Member States are loath to retire or re-negotiate these treaties, but the Parliament has outlined a number of areas where they should be reformed in the public interest, in areas such as transparency and corporate social responsibility. These negotiations remain ongoing.

Australia proceeds with plain packaging legislation on tobacco products, in face of industry challenge

Australia has passed legislation on plain-packaging of tobacco products, with the law set to come into effect in January 2012.

The legislation was approved by Australia’s Federal Parliament with broad support in August. Under the law, cigarette packages will be stripped of their logos and other elements of branding, to be replaced by graphic health warnings.

The strict regulations on cigarette packages have drawn a strong reaction from tobacco companies, which have challenged on the law on a number of legal fronts, including international investment law.

In June 2011, the tobacco company Philip Morris served a notice of claim against Australia, a first step towards initiating investor-state arbitration under an international investment treaty. Philip Morris says it “will be seeking the loss in value of its investments in Australia that will result from plain packaging,” and that “damages may amount to billions of dollars.”

Philip Morris claims breaches of the Australia-Hong Kong bilateral investment treaty (Philip Morris’ Australian operation is owned by Hong Kong-based Philip Morris Asia Limited).

Philip Morris has also initiated an arbitration claim against Uruguay in reaction to its tobacco packaging regulations. That claim was registered with ICSID in March 2010, and the tribunal held its first session in May 2011. In its case against Uruguay, Philip Morris is alleging violation of the Switzerland-Uruguay BIT. Philip Morris has its international headquarters in Lausanne, Switzerland.
These cases have drawn a public spotlight to the international law framework of investment treaties, and in particular the system of setting disputes through investor-state arbitration.

Writing in the July 2011 issue of Investment Treaty News, Matthew C. Porterfield and Christopher Byrnes argue that the “tobacco industry’s aggressive use of investment rules could prove to be an effective strategy for opposing restrictions on tobacco marketing.  Yet given the widespread support for tobacco regulations, it seems just as plausible that this strategy could result in a backlash against investor-state arbitration.”[2]

Indeed, in April 2011, the Australian government announced that it would not be including investor-state arbitration provisions in its future free trade agreements; a decision that was based in part on the threats by tobacco companies over Australia’s plans introduce plain-packaging regulations.[3]

Azurix petitions the USTR on enforcement of award against Argentina

A water services company announced plans in August to the petition the United States government to pressure the government of Argentina to pay a US$235 million award.

The Texas based company, Azurix Corp., is submitting a case under Section 301 of the US Trade Act, which allows the US government to retaliate against a foreign government for actions that unreasonable restrict US commerce. A Section 301 case can be initiated by the United States Trade Representative or on the basis of petition by a firm or industry group.

If the petition is successful, this would be the first time that Section 301 has been used to seek enforcement of an investment-treaty award.

In July 2006 an ICSID tribunal unanimously found Argentina liable to the Texas-based company, Azurix Corp. However, Argentina has argued that the award must be recognized by an Argentine court before it can comply with the award – a step that Azurix, and the United States government, believe is unnecessary under the ICSID Convention.

As a remedy under Section 301, Azurix wants the US government to withhold its support for a US$7 billion loan, which Argentina has requested from the Paris Club of creditor nations.  Azurix also wants the US government to block loans from the World Bank and Inter-American Development Bank.

Earlier, Azurix asked the USTR to withdraw Argentina’s benefits under the Generalized System of Preferences, which provides preferential duty-free entry for certain products from developing countries. However, the GSP program expired on December 31, 2010, and so far has not been reauthorized by the United States Congress.

Argentina currently faces 34 claims at ICSID, a number of claimants are seeking enforcement of final awards. While the government has insisted it will comply with those awards, claimants have refused to submit those awards to Argentine domestic courts, as Argentina has required.