Globalization and Canadian Federalism:
Implications of the NAFTA’s Investment Rules
Mark A. Luz and C. Marc Miller
Globalization is a theory blind to federalism. In
this Note, the authors consider the implications of
globalization for Canadian federalism by exploring the
implications of the investment protection provisions of
Chapter 11 of the North American Free Trade Agree-
ment (“NAFTA”).
After exploring the theoretical foundations of glob-
alization, three indicators of globalization are identified:
the increase in regulatory treaties, the legalization of dis-
pute resolution, and the individualization of remedy. All
three indicators are exemplified by the NAFrA invest-
ment protections.
The authors then address three potential conse-
quences of NAFrA Chapter 11 for the constitutional
division of powers in Canada. First, they foresee that
international law will be brought to bear on the most
local levels of Canadian society, with an unprecedented
effect on provincial powers. Second, the territorial
limitation on provincial powers will be challenged by
the non-territorial aspects of globalization. Third, the
authors predict an expansion of federal power through
the trade and commerce power and the peace, order,
and good government power.
The authors conclude that a judicial balancing
solution is preferable to granting the federal govern-
ment a treaty-maling power. This balance may be as-
sisted by employing the national concern doctrine.
La thtorie du f~dralisme 6chappe ii Ia mondiali-
sation. Darts cette Note, les auteurs examinent les im-
plications de la mondialisation pour le fdralisme ca-
nadien en explorant les implications des directives de
protection d’investissement du Chapitre 11 de l’Accord
de libre-ichange nord-amdricain (<
Aprs un examen des fondements thoriques de la
mondialisation, trois indicateurs de ]a mondialisation
sont identifids, soit la croissance des traitds rdgulateurs,
la 16galisation des rsolutions de diffdrends et
l’individualisation du remade. Ces trois indicateurs sont
illustrs par les directives de protection d’inves-
tissements de I’ALNA.
Les auteurs examinent ensuite les implications du
Chapitre 11 de I’ALtNA pour la division des pouvoirs
en Canada. Premi~rement, ils prdvoient que le droit in-
ternational sera appliqu6 aux 6chelons locaux de la so-
cidt6 canadienne entranant ainsi un effet sans prc&6-
dent sur les pouvoirs provinciaux. Deuxi~mement, les
limitations territoriales des pouvoirs provinciaux semnt
mises au dtfi par les aspects non territoriaux de la
mondialisation. Troisi~mement, les auteurs envisagent
un O1argissement du pouvoir fdral A travers les pou-
voirs du trafic et du commerce et du pouvoir de paix,
d’ordre et de bon gouvemement.
En conclusion, les auteurs reconnaissent qu’une
solution d’6quilibre judiciaire est prefdrable au pouvoir
f&ldral de conclure des trait6s. La doctrine de l’intr&
national peut alder A atteindre cet 6quilibre.
. Mark A. Luz, Associate, White & Case LLP (Moscow), B.A., M.A., LL.B., B.C.L.; C. Marc
Miller, Associate, Paul, Weiss, Rifkind, Wharton & Garrison LLP (New York), B.A., M.Sc., LL.B.,
B.C.L. The authors would like to thank Professor Stephen Toope for his great support and guidance
on this note, as well as the editors of the McGill Law Journal for their diligent editing and helpful
comments.
McGill Law Journal 2002
Revue de droit de McGill 2002
To be cited as: (2002) 47 McGill L.J. 951
Mode de rdfdrence: (2002) 47 R.D. McGill 951
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 47
Introduction
I. The Theory of Globalization
II. Legal Indicators of Globalization
Increase in the Number and Scope of Regulatory Treaties
A.
B. Legalization of Dispute Resolution
C. Individualization of Remedy
I1l. Case Study: NAFTA Chapter 11
IV. Effects on Canadian Federalism
International Law in Canada
A.
B. Territoriality of Provincial Powers
C. Implicated Federal Powers
1. Trade and Commerce Power
2. Peace, Order, and Good Government Power
Conclusion
2002] M.A. Luz & C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 953
Introduction
While there has been substantial discussion about the implications of the North
American Free Trade Agreement(“NAFfA”)’ for the Canadian economy, sovereignty,
and democracy, few studies have sought to put the NAFTA into the broader context of
globalization and examine what impact it will have on Canadian federalism. Indeed,
globalization is a theory blind to federalism. If globalization represents the decay of
national borders, how can internal borders in federal states remain unaffected? The
NAFTA, as a particular expression of globalization, is similarly blind to the basic ten-
ets of federalism. If we are to reconcile globalization with the principles of federalism
that have sustained Canada since Confederation, the traditional tests of balancing fed-
eral and provincial powers need to be rethought.
We argue that a treaty like the NAFFA, particularly the investment protection
provisions contained in Chapter 11, will accelerate significantly the entrenchment of
international legal standards at the provincial level by virtue of the threat of credible
international arbitration and the direct enforcement of arbitral awards by domestic
courts. Historically, there have been few international investment claims against Can-
ada (on its own behalf or because of an alleged wrongful action taken by a province)
because Canada has rarely entered into agreements that either gave individuals proce-
dural remedies against it or covered provincial actions within the scope of the agree-
ment. Recently, treaties like the NAFIA, the Canada-Chile Free Trade Agreement,2
investment protection agreements
and Canada’s newest versions of foreign
(“FIPAs”), expose the country to potential international investment claims unprece-
dented in Canadian history. In particular, NAFTA Chapter 11 outlines specific stan-
dards of treatment of investors and their investments, directly incorporates customary
international law as a source of interpretation, and provides for a direct right of action
by an investor against a NAFTA government for transgressions of the treaty by federal
and provincial entities. With the federal and provincial governments having recently
‘North American Free Trade Agreement between the Government of Canada, the Government of
Mexico and the Government of the United States, 17 December 1992, Can. T.S. 1994 No. 2, 32 I.L.M.
289 & 605 (entered into force 1 January 1994).
25 December 1996, Can. T.S. 1997 No. 50,36 LL.M. 1067 (entered into force 2 June 1997).
See e.g. Canada-Venezuela Agreement for the Protection and Promotion of Investments, 1 July
1996, Can. T.S. 1998 No. 20 (entered into force 28 January 1998), online: DFAIT
the Department of Foreign Affairs and International Trade’s list of FIPAs online: DFAIT
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 47
adopted legislation on the recognition and enforcement of foreign arbitral awards,’ in-
dividual and corporate investors have more power against governments than ever be-
fore. Whether this is a positive or negative development is a topic for another study,
but it is clear that conflicts centred on the status of treaties and customary interna-
tional law will likely arise in Canada in the near future.
In Part I we discuss globalization from a theoretical perspective and identify
globalization for the purposes of this paper as a process that is transforming tradi-
tional structures of society, in particular the state. In Part II we identify three indica-
tors of globalization: the increase in regulatory treaties, the legalization of dispute
resolution, and the individualization of remedy. Part III outlines how the three indica-
tors operate by demonstrating how certain provisions in a regulatory treaty such as the
NAFTA (particularly those contained in Chapter 11) are symptomatic of globaliza-
tion. Finally, in Part IV we address the potential impact of NAFTA’s Chapter 11 pro-
visions on Canada’s federal structure and suggest that these provisions will present an
increasing challenge to the traditional distribution of powers between the federal and
provincial governments.
I. The Theory of Globalization
The modern use of the term “globalization” can be traced back at least to the
1960s. In 1962, Marshall McLuhan observed that the “new electronic interdepend-
ence” was recreating the world in the image of a global village and that this new elec-
tronic age was merging humanity into a single global tribe McLuhan pointed to
technological development as having created a situation in which change itself had
become the “archetypal norm of social life.” ‘6 The growing discussion of “the global”,
for which McLuhan’s work was in part responsible, builds on the great technological
developments of the twentieth century. Indeed, the common theme running through
most accounts of globalization emphasizes the massive technological leap that has oc-
curred in the past century and its effects on humanity through the provision of instant
access to information in vast quantities and through allowing individuals to interact
with each other more quickly, more often, and more economically than before. The
4 See e.g. Commercial Arbitration Act, R.S.C. 1985 (2d Supp.), c. 17; International Commercial
Arbitration Act, R.S.B.C. 1996, c. 233; United Nations Foreign Arbitral Awards Convention Act,
R.S.C. 1985 (2d Supp.), c. 16; Foreign Arbitral Awards Act, R.S.B.C. 1996, c. 154.
‘ M. McLuhan, The Gutenberg Galaxy: The Making of Typographic Man (Toronto: University of
Toronto Press, 1962) at 8, 31.
6 Ibid. at 155.
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 955
globalization debate, however, is much more than the observation of technological
transformation.
Globalization is not an entirely new phenomenon. Indeed, if one is to believe
McLuhan, global change started with Gutenberg’s printing press. If globalization is to
be identified with converging societies and a process of integration, then Emile Durk-
heim, Claude-Henri de Saint-Simon, Karl Marx, and Max Weber, among others, have
already addressed this phenomenon.” Durkheim argued that industrialization was
erasing national borders and Saint-Simon identified the emergence of a pan-European
state. Weber saw the Protestant ethic as a rationalization process that would modern-
ize the Western world, while Marx argued that the capitalist method of production led
to the expansion of the bourgeois class, which would eventually allow a worldwide
proletariat to triumph.8 These writers focused not only on economic development but
also on the shaping of ideas and the transformation of societies.
From a historical perspective, it can be argued that the current form of globaliza-
tion is the result of a drawn-out process. Roland Robertson identifies five phases of
globalization The fifth phase, from 1965 onward, is marked by the vast increase in
global consciousness due largely to the increase in means of communication and in-
formation transfers. It is, according to Robertson, characterized by the spread of de-
7 E. Durkheim, The Division of Labor in Society, trans. by G. Simpson (New York: Free Press,
1933); G. Ionescu, ed., The Political Thought of Saint-Simon (London: Oxford University Press,
1976); M. Weber, The Protestant Ethic and the Spirit of Capitalism, trans. by S. Kalberg (Los Ange-
les: Roxbury, 2002); K Marx, Capital: A Critique of Political Economy, ed. by E Engels, 3 vols.
(New York: International, 1967).
8 M. Waters, Globalization (London: Routledge, 1995) at 5-7.
9 R. Robertson, Globalization: Social Theory and Global Culture (London: Sage, 1992) at 58-59.
The first phase, from 1400 to 1750, was characterized principally by the formation of national com-
munities, the recognition of the heliocentric theory, the propagation of the Gregorian calendar, and the
expansion of the Catholic Church. This phase was followed by the “nascent” period from 1750 to
1870 in which the key benchmarks included the solidification of the homogeneous nation-state, the
formation of international relations, as well as the increased presence of non-European states. The
third phase, termed the “take-off” phase, ranged from 1870 to 1925 and was capped by the First
World War. Robinson considers the take-off phase to be a period in which the inclusion in interna-
tional relations of non-European societies started to take place, as well as a significant increase in
means of communication. This phase was also characterized by more global forms of competition
and recognition such as the Olympics and the Nobel Prize. The fourth phase, or the “struggle for he-
gemony” phase, lasted between 1925 and 1965. According to Robertson, this period’s benchmarks
were the League of Nations, the Second World War, and the United Nations. It was marked by differ-
ent conceptions of modernity, as exemplified by the opposing ideological forces characteristic of the
Second World War and the Cold War. The increased awareness of the world and humanity writ large,
notoriously through the harnessing of atomic energy, was also a key benchmark.
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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mocracy and human rights as a global norm of governance, and coincides roughly
with what Samuel Huntington has called the third wave of democratization.” This
model, though summary, illustrates the historical progress that forms the basis for
globalization theory.”
Anthony Giddens argues that a dislocation has occurred in modem history such
that forms of organization like the nation-state can only be properly understood in ref-
erence to modernity, a social process that began with industrialization. Giddens claims
that “originating in the West but becoming more and more global in their impact [are]
a series of changes of extraordinary magnitude.”” Giddens further argues that global-
ization is a process involving a dialectic between the global and the local.” Under-
stood as an increasing compression of time and space, globalization implies that no
one can opt out of the transformations caused by modernity as typified by the risks of
an ecological disaster or nuclear war.” Globalization thus cannot be understood solely
as an overwhelming “top-down” process. It is also reflexive-meaning that it is
structured in reference to itself. Indeed, events and activities that one might think of as
being strictly local phenomena may well be the result of global forces.
This idea was developed earlier by Karl Polanyi, who argued that although “haute
finance” had contributed internationally to the maintenance of peace, particularly in
the so-called Hundred Years Peace, it was not sufficient for government simply to follow
simplistic principles of auto-regulation and utopian liberalism.'” Polanyi argued that
modem society at that time was governed by a dual movement: a constant expansion of
the market met by a countermovement of social forces limiting its expansion.’6 The idea
of this dual movement, although seemingly antagonistic in Polanyi’s analysis, under-
scores the dynamic interaction later identified by Giddens as the global-local dialectic:
the process by which new social structures emerge and transform old structures.
‘0 S.P. Huntington, The Third Wave: Democratization in the Late Twentieth Century (Norman, Ok.:
University of Oklahoma Press, 1991).
” This theory has been described by other eminent writers such as
. Braudel, Civilization and
Capitalism 15th-18th Century: The Perspective of the World, vol. 3, trans. by S. Reynolds (London:
Collins, 1984); I. Wallerstein, The Modem World-System: Capitalist Agriculture and the Origins of
the European World-Economy in the Sixteenth Century (New York: Academic Press, 1974).
“S A. Giddens, The Nation-State and Violence, vol. 2 of A Contemporary Critique of Historical Ma-
terialism (Berkeley: University of California Press, 1987) at 33.
13 A. Giddens, Modernity and Self-Identity: Self and Society in the Late Modem Age (Cambridge:
Polity Press, 1991) at 22.
4 Ibid
‘ K. Polanyi, The Great Transformation (New York: Rinehart, 1957) at 17-18, 29-30.
,6Ibid. at 130.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 957
Given this theoretical and historical background, globalization is most aptly con-
ceptualized by five general conclusions.’7 First, it is a set of potentially competing
processes and not a single condition. Second, globalization, through its intense and
far-reaching web of interconnected international and transnational relationships, is
contributing to an emerging structure that both enables and constrains communities,
states, and social forces. Third, very few areas of social life escape this process, which
affects life in different ways. Fourth, both socio-economic and political spaces are
being subjected to a “deterritorialization” and “reterritorialization”. In many areas of
social life, territoriality is becoming disembedded. Finally, and perhaps as a conse-
quence of the foregoing, power relationships amongst local, national, and global ac-
tors are becoming increasingly affected and restructured by globalization.
If globalization is a “widening, deepening and speeding up of worldwide inter-
connectedness in all aspects of contemporary social life,”” it is clearly a phenomenon
of varying intensity and extent. In particular, there is a disturbing disjuncture between
the developed and developing world in virtually all aspects of globalization. Also, this
phenomenon is modifying or extinguishing traditional forms of organization. Thus,
any discussion of globalization should focus on the transformation of the spatial or-
ganization of social relations and transactions as assessed in terms of their extent, in-
tensity, velocity, and impact.’9
The globalization debate has generated three identifiable theses: hyperglobalist,
skeptical, and transformationalist. The hyperglobalist school of thought defines
globalization as a new point in human history and posits that traditional structures,
such as the nation-state, are outdated and incapable of fully controlling modem life.!’
This view usually points to an economic logic such as the emergence of the world
market as a near-irresistible force that is replacing traditional units of social organiza-
‘” D. Held et al., Global Transformations: Politics, Economics and Culture (Stanford: Stanford Uni-
versity Press, 1999) at 27-28.
‘ibi. at 2.
Ibid. at 16.
Ibid. at 2. As Held et aL point out, none of these schools of thought replicate the classical schools
of thought in the social sciences: Marxism, liberalism, and conservatism.
21 See e.g. K. Ohmae, The End of the Nation-State: The Rise of Regional Economies (New York-
Free Press, 1995); W.B. Wriston, The Twilight of Sovereignty: How the Information Revolution Is
Transforming Our World (New York Charles Scribner’s Sons, 1992); S. Strange, The Retreat of the
State: The Diffusion of Power in the World Economy (Cambridge: Cambridge University Press, 1996).
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
[Vol. 47
tion with new ones. In the hyperglobalist logic, the perceived consequences of this
new and powerful force can be radically divergent.’
The skeptical school of thought argues that the levels of economic interdepend-
ence are overstated and not unprecedented. This school further emphasizes the in-
creasing need for and salience of national governments in this process of intemation-
alization.’ Accordingly, there is no clear evidence of perfectly integrated world mar-
kets and at best, the current evidence indicates further world fragmentation and re-
gionalization.’ Moreover, the argument according to which nation-states are becom-
ing increasingly irrelevant is one that is categorically rejected by this school.’ If any-
thing, states themselves have been the authors of any perceived increase in interna-
tionalization. As Robert Gilpin argues, the role of the state and the role of the market
are fundamentally different: “[Tihe logic of the market is to locate economic activities
where they are most productive and profitable; the logic of the state is to capture and
control the process of economic growth and capital accumulation.” ‘ Furthermore, in-
creased economic activity is not being globalized, but is restricted to Northern coun-
tries, and the rift with the “Third World” is becoming increasingly wide.”
” Neo-Marxist arguments underscore the increase of oppressive global capitalism tied to American
hegemony. See S. Gill & D. Law, “Global Hegemony and Structural Power of Capital” in S. Gill, ed.,
Gramsci, Historical Materialism and International Relations (Cambridge: Cambridge University
Press, 1993) 93. See also B. Stem, “How to Regulate Globalization?” in M. Byers, ed., The Role of
Law in International Politics: Essays in International Relations and International Law (Oxford: Ox-
ford University Press, 2000) 247; M. Koskenniemi, “Carl Schmitt, Hans Morgenthau, and the Image
of Law in International Relations” in Byers (ibid., 17). Meanwhile, a more neo-liberal account
stresses the victory of individualism over state power. See Held et al., supra note 17 at 3. See also
T.M. Franck, The Empowered Sef. Law and Society in the Age of Individualism (Oxford: Oxford
University Press, 1999). Nevertheless, there is considerable agreement on the proposition that nation-
states are increasingly unable to contain and regulate social and economic activities and respond to
the demands of their citizens.
P. Hirst & G. Thompson, Globalization in Question: The International Economy and the Possi-
bilities of Governance (Cambridge: Polity Press, 1996) at 199-200.
21 See R. Boyer & D. Drache, eds., States against Markets: The Limits of Globalization (London:
Routledge, 1996). See also S.P. Huntington, The Clash of Civilizations and the Remaking of World
Order (New York: Simon & Schuster, 1996).
25 See A. Wendt, Social Theory of International Politics (Cambridge: Cambridge University Press,
1999).
‘ R. Gilpin with J.M. Gilpin, The Political Economy of International Relations (Princeton: Prince-
ton University Press, 1987) at 11.
27Robertson, supra note 9; Held et al., supra note 17 at 6-7.
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 959
The transformationalist school argues that societies are being transformed by an
unprecedented and distinct historical process rife with contradictions. Accordingly,
the current phase of globalization is forcing governments and societies to adapt to a
world where there is no longer a sharp distinction between international and domestic
or internal and external.’ For example, James Rosenau argues that since the Second
World War, a technological revolution has occurred creating a significant degree of
turbulence in world politics, thus creating a bifurcated system where there is increased
parity between the global, the national, and the subnational?. This account identifies
globalization as a process that is significantly transforming states, societies, and indi-
viduals, without necessarily tending towards a global market or a global civilization.
The state is thus under increased pressure to seek coherent strategies for dealing with
a globalized world and consequently there is no clearly defined set of rules to address
this powerful force of change.’
We adopt the transformationalist school of thought primarily because we accept
the notion that nation-states face difficulties in regulating and controlling global
forces. We also take the state as our focal point of analysis and as the primary actor in
international politics, since it is in part responsible for the creation and unleashing of
these forces. One of the ramifications is that states are compelled to adapt and reform
one of the fundamental means by which they manage legal relations amongst them-
selves: treaties.” Whereas historically treaties were strictly meant to govern interna-
tional relationships between sovereign states, they now deal with issues in areas once
considered to be solely within the domestic sphere of nations. As such, local issues
have become matters of concern for other states. Furthermore, treaties have histori-
cally only offered general and vague rules, without the means to resolve disputes over
2′ Held et aL, ibid. at 7.
Ibid See also A. Giddens, The Consequences of Modernity (Stanford: Stanford University Press,
1990); J.N. Rosenau, Turbulence in World Politics: A Theory of Change and Continuity (Princeton:
Princeton University Press, 1990); J.G. Ruggie, “Territoriality and Beyond: Problematizing Moder-
nity in International Relations” (1993) 47 International Organization 139.
Rosenau, ibiL at 100-01.
3′ Held et aL, supra note 17 at 9.
32Customary international law is obviously of critical importance as well. Unlike treaties, however,
which are negotiated as instruments of international law, customary rules are created by substantial
state practice and by states considering that the rule in question is legally binding upon them (opinio
juris). See Statute of the International Court of Justice, s. 38(1)(b), online: UN
Cases (Federal Republic of Germany v. Denmark; Federal Republic of Germany v. Netherlands),
[1969] I.CJ. Rep. 4; Case Concerning Military and Paramilitary Activities in and against Nicaragua
(Nicaragua v. United States of America) (Merits), [1986] LCJ. Rep. 14.
960
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[Vol. 47
interpretation and application other than through diplomatic negotiations. Today,
many treaties are complex regulatory instruments with highly institutionalized over-
sight bodies and binding dispute resolution mechanisms. Finally, whereas states are
still the primary subjects of international law and as a rule the only entities that can
make such agreements, treaties are increasingly granting substantive and procedural
rights to non-state actors.
The theoretical outcome of this analysis is that globalization is increasingly chal-
lenging the traditional conception of the nation-state, and will therefore force a
change in the traditional means by which states govern relations between themselves.
Globalization theories put into question the viability of the state as an actor capable of
making effective decisions. Both “pressure from above” and “pressure from below”
challenge states in their institutional procedures. Stephen Gill argues that states are
active participants in the creation of a “new constitutionalism”, which involves the
imposition of “binding constraints” on key aspects of economic life, ensured through
the creation of supra-national institutional mechanisms like the World Trade Organi-
zation (“WTO”), the European Union, and the NAFrA3 The result of this process is
that state institutions are constrained in their powers to interfere with, for example,
property rights, such that holders of mobile capital are provided secured “entry and
exit options.”‘ Where power is divided federally in a state, the effect of these “con-
straints” is felt even more acutely. We argue that globalization disembeds the tradi-
tional legal order such that the division of powers typical of federal systems is under
attack.
Globalization theory usually focuses on two sets of actors: the nation-state, as if it
were an undivided sovereign entity, and non-state actors such as corporations, non-
governmental organizations, and individuals. The internal political structure of a state
and its relevance for that society, however, is rarely discussed in a globalization con-
text. Here we argue that federalism, as a particularly valuable internal political and so-
cial structure, should receive much more attention in globalization debates, precisely
because it conceives of the state as other than an undivided sovereign entity. If we
consider some of the aforementioned conclusions about globalization in the context of
federalism, it becomes apparent that significant and perhaps damaging consequences
await federal states like Canada as a result of globalization. While we examine only
the Canadian situation from an international legal and Canadian constitutional divi-
sion of powers perspective and focus on the particular issue of investment, we also
33 S. Gill, “Globalisation, Market Civilisation, and Disciplinary Neoliberalism” (1995) 24 Millen-
ium: Journal of International Studies 399 at 412.
, Ibid. at 413.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 961
attempt to add to the broader debate on how subnational entities like the Canadian
provinces will adapt to globalization.
II. Legal Indicators of Globalization
From a legal perspective, three indicators are particularly valuable illustrations of
how globalization has permeated and transformed international law: the increase in
treaties of a regulatory nature, the legalization of dispute resolution, and the individu-
alization of remedies. While the strength of these indicators varies by treaty and issue-
area, matters that were once the exclusive domain of diplomatic “high politics” and
off limits to any person or entity other than a sovereign state are becoming more
transparent and accessible to non-state actors.
A. Increase in the Number and Scope of Regulatory Treaties
Since the inception of the United Nations (“UN”) system, and arguably earlier,
there has been a trend towards the legalization of international interactions. The sheer
number of international treaties is telling; the United Nations Treaty Series now con-
tains more than 40,000 treaties and currently publishes more than 100 volumes per
year.” While many of these treaties remain exclusively relevant to state-state interac-
tions, international law is taking up an increasingly important role in domestic legal
spheres.
Koh describes this trend as “an epochal transformation in international law.”‘ He
argues that this particular transformation “has been characterized by the marked de-
cline of national sovereignty; the concomitant proliferation of international regimes,
institutions, and nonstate actors; the collapse of the public-private distinction; the
rapid development of customary and treaty-based rules; and the increasing interpene-
tration of domestic and international systems.”3 Chayes and Chayes point to a similar
” UN, United Nations Treaty Collection-Overview, online: UN
‘ H.H. Koh, “Review Essay: Why Do Nations Obey International Law? ‘ (1997) 106 Yale L.J. 2599
at 2604.
Ibid. ×.. Koh traces this radical transformation of international law and divides it
into six phases of evolution: (1) ancient and primitive international law, (2) traditional international
law, (3) the dualistic era, (4) the era of institutions, (5) interdependence and transnationalism, and (6)
the new world order. See ibid at 2604-34. Dealing with the period immediately after the Second
World War, which he calls the “era of institutions”, he characterizes this phase as one of international
institutions that are governed by multilateral treaties and that organize “proactive assaults on all man-
ner of global problems.” !bid at 2614. He describes the system as global constitutions seeking “both
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trend, noting that the focus of treaty practice in recent decades has shifted from the re-
cording of bilateral political settlements and arrangements to multilateral agreements
concerning complex economic, political, and social problems that require co-
operative action among states.” Although treaties are not the sole source of state obli-
gation, they indicate an increased legalization of international relations. An example
from the domain of high politics-the prohibition of chemical weapons-illustrates
this trend.
In 1925, the Protocol for the Prohibition of the Use in War of Asphyxiating, Poi-
sonous or Other Gases, and of Bacteriological Methods of Warfare39 was signed in
Geneva. It prohibited the use of chemical and bacteriological weapons when it entered
into force on 8 February 1928. Nevertheless, many reservations were made to the
protocol, most of which limited compliance to first use. It lacked substantive detail
and was essentially an agreement in principle. It contained no verification mechanism
and was liniited solely to the use in war of asphyxiating, poisonous, or other gases.
Moreover, it was unspecific as to what constituted a prohibited substance. Not until
almost fifty years later, in 1972, with the signing of the Convention on the Prohibition
of the Development, Production, and Stockpiling of Bacteriological (Biological) and
Toxin Weapons and on their Destruction—did the processes leading up to the poten-
tial use of such weapons become prohibited. Once again, however, this treaty spanned
only fifteen short articles (although it was more extensive than the 1925 treaty). In-
deed, it contained no verification mechanism and its level of specificity was low. Even
at the height of the Cold War, this treaty was seen as insufficiently detailed, but its
signature and ratification were nevertheless considered to be necessary, in part to
maintain the momentum in the field of arms control.” Work towards a more detailed
treaty and a viable verification mechanism carried on, focusing specifically on chemi-
cal weapons. In 1993, the Convention on the Prohibition of the Development, Pro-
duction, Stockpiling and Use of Chemical Weapons and on their Destruction
to allocate institutional responsibility and to declare particular rules of international law.” Ibid. This
phase was followed by a period of interdependence, followed by what Koh calls the new world or-
der-marred by considerable uncertainty but distinct in that international law is becoming increas-
ingly transnational, permeating deeper into domestic legal orders. Ibid. at 2630-33.
” A. Chayes & A.H. Chayes, The New Sovereignty: Compliance with International Regulatory
Agreements (Cambridge, Mass.: Harvard University Press, 1995) at 1.
” 17 June 1925, T.I.A.S. 8061, Can T.S. 1930 No. 3 (entered into force 8 February 1928, ratified by
Canada on 6 May 1930).
0 10 April 1972, 1015 U.N.T.S. 163, T.I.A.S. 8062, 11 I.L.M. 310, Can. T.S. 1975 No. 12 (entered
into force 26 March 1975).
41 J.C. Kessler, Verifying Non-Proliferation Treaties: Obligation, Process, and Sovereignty (Wash-
ington, D.C.: National Defence University Press, 1995) at 52-53.
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 963
(“CWC”Y2 was signed, and it entered into force in 1997. Although this treaty deals
solely with chemical weapons and certain toxins, it can accurately be described as
regulatory in nature. The CWC is a highly detailed document that creates a central
authority, the Organization for the Prohibition of Chemical Weapons, to ensure com-
pliance with the treaty. Furthermore, it lists prohibited chemicals and requires report-
ing when they are used for civilian purposes. The transparency mechanism is rein-
forced by an inspection mechanism that requires states parties to allow an interna-
tional inspectorate to examine sensitive facilities situated within the state. Arguably,
this new mechanism is groundbreaking in the field of high politics and it exemplifies
the transformation of international law as described by Koh. The CWC thus bears little
resemblance to its 1925 predecessor, whether in intensity, specificity, or delegation.
The past six decades have been characterized by significant increases in depth and
scope of treaties in arms control, security and defense, economics and trade, criminal
matters, the environment and natural resources, transportation and communication,
education and culture, and human rights. This tendency points to a more generalized
pattern of compliance, particularly as embodied by the UN system. As noted by Oscar
Schachter, this increased concern for compliance at the world level was brought most
notably to the fore by pressure on governments to respect human rights.’3 More gener-
ally, Schachter notes that globalization and the spread of the UN system have fostered
this process.’ This in turn has resulted in increased institutionalism and legalized pat-
terns of transaction.”
This elaboration of what constitutes “legalization”–although highly positivis-
tic-essentially reproduces the argument made regarding the more general concept of
globalization: it makes membership to the international structure more intense and
more complex. The conceptual framework falls neatly within the context of global-
ization and the growing importance of treaty law; globalization is entrenching this
trend towards legalized relationships, which in turn, is penetrating issue-areas that
were traditionally territorially bound.’ As Chayes and Chayes emphasize, although
42 13 January 1993, 32 I.L.M. 800 (entered into force 29 April 1997, ratified by Canada 26 Septem-
ber 1995).
43
. Schachter, “United Nations Law” (1994) 88 AJ.I.L. 1.
tlbid at 19, n. 62.
4′ A.-M. Slaughter, A.S. Tulumello & S. Wood, ‘International Law and International Relations
Theory: A New Generation of Interdisciplinary Scholarship” (1998) 92 AJ.I.L. 367. The trend to-
wards legalization of international interactions has recently been discussed in a special issue of Inter-
national Organization. See (2000) 54:3 International Organization.
, Chayes & Chayes, supra note 38 at 284-85.
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regulatory treaties, formally, are cast as obligations of a state to do or not do some-
thing, their object also is to regulate the activities of private entities and individuals. ‘7
B. Legalization of Dispute Resolution
Legalization is a form of institutionalization of international rules and norms
characterized by obligation, precision, and delegation. 8 The degree of obligation can
vary from expressly non-legal norms to binding legal rules and is evaluated by the
extent to which an actor is bound by its commitments. The degree of precision can
range from a vague principle to a precise and highly-elaborated rule. This dimension
involves clearly and unambiguously defining what is expected of the actors in ques-
tion.” The third dimension, the level of delegation, can shift from simple diplomacy to
international or domestic court remedies.’ It refers to the extent to which states and
other actors delegate authority to third parties in order to implement and enforce
agreements.’
As states enter into more substantively complex, regulatory, and intrusive treaties
than ever before, the mechanisms by which disputes are resolved have also become
more complex and intrusive. The delegation of broad authority to a neutral entity
charged with ensuring that implementation, interpretation, dispute settlement, and
rule-making are taking place bolsters the institutional nature of these treaties and, ul-
timately, the level of compliance. 2
47Ibid. at 14.
48K.W. Abbott et aL, “The Concept of Legalization” (2000) 54 International Organization 401.
49 Ibid. at 412.
‘o Ibid. at 404.
“, Ibid. at 415.
52 J.L. Goldstein et aL, “Introduction: Legalization and World Politics” (2000) 54 International Or-
ganization 385 at 388-91. Specifically focusing on dispute resolution in trade treaties, James McCall
Smith argues, “The more legalistic the dispute settlement mechanism … the higher the likely level of
compliance.” J. McCall Smith, “The Politics of Dispute Settlement Design: Explaining Legalism in
Regional Trade Pacts” (2000) 54 International Organization 137 at 144. By “legalistic”, McCall
Smith refers to five features of institutional design: an automatic right to third-party review; a standing
tribunal of judges; access to the dispute resolution mechanism by states, individuals and treaty organs;
the ruling is a binding obligation in law; and the enforcement of the ruling has direct effect in domes-
tic law (ibid at 139-43). The progressive institutionalization of the world trading system is one exam-
ple of this process.
2002] M.A. Luz & C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 965
The unprecedented increase in world trade,53 for example, has been fostered by in-
stitutional efforts to remove tariff barriers and to promote competition in the global
trading system. The 1944 Bretton Woods agreement represented a conscious attempt
to purge the protectionism of the 1930s by laying the foundations for a multilateral
trading order.’ Although the 1947 Havana Charter provided for the creation of the
International Trading Organization to oversee the international trading system, it was
opposed in the U.S. Congress, leaving the General Agreement on Tariffs and Trade
(“GAT’)” as little more than a trade agreement with a small secretariat setting the
rules for global trade. It was not until 1995 that the WTO cemented the GATT into a
more powerful institution.’
The GATT’s transition from a system of soft law to a more hard-law system il-
lustrates the global shift toward legalization and the emergence of supranational law-
based governance mechanisms in the area of trade law. The GATT was drafted in
relatively general terms and its delegation of authority to a dispute settlement body
was unwieldy and insufficient.’7 While it was a major step forward at the time it was
negotiated, over time it became anemic and incapable of addressing more sophisti-
cated forms of protectionism such as the so-called second and third generation trade
barriers: non-tariff governmental measures like quotas, export subsidies, anti-dumping
measures, and voluntary restraints. Internal governmental regulatory measures not di-
rectly targeting trade also presented difficulties, such as services, regulatory measures,
” Although the emergence of the world trading system can be traced back to the sixteenth century,
it was not until the period ranging from 1870 to 1939 that markets for key goods started to acquire a
global dimension which resulted in country specialization where national patterns of production were
increasingly influenced by global competition. The post-World War II period up until 1973 saw trade
volumes increase at 5.8 percent annually, while world trade output grew at a rate of 3.9 percent annu-
ally. This was followed by, from 1973 to 1996, increased trade volumes of 4.1 percent and world out-
put volume increases of 3.3 percent annually. Held et al., supra note 17 at 163-65. See also Braudel,
supra note 11; A.K. Smith, Creating a World Economy: Merchant Capital Colonialism, and World
Trade, 1400-1825 (Boulder, Colo.: Westview Press, 1991); M. Kitson & J. Michie, ‘Trade and
Growth: A Historical Perspective” in J. Michie & J.G. Smith, eds., Managing the Global Economy
(Oxford: Oxford University Press, 1995) 3.
‘6Held et aL, ibid at 164.
“30 October 1947, 55 U.N.T.S. 187, Can. T.S. 1947 No. 27 (entered into force 1 January 1948).
‘6 Agreement Establishing the Multilateral Trade Organization [World Trade Organization], 15
April 1994,33 I.L.M. 15.
tional Organization 519 at 520.
“F.M. Abbott, “NAFrA and the Legalization of World Politics: A Case Study” (2000) 54 Interna-
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intellectual property norms, and competition policies.” It took five decades to address
the insufficiencies of the original GATT agreement.”
The GAIT dispute resolution process was radically transformed by the creation
of the WTO. The GATT panel and appellate body decisions became legally binding,
thus giving these bodies the power to rule that a government was in breach of interna-
tional trade laws and to impose sanctions.’ According to Shell, this move constituted
a dramatic departure from prior trade practice:
mhe new WTO system represents a stunning victory for international trade
“legalists” in their running debate with trade “pragmatists” over how interna-
tional trade dispute resolution should be structured. Pragmatists have supported
formally nonbinding methods of dispute resolution based on their belief that
such systems provide the best means of coping with power relationships be-
tween countries…. For their part, legalists have advocated the creation of rule-
based trade tribunals that can move world trade toward a governance system
based on “the rule of law” ’61
This increased delegation to an independent dispute resolution mechanism was seen
as necessary
to reinforce the trading system further and to give teeth to the
GATT/WTO adjudicative process.’ Ultimately, the trend towards legalization of dis-
pute resolution is attractive because it leads to greater compliance.”
C. Individualization of Remedy
The third legal indicator of globalization is the individualization of remedy. An
increasing number of treaties confer not only substantive legal rights on non-state ac-
tors but also the procedural rights necessary for their enforcement. Given the intensity
and frequency of international transactions, states are finding it necessary to give in-
dividuals greater procedural rights to encourage those exchanges and to resolve dis-
58 Ibid. at 520, n. 5.
59 F.M. Abbott “The Intersection of Law and Trade in the WTO System: Economics and the Transi-
tion to a Hard Law System” in D. Orden & D. Roberts, eds., Understanding Technical Barriers to Ag-
ricultural Trade (Minneapolis, Minn.: International Agricultural Trade Research Consortium, 1997)
33.
‘” G.R. Shell, “Trade Legalism and International Relations Theory: An Analysis of the World Trade
Organization” (1995) 44 Duke L.J. 829.
6 Ibid. at 833-34 ×..
62 See generally J.H. Jackson, The World Trade Organization: Constitution and Jurisprudence
(London: Royal Institute of International Affairs, 1998).
613 See R.O. Keohane, A. Moravcsik & A.-M. Slaughter, “Legalized Dispute Resolution: Interstate
and Transnational” (2000) 54 International Organization 457.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 967
putes efficiently when they arise. As globalization transforms traditional power rela-
tionships, states, for various reasons, find it in their interests to open up international
legal space for non-state actors.’
The real issue is not whether an individual is a subject of international law and is
the bearer of rights but rather whether the individual has the procedural capacity to
pursue and enforce those rights. ‘ States do have the capacity to confer both substan-
tive and procedural rights on individuals, although “it cannot be presumed that States
intend to treat what normally are mere objects of international law as subjects within
In the Danzig Railway Officials case, the Permanent
the realm of the law of nations”
Court of International Justice (‘PCIJ”) noted that “it cannot be disputed that the very
object of an international agreement, according to the intention of the contracting
Parties, may be the adoption by the Parties of some definite rules creating individual
rights and obligations and enforceable by the national courts ”
At the beginning of the twentieth century individuals slowly began to acquire in-
dependent recognition under international law.’ For example, while the mixed arbitral
‘ Of course, it might be stated with equal credibility that states have no choice but to allow non-
state actors to have procedural rights if they wish to exercise any modicum of control over interna-
tional interactions.
‘6 D.P. O’Connell, International Law, vol. 1 (London: Stevens & Sons, 1965) at 109-11. Brownlie
also criticizes this tendency to focus on the theoretical question of whether an individual is an object
or subject of international law. See I. Brownlie, Principles of Public International Law, 5th ed. (Ox-
ford: Oxford University Press, 1998) at 584-85.
‘ G. Schwarzenberger, International Law, vol. 1 (London: Stevens & Sons, 1945) at 66-67 [foot-
note omitted).
(1928), P.C.IJ. (Ser. B) No. 15 at 17-18.
‘ This process, however, was without much success prior to World War II. An early example was
the International Prize Court, which was supposed to have been established pursuant to Hague Con-
vention XII, 18 October 1907, but never was. See J.B. Scott, ed., The Hague Conventions and Decla-
rations of 1899 and 1907 (New York: Oxford University Press, 1915) 188. The International Prize
Court was to have allowed individuals a claim against a foreign state before the court, although the
individual’s home state retained the right to disallow. Indeed, the individual could be forbidden by his
or her own state to initiate a proceeding and the home state could choose to initiate the claim itself.
See Schwarzenberger, supra note 66 at 118-20. The ill-fated Central American Court of Justice, es-
tablished in 1908, similarly did not contribute a great deal to substantive international law, but the fact
that it existed until 1918 is evidence of states’ willingness to recognize the individual as the bearer of
substantive rights and the procedural rights by which to enforce them. It heard five cases brought by
individuals against the five Central American Republics signatory to the Convention for the Estab-
lishrment of a Central American Court of Justice, 20 December 1907, 206 C.T.S. 78, which estab-
lished the Court. The convention provided that individuals could “raise [questions] against any of the
other Contracting Governments, because of the violation of Treaties or Conventions, and other cases
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tribunals established after World War I’ are of historical interest because they heard
several cases brought by citizens of the victor countries against the defeated states
seeking compensation for injury to their property during the war, they enjoyed un-
usual coercive powers in support of their decisions and state governments still main-
tained an important role in the claims process.”0 These institutions all laid the ground-
work for the establishment of modern claims tribunals where individuals have the
procedural capacity to bring claims rather than having to rely on their home state’s
discretion to enforce the claim on their behalf.” The entrenchment of the individual as
a subject of international law with procedural capacity to enforce substantive rights
came about after the Second World War.
Non-state actors have also made significant inroads in the realm of foreign direct
investment (“FDI”). Transnational corporations (and small-scale investors with for-
eign investments) have gained substantial procedural rights in international law for the
protection of their FDI, especially in the past ten years. Whereas foreign investors
used to be required by treaty and custom to rely exclusively on their home state to es-
pouse their claims,” there are now many bilateral and multilateral investment treaties
that allow for direct investor-state arbitration to resolve disputes.”
of an international character, no matter whether their own Government supports said claim or not; and
provided that the remedies which the laws of the respective country provide against such violation
shall have been exhausted or that denial of justice shall have been shown” Four of the five cases were
dismissed and the Court ruled against the claimant in the fifth case. See Brownlie, supra note 65 at
587-88.
6′ Articles 296, 297, 304, 305 of the Treaty of Versailles, 28 June 1919, 225 C.T.S. 188, established
these tribunals.
70 Brownlie, supra note 65 at 588-89. Other mixed arbitral tribunals have been set up giving indi-
viduals procedural rights. For example, see Agreement of 10 August 1922 between U.S. and Ger-
many (cited in ibid. at 589).
7 These include the U.S.-Iran Claims Tribunal, established by the Declaration of the Government of
the Democratic and Popular Republic of Algeria Concerning the Settlement of Claims by the Gov-
ernment of the United States of America and the Government of the Islamic Republic of Iran, 19
January 1981, 20 I.L.M. 230, art. 2 (part of the Algiers Accords).
” The two most prominent examples are Case Concerning the Barcelona Traction, Light and Power
Company, Ltd. (Belgium v. Spain), [1970] I.C.J. Rep. 4; Case Concerning Elettronica Sicula S.p.A.
(ELSI) (United States v. Italy), [1989] I.C.J. Rep. 15.
7 According to the United Nations Conference on Trade and Development (“UNCTAD”), the num-
ber of investment treaties concluded in the 1990s quintupled, driven particularly by the growth of bi-
lateral investment treaties signed between developing countries, as well as between Central and East-
em European countries. See Bilateral Investment Treaties: 1959-1999, UNCTAD/ITEIA2 (New
York & Geneva: United Nations, 2000) at iii, online: UNCTAD
Instruments on Investment Protection” (1997) 269 Rec. des Cours 251.
‘4 18 March 1965, 575 U.N.T.S. 160 (entered into force 14 October 1966) [hereinafter ICSID Con-
vention].
75 In order for the ICSID to have jurisdiction over an investment dispute, three conditions must be
fulfilled: (a) there must be a legal dispute arising out of an investment, (b) the dispute must have
arisen between a contracting state and a national of another contracting state, and (c) the parties must
have consented to submit their dispute to the ICSID. See American Manufacturing & Trading, Inc. v.
Republic ofZaire, ICSID Case No. ARB/93/1 (award of 21 February 1997), 36 I.L.M. 1531. See gen-
erally A. Broches, “The Convention on the Settlement of Investment Disputes between States and
Nationals of Other States” (1972) 136 Rec. des Cours 331.
76 Rules Governing the Additional Facility for the Administration of Proceedings by the Secretariat
of the International Centre for Settlement of Investment Disputes (Additional Facility Rules), online:
ICSID Additional Facility
18 October 2002) [hereinafter Additional Facility Rules]. See A. Broches, “The ‘Additional Facility’
of the International Centre for Settlement of Investment Disputes (ICSID)” (1979) 4 YB. Comm. Arb.
373. Following the fundamental tenet of international commercial arbitration that the parties to a dis-
pute must consent to arbitration, both the ICSID Convention and the Additional Facility Rules require
that both the investor and the state involved consent to submit their investment dispute to arbitration.
Article 25(1) of the ICSID Convention, supra note 74, requires that “the parties to the dispute consent
in writing to submit [it] to the Centre. When the parties have given their consent, no party may with-
draw its consent unilaterally.” Article 4 of the Additional Facility Rules (ibid.) requires that there be
an agreement providing for conciliation or arbitration proceedings under the Additional Facility in re-
spect of existing or future disputes in order for the Secretary General to approve the institution of pro-
ceedings.
‘ See generally M. Somarajah, The International Law on Foreign Investment (Cambridge: Cam-
bridge University Press, 1994); R. Dolzer & M. Stevens, Bilateral Investment Treaties (The Hague:
Martinus Nijhoff Publishers, 1995); A.R. Parra, “Provisions on the Settlement of Investment Disputes
in Modem Investment Laws, Bilateral Investment Treaties and Multilateral Instruments on Invest-
ment” (1997) 12 ICSID Review-F.I.LJ. 287; Sacerdoti, supra note 73. These treaties typically include
provisions on the scope and definition of foreign investment; admission of foreign investment; na-
tional and most-favoured-nation treatment; fair and equitable treatment; guarantees and compensation
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Many of the recently negotiated BITs include an “offer” to arbitrate on behalf of the
contracting states that an investor may choose to accept should it wish to pursue arbi-
tration rather than seek remedies in a domestic court.” As private foreign investment
is now seen as a critical means of economic development,” BITs are negotiated not
only to provide incentives to bring in foreign investment but also in order to give en-
hanced protection for foreign investment beyond that which exists in customary inter-
national law.
Indeed, a clear indicator of Canada’s entry into the global marketplace is epito-
mized by the negotiation of FIPAs starting in 1989.’ Canada’s negotiation of such
treaties (which has been common practice for the United States and Western Euro-
pean countries for some time) is concomitant to the increasing stock of Canadian FDI
abroad, which has more than tripled from $74 billion in 1987 to $257 billion in
1999.” Canadian efforts to negotiate foreign investment protection treaties, both
bilaterally and multilaterally,’ signify the growing importance of FDI and Canada’s
for expropriation and nationalization, as well as for damages caused by war and civil disturbances;
guarantees of free transfer of funds and repatriation of capital and profits; subrogation on insurance
claims and dispute settlement covering investor-state disputes as well as disputes as between the two
contracting parties. In recent years, some of the treaties have become even more complex and deal
with a broader array of subjects, including transparency of national laws, performance requirements,
entry and sojourn of foreign personnel, and the extension of national and most-favoured-nation treat-
ment to the entry and establishment of investments.
78 See generally Sacerdoti, ibid. The first case brought by an investor under a bilateral treaty was
Asian Agricultural Products Ltd. v. Republic of Sri Lanka (1990), Case No. ARB/87/3 (ICSID Tribu-
nal), 30 I.L.M. 577.
” See generally UNCTAD, World Investment Report 2000: Cross-border Mergers and Acquisitions
and Development (New York: United Nations, 2000).
“‘ See R.K. Paterson, “Canadian Investment Promotion and Protection Treaties” (1991) 29 Can.
YB. Int’l L. 373. On FIPAs, see text accompanying note 3 above.
“I See Canada, Department of Foreign Affairs and International Trade, Opening Doors to the World:
Canada’s International Market Access Priorities, 2001 (Ottawa: Department of Foreign Affairs and
International Trade, 2001) at 35-38, online: DFAIT
to $240 billion. Moreover, as is pointed out on the Department of Foreign Affairs and International
Trade’s website, “[s]ince 1996, the stock of Canadian direct investment abroad has surpassed the
stock of FDI in Canada.”
” The inclusion of an investor-state mechanism in the Free Trade Agreement of the Americas similar
to that of NAFTA will undoubtedly be very controversial. See Canada, Department of Foreign Affairs
and International Trade, “Free Trade of the Americas (FTAA): Backgrounder-December 2000”, on-
line: DFAIT
(date accessed: 18 Octo-
ber 2002). Canada was also, for a while, a leading proponent of the Multilateral Agreement on Invest-
ment. See OECD, Directorate for Financial, Fiscal and Enterprise Affairs, The Multilateral Agreement
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 971
growing role in that global market. Canada has historically been a net importer of
capital and had therefore never been compelled to conclude such treaties with foreign
countries. In the past, Canadian investors who suffered damage as the result of actions
of another state had to rely primarily on the Department of Foreign Affairs and Inter-
national Trade to espouse their claims, as few other remedies were available.’ In sup-
port of the Canadian companies that have begun to venture out into the world in re-
cent years, however, Canada’s FIPAs now provide for a potentially effective mecha-
nism for investor-state dispute resolution by enshrining consent to arbitration in the
treaty itself.-
States often find it inefficient and politically dangerous to rely on the old model of
espousing claims on behalf of their nationals; individuals find the old model costly,
cumbersome, and dependent not solely on the merits of their claim but also on
broader diplomatic considerations.’ By offering individualized remedies, particularly
ones similar to those contained in investment treaties, states not only increase indi-
viduals’ confidence in the obligations agreed to in the treaties, thereby promoting in-
vestment by reducing risks to those investments, but also more greatly bind them-
selves to their treaty commitments because of the high cost of ignoring them.’
on Investment: Draft Consolidated Text, Doe. No. DAFFE/MAI(98)7/REV1 (OECD, 1998), online:
OECD
See C.. Cole, ‘A Generation of Canadian Experience with International Claims” (1965-66) 41
Brit. Y.B. Int’l L. 368.
This was not always the case–Canada’s old model FIPAs contained very vague provisions on in-
vestment protection and did not provide for compulsory arbitration in case of a dispute unless the
parties specifically agreed to submit it to arbitration after the dispute arose. See e.g. Agreement be-
tween the Government of Canada and the Government of the Union of Soviet Socialist Republics for
the Promotion and Reciprocal Protection of Investments, 20 November 1989, Can. T.S. 1991 No. 31
(entered into force 27 June 1991), online: DFA1T
advance consent to arbitration by the host state is the Canada-Venezuela treaty, supra note 3, art.
12(5).
‘ As Chayes & Chayes write, “[fIn a world increasingly dependent on the reliable performance of
international regimes, states and their citizens may also be less willing to rest content with either ne-
gotiation or the hope that some ad hoc arrangement to umpire a dispute will be set up in the event of
an impasse.” Supra note 38 at 216.
‘ McCall Smith writes: ‘Trading states realize that agreements are valuable only if compliance with
their terms is high. Cheating, in the form of ex post protectionism, undermines the expected benefits
of free trade accords. One way to discourage defection is to craft dispute settlement mechanisms that
monitor and enforce compliance. The more legalistic the mechanism-in other words, the more ef-
fectively and impartially it identifies violations and enforces third-party rulings-the higher the likely
level of government compliance.” Supra note 52 at 146.
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III. Case Study: NAFTA Chapter 11
Globalization has compelled states to negotiate and conclude treaties in a signifi-
cantly different manner in order to accommodate the increased number of transna-
tional interactions and transnational actors. We have identified three legal indicators of
this trend: the increased complexity of regulatory treaties, the legalization of treaties,
and the individualization of remedies contained in many of these treaties. NAFTA
Chapter 11, which covers investment, encapsulates all three indicators.
The opening of foreign markets and the integration of national economies into a
global marketplace have driven the need for trade liberalization. While it is by no
means assured that the current global economic framework will succeed in achieving
all of its promises, there is now a growing awareness that national economies cannot
“afford to remain outside the international network of products, customers, suppliers,
financing, and technology embodied in the activities of [transnational corporations].” ‘
This is particularly true in the realm of FDJ. There has been a massive increase in
global FDI since the early 1980s, driven not only by the increased privatization of
state-owned economies and national deregulation but also by the growing importance
of transnational services.’
FDI is particularly worth studying through the lens of globalization because it en-
compasses many of the factors outlined above. FDI both enables and constrains states,
corporations, and local communities. It raises sensitive issues of sovereignty, democ-
racy, and national control over domestic economies.’ It involves not only states and
multinational corporations, but also NGOs, labour unions, and other social groups.
Finally, FDI exemplifies the reconceptualization of territory. On the one hand, it
means a greater and longer-term link to the domestic economy of the host state than in
the case of portfolio investment, while on the other hand, foreign investors also have
“supranational” rights safeguarded by customary international
law and treaties,
thereby mitigating the exclusive application of national law.
D. Schwanen, “Investment and the Global Economy: Key Issues in Rulemaking” in P. Sauv6 &
D. Schwanen, eds., Investment Rules for the Global Economy: Enhancing Access to Markets (To-
ronto: C.D. Howe Institute, 1996) 1 at 4.
n M. Wolf, “Will the Nation-State Survive Globalization?” (2001) 80:1 Foreign Affairs 178.
Whereas antipathy towards FDI characterized much of the postwar era, there are virtually no govern-
ments left that espouse pure protectionism as a path to economic growth.
,9 Somarajah, supra note 77 at 4 ×., defines foreign direct investment as involving
“the transfer of tangible or intangible assets from one country into another for the purpose of use in
that country to generate wealth under the total or partial control of the owner of the assets.”
2002] M.A. Luz& C.M. MILLER- THE NAFA AND CANADIAN FEDERALISM 973
The NAFTA, as a whole, is designed to promote trade and investment between
Canada, the United States, and Mexico by eliminating tariffs and reducing non-tariff
barriers, as well as by establishing rules for the conduct of business in the free trade
area, including regulations of investment, services, intellectual property, competition,
and the temporary entry of business persons. The NAFrA not only commits govern-
ments to remove barriers to trade and investment amongst Canada, the United States,
and Mexico, but it affords individuals a primary role in ensuring the NAFTAs consoli-
dation. For example, Chapter 19 provides for a system of binational panel reviews in
place of judicial review of domestic decisions regarding anti-dumping and countervail-
ing duty matters.
Of even greater significance are the investor-state dispute resolution provisions
contained in Chapter 11.? The standards of treatment that each of the NAFFA govern-
ments are committed to afford to investors and investments include national treatment,
most-favoured-nation treatment, treatment in accordance with international law, prohi-
bitions against certain performance requirements, permissive transfers relating to an in-
vestment of an investor, and a prohibition against expropriation of an investment except
in accordance with the international legal standards stipulated in the treaty.’ If a NAFTA
government breaches one of its commitments, an investor has the option of demanding
that the dispute be submitted to an arbitral tribunal pursuant to the provisions of Chapter
11 and either the ICSID Rules, the Additional Facility Rules, or the UNCITRAL Arbi-
tration Rules. An offer and consent to such arbitration is given in advance within the
treaty itself, as long as the dispute is arbitrable under the treaty 3 If the arbitral tribunal
finds that the respondent government has in fact breached its commitments under the
treaty, monetary damages can be awarded and are legally enforceable in domestic
courts.’ Since the NAFTA came into force on 1 January 1994, there have been numer-
‘ See generally J.A. VanDuzer, “Investor-State Dispute Settlement under NAFrA Chapter 11: The
Shape of Things to Come?” (1997) 35 Can. Y.B. Int’l L. 263; J.C. Thomas, ‘Investor-State Arbitra-
tion under NAFTA Chapter 11″ (1999) 37 Can. YB. Int’l L. 99.
91NAFTA, supra note 1, arts. 1102-10.
92 ICSID Convention, supra note 74; Additional Facility Rules, supra note 76; UNCITRAL Arbitra-
tion Rules, UN GAOR, 31st Sess., Supp. No. 17, U.N. Doe. A/31/17 (1976) 46.
9′ NAFTA, supra note 1, art. 1122(1) (Consent to Arbitration) states: “Each Party consents to the
submission of a claim to arbitration in accordance with the procedures set out in this Agreement” Art
1122(2) explicitly states that this consent satisfies the requirements for agreement to arbitrate as de-
fined in the ICSID Convention, ibid, the Additional Facility Rules, ibid., the Convention on the Rec-
ognition and Enforcement of Foreign Arbitral Awards, 10 June 1958, 330 U.N.T.S. 38 (entered into
force 7 June 1959) [hereinafter New York Convention], and the Inter-American Convention on Inter-
national CommercialArbitration, 30 January 1975, OR/OEA/Ser.A/20/Doc.42 (1975).
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ous interim and final awards by arbitral tribunals constituted under Chapter 11 , , with
numerous cases pending.’
Notwithstanding that there is no permanent judicial authority to interpret and ap-
ply the NAFTA’s rules, Chapter 11 specifically remains legalistic given that consent to
arbitration is enshrined in the treaty and that the initiation of the arbitration is left to
the discretion of the investor.’ The ruling of the arbitral tribunal is legally binding on
The losing government is bound by art. 1136(2) to “abide by and comply with an award without
delay” and by art. 1136(4), which states: “Each Party shall provide for the enforcement of an award in
its territory” International arbitration awards are enforceable in Canada pursuant to federal and pro-
vincial legislation implementing the New York Convention, ibid. See supra note 4. See also J.G. Castel
et al., The Canadian Law and Practice of International Trade with Particular Emphasis on Export
and Import of Goods and Services, 2d ed. (Toronto: Emond Montgomery, 1997) at 745-50. If the re-
spondent NAFTA government fails to comply with a final award, art. 1136(5) allows for the investor’s
home state to initiate a state-to-state dispute settlement panel pursuant to NAFTA Chapter 20.
” Ethyl Corporation v. Canada (Notice of Arbitration), 14 April 1997, online: DFAIT
fore any award was made. See J. Urquhart, “Canada Removes Its Ban on Ethyl’s Additive; U.S. Firm
to Terminate Its Legal Fight” The Wall Street Journal (21 July 1998) A4. See also Azinian v. United
Mexican States (Award), 1 November 1999, online: DFArT
v. United Mexican States (Notice of Arbitration, 29 September 1998), online: DFAIT
(date accessed: 18 October 2002); S.D.
Myers Inc. v. Canada (Partial Award), 13 November 2000, online: DFAIT
(Award on the Merits of Phase 2), 10 April 2001, online: DFAIT
tion v. United Mexican States (2000), Case No. ARB(AF)/97/1 (ICSID Additional Facility), online:
DFAIT
(date accessed: 18 October
2000) [hereinafter Metalclad]. For an example of judicial review, see United Mexican States v. Metal-
clad Corp. (2001), 89 B.C.L.R. (3d) 359,2001 BCSC 664.
96United Parcel Service of America, Inc. v. Canada (Notice of Arbitration), 19 April 2000, online:
DFAIT
(date accessed: 18 October 2002);
Methanex Corporation v. United States (Notice of Arbitration), 3 December 1999, online: U.S. De-
partment of State
Group Inc. v. United States (Notice of Arbitration), 19 July 2000, online: U.S. Department of State
Vancouver has launched a $970 million U.S. suit seeking damages from the American government in
compensation for a ban by California of its methanol gasoline additive MRBE. See P Morton, “$iB
Methanol Battle Fires up this Week-Methanex Corp. in Face-off with US Government: Canadian
Firm Claims California Violated NAFTA When It Banned Fuel Additive” National Post (5 September
2000) Cl.
97 NAFrA, supra note 1, art. 1122.
2002] M.A. Luz & C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 975
the parties to the dispute and can be enforced directly in domestic courts by virtue of
domestic legislation.”
Put in a broader context, Chapter 11 is not only about investment-it implicates
employment, the environment, social welfare, and democracy.” It also attempts to
regulate and stimulate relationships between foreign capital and local economies. This
constrains and enables states. Though states are restricted in their policy-making dis-
cretion, people are empowered by the freedom to pursue their economic goals. While
territory remains important because FDI means a more entrenched economic relation-
ship with the host state, NAFTA investors have extraterritorial rights and remedies.
Furthermore, the only borders that truly matter to FDI are external ones: once allowed
entry into a national market, the rules apply throughout. Finally, Chapter 11 has al-
ready begun to redefine the traditional power relationships between foreign corpora-
tions, citizens, and government. Given the aforementioned realities, it is only a matter
of time before it provokes a rethinking of the federal-provincial relationship.
IV. Effects on Canadian Federalism
If globalization necessitates de-territorializing and altering traditional structures
of power, Canada will have to adapt its internal legal structure to the realities of glob-
alization, such as our three legal indicators. Globalization will have an effect on Ca-
nadian federalism, but identifying and responding to these effects is a confusing proc-
ess if some indicators of globalization are not identified. In describing three legal in-
dicators of globalization as manifested in international treaties (regulatorization, le-
galization of dispute resolution, and individualization of remedies), we hope to con-
tribute to the debate on how Canada may adapt its internal legal structure to these new
realities. To do so, however, will have serious consequences for Canada’s traditional
federal structure and could impose significant costs on the constitutional powers of
the provinces.
The principle of federalism” is not simply a function of dividing powers between
a national government and territorially-defined subunits. In the Canadian context, fed-
eralism is aimed particularly at maintaining and developing the diversity of the com-
ponent parts of the country, as well as giving provinces the necessary and desirable
” Ibid., art. 1136.
“‘ For environmental issues, see J.A. Soloway, “Environmental Regulation as Expropriation: The
Case of NAFTA’s Chapter 11” (2000) 33 Can. Bus. L.J. 92.
“‘ KC. Wheare defines federalism as “the method of dividing powers so that the general and re-
gional governments are each, within a sphere, co-ordinate and independent.” K.C. Wheare, Federal
Government, 4th ed. (New York: Oxford University Press, 1964) at 10.
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autonomy to develop their regional identities within their respective spheres of juris-
diction. In Reference Re Secession of Quebec, the Supreme Court of Canada held that
“[flederalism was the political mechanism by which diversity could be reconciled
with unity””‘ Furthermore, the Court recognized that a federal structure also facili-
tates democratic participation by distributing power to the government that is the most
suited to achieving the “particular societal objective having regard to this diversity.’
These are important values, recognized by the Supreme Court to be on an equal foot-
ing with Canada’s other foundational principles: democracy, constitutionalism and the
rule of law, and the protection of minorities.
We argue that the regulatorization, legalization of dispute resolution, and indi-
vidualization of remedies found in treaties like the NAFTA will have at least three ef-
fects on the Canadian federal structure. First, it will bring international law to the
most local levels of Canadian society and have an unprecedented effect on the exer-
cise of provincial powers. Second, because provincial powers are territorially limited,
the unterritorial nature of global interactions identified earlier will increasingly be put
beyond provincial legislative competence. This is particularly true of FDI, an area
where provinces have traditionally exercised significant control. As a result of the
latter, the third implication will likely be a concomitant expansion in federal power at
the expense of the provinces. The federal general trade and commerce power” and
the peace, order, and good government power” are the primary vehicles through
which this expansion is likely to occur.
Localizing globalization means that local economic structures and conditions
must be reformed to conform to transnational rules and practice. Territorially-based
provincial powers are subject to erosion from both bottom and top–individuals are
becoming the driving force behind the process of localizing globalization while the
realities of global investment require the introduction and creation of complex regu-
lating treaties outlining supranational sets of enforceable rules that penetrate deep into
local aspects of the economy. The Supreme Court of Canada will have to chart a path
through which it can apply judicial interpretations to a new global society where bor-
ders, both external and internal, lose significance.
lO'[1998] 2 S.C.R. 217 at para. 43, 161 D.L.R. (4th) 385.
“02 Ibid. at para. 58.
‘o’ Constitution Act, 1867 (U.K.), 30 & 31 Vict., c. 3, s. 91(2), reprinted in R.S.C. 1985, App. II,
No. 5.
” Ibid., s. 91.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 977
A. International Law in Canada
The process of regional economic integration and the entrenchment of interna-
tional legal standards into Canada’s legal system will be greatly accelerated through
investors’ exercise of their treaty rights. Individual corporations are subject to fewer
diplomatic restraints than national governments and we have seen their growing will-
ingness to use the procedural remedies of NAFTA Chapter 11.'” As lawyers and in-
vestors become more experienced with Chapter 11 and more cases interpret and apply
its provisions, it will be used even more often. This will have particularly significant
implications for the Canadian provinces. With globalization bringing international le-
gal norms down to the most local levels of the economy, policy decisions that were
once strictly intraprovincial now have to take international law into account if prov-
inces do not wish to put Canada in breach of its international obligations. Provinces
have always been “subject” to international law,'” but with the individualization of
remedy, foreign investors now have the procedural capacity to hold provinces ac-
countable to international legal standards.
This is a significant development given the treatment of international law in the
Canadian legal system. Canada has largely retained the legal principles of status and
implementation of international law into domestic law that it derived from the United
Kingdom: the Crown holds the royal prerogative to conduct foreign affairs and to en-
ter into treaties, but Parliament must enact any necessary legislation to implement a
treaty into domestic law.10’7 Unlike the United Kingdom, however, Canadian treaty law
has to deal with the special issue of the division of powers. The uneasy relationship
between Canada’s international treaties and their domestic implementation in spheres
of provincial jurisdiction was outlined in Labour Conventions.” In that case, Lord
‘ ‘ NAFrA, supra note 1, arts. 1115-38.
See Reference Re the Powers of the Corporation of the City of Ottawa and the Corporation of the
Village of Rockcliffe Park to Levy Rates on Foreign Legations and High Commissioners’Residences,
[1943] S.C.R. 208, [194312 D.L.R. 481 [hereinafter Foreign Legations Reference cited to S.C.R.].
“. EW. Hogg, Constitutional Law of Canada, looseleaf (Scarborough, Ont.: Carswell, 1997) at 11-
5; R.St.J. Macdonald, “International Treaty Law and the Domestic Law of Canada” (1975) 2 Dal. L.J.
307. See Re Arrow River & Tributaries Slide & Boom Co., [1932] S.C.R. 495, [1932] 2 D.L.R. 250.
In the United Kingdom, it is the constitutional practice for the government to submit a treaty that is
subject to ratification to Parliament for twenty-one days while Parliament is in session (the “Ponsonby
Rule”). If legislation to implement the treaty is required, then it may take the form of an Act of Par-
liament that formally incorporates the treaty into the law of the United Kingdom or it may provide a
framework by which secondary legislation may be adopted in the future. A. Aust, Modem Treaty Law
and Practice (Cambridge: Cambridge University Press, 2000) at 151.
“‘ Canada (A.G.) v. Ontario (A.G.) (Reference re Weekly Rest in Industrial Undertakings Act,
Minimum Wages Act and Limitation of Hours of Work Act), [1937] A.C. 326, [1937] 1 D.L.R. 673
MCGILL LAW JOURNAL / REVUE DE DROIT DE MCGILL
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Atkin held that section 132 of the Constitution Act, 1867 did not give the federal gov-
ernment the power to implement treaties outside its legislative competence.'” It was
held that the authority to implement treaties remained with the level of government
having the appropriate jurisdiction under the constitution for the subject-matter cov-
ered in the treaty. Given that the case dealt with the implementation of three Interna-
tional Labour Organization conventions dealing with areas that clearly fell within
provincial jurisdiction (employee working hours, weekly rest, and minimum wages),
the Privy Council was concerned that a treaty implementation power equal to section
132 would effectively undermine the division of powers. Despite some past musings
in the Supreme Court about the soundness of Labour Conventions,”‘ the notion that
treaties do not have a direct effect in domestic law without implementing legislation
remains the fundamental understanding of international treaty law in Canada.’
The status of customary international law in Canada is somewhat amorphous. The
basic rule is that customary international law is incorporated into Canadian law with-
out enacting legislation unless the customary rule clearly conflicts with existing
statutory law or with established principles of the common law. As Lord Atkin wrote
in Chung Chi Cheung v. The King, “The Courts acknowledge the existence of a body
of rules which nations accept amongst themselves [and the courts] … will treat it as
incorporated into the domestic law, so far as it is not inconsistent with rules enacted
by statutes or finally declared by their tribunals.””‘ 2
Federal and provincial legislation is usually interpreted in conformity with inter-
national law. There is a presumption of legislative interpretation at common law that
[hereinafter Labour Conventions cited to A.C.]. See generally W.H. McConnell, “A Half Century of
Constitutional Turbulence” (1993) 57 Sask. L. Rev. 105.
‘o Labour Conventions, ibid. at 350. Section 132 of the Constitution Act, 1867, supra note 103,
states: “The Parliament and Government of Canada shall have all Powers necessary or proper for per-
forming the Obligations of Canada or of any Province thereof, as Part of the British Empire, towards
Foreign Countries, arising under Treaties between the Empire and such Foreign Countries'”
“o See MacDonald v. Vapor Canada Ltd. (1976), [1977] 2 S.C.R. 134 at 168, 66 D.L.R. (3d) 1
[hereinafter Vapor Canada cited to S.C.R.]; Schneider v. R., [1982] 2 S.C.R. 112 at 134, 139 D.L.R.
(3d) 417; R. v. Crown Zellerbach Canada Ltd., [1988] 1 S.C.R. 401, 49 D.L.R. (4th) 161 [hereinafter
Crown Zellerbach cited to S.C.R.].
.. See Baker v. Canada (Minister of Citizenship and Immigration), [1999] 2 S.C.R. 817 at para. 69,
174 D.L.R. (4th) 193 [hereinafter Baker].
1’ [1939] A.C. 160 at 168. See also Reference Re Seabed and Subsoil of the Continental Shelf Off-
shore Newfoundland, [1984] 1 S.C.R. 86, 55 D.L.R. (4th) 385 [hereinafter Newfoundland Reference
cited to S.C.R.]; R. v. The “North” (1906), 37 S.C.R. 385 at 393-95, 26 C.L.T. 380 where Davies J.
found that the Admiralty Court of Canada is bound to take notice of the law of nations regarding pur-
suit and arrest of ships into open seas beyond territorial limits for the commission of offenses in the
territorial waters of Canada.
2002] M.A. Luz & C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 979
Parliament will not “legislate in breach of a treaty or in any manner inconsistent with
the comity of nations and the established rules of international law'”” Similarly, Ca-
nadian courts will interpret provincial statutes so as to conform with international law
as far as possible. In the Foreign Legations Reference, the Supreme Court opined that
general legislation should not be construed as intending to violate international law.”‘
It is also well established in Anglo-Canadian law, however, that where a rule of
international law, customary or otherwise, directly conflicts with established legisla-
tion or a rule of common law, the latter must prevail. As Justice L’Heureux-Dub6 af-
firmed in Thomson v. Thomson, “A statute is not void or inoperative simply because it
violates international custom or convention.” l This rule is supported by section 52(1)
of the Constitution Act, 1982.116 It is also supported by section 33 of the Canadian
Charter of Rights and Freedoms”7 (the “notwithstanding clause”) given that section
“.. Daniels v. White and The Queen, [1968] S.C.R. 517 at 541, 2 D.L.R. (3d) 1 [hereinafter Daniels
cited to S.C.R.]. See also Salomon v. Commissioners of Customs and Excise, [1966] 3 All E.R. 871 at
875, [1966] 3 W.L.R. 1223 (C.A.) where Diplock U. said, “inhere is a prima facie presumption that
Parliament does not intend to act in breach of international law, including therein specific treaty obli-
gations:’ R. Sullivan, ed., Driedger on the Construction of Statutes, 3d ed. (Markham, Ont: Butter-
worths, 1994) at 330.
“1 Supra note 106.
“, [1994] 3 S.C.R. 551 at 618, 119 D.L.R. (4th) 253, citing P.-A. C6t6, The Interpretation of Legis-
lation in Canada, 2d ed. (Cowansville, Qc.: Yvon Blais, 1991) at 308. See also Daniels, supra note
113: “[I]f a statute is unambiguous, its provisions must be followed even if they are contrary to inter-
national law … [Where] the intent of Parliament was clear and unmistakable …. the plain words of a
statute [cannot] be disregarded in order to observe the comity of nations and the established rules of
international law”; R. v. Gordon (1980), 19 B.C.L.R. 289 at 291-92, [1980] 5 W.W.R. 668 (S.C.),
aff’d (1980), 22 B.C.L.R. 17, [1980] 6 W.W.R. 519 (C.A.): “[W]here Canada asserts jurisdiction over
an area of the sea and purports to limit access thereto, from the standpoint of domestic law the access
is in fact limited for a special purpose, and even if the law of Canada contravenes ‘customary interna-
tional law’, if Parliament … has acted unambiguously, the courts of this country are bound to apply the
domestic law”; R. v. Meikleham (1905), 11 O.L.R. 366 at 373 (Div. Ct.), Meredith CJ.: “[W]here it is
plain that the Legislature has intended to disregard or interfere with [international law], the Courts are
bound to give effect to its enactments.”
1′ Being Schedule B to the Canada Act 1982 (U.K.), 1982, c. 11: “The Constitution of Canada is
the supreme law of Canada, and any law that is inconsistent with the provisions of the Constitution is,
to the extent of the inconsistency, of no force or effect’
“.. Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c.
11 [hereinafter Charter].
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11 (g) of the Charter, which incorporates international law and the “general principles
of law recognized by the community of nations,” can be constitutionally suspended. “‘
Canada’s dualist approach to international law,”9 combined with the federal sys-
tem as interpreted in Labour Conventions, complicates Canada’s compliance with in-
ternational law. It is a well-established rule of international law that “a State cannot
adduce as against another State its own Constitution with a view to evading obliga-
tions incumbent upon it under international law or treaties in force.” The NAFTA
panel in Metalclad affirmed this rule and neither Mexico nor the United States dis-
puted it. The tribunal’s ruling restated a well-settled rule of international law: a state
cannot plead a violation of, or deficiencies in, its internal law to absolve itself of re-
sponsibility for breach of an obligation under treaty.'”‘ Thus, even if it is not illegal in
Canadian law to breach a treaty or customary rule that is not otherwise enshrined in
domestic legislation, Canada may still be held in violation of international law and be
responsible for the ensuing consequences.
Canada had evaded this lacuna for many years, in part because of the lack of
credible dispute resolution procedures that applied international law as a primary
source of law. NAFTA Chapter 11, however, brings the issue to the fore and domestic
laws and actions will be scrutinized through the lens of treaties and customary inter-
national law.
Seeking to avoid the bias of local courts and to provide investors from the three
NAFTA countries with a common set of rules for investment, Chapter 11 directly im-
ports standards of international law and affords no room for the application of na-
“‘ This seems to contradict the view of Professor La Forest (as he then was) that provinces are le-
gally incompetent to legislate in violation of customary international law based on the argument that it
would be an extra-territorial application of provincial law. See G.V La Forest, “May the Provinces
Legislate in Violation of International Law?” (1961) 39 Can. Bar Rev. 78.
“‘ “This approach reflects, on the one hand, the constitutional power of the executive generally to
bind itself to a treaty without the prior consent of the legislature and, on the other hand, the supreme
power of the legislature under the constitution to make laws?’ Aust, supra note 107 at 150-51.
120 Treatment of Polish Nationals in Danzig (1932), Advisory Opinion, P.C.I.J. (Ser. B.) No. 44 at
441. See also art. 46 of the Venna Convention on the Law of Treaties, 22 May 1969, UN Doc.
A/CONF. 39/27, 8 1.L.M. 679 (entered into force 27 January 1980); Brownlie, supra note 65 at 34-35.
121 Metalclad, supra note 95 at para. 73, the tribunal cited article 10 of the “Report of the Commis-
sion to the General Assembly” (1975) 2 YB. Int’l L. Comm’n 47 at 61: “The conduct of an organ of a
State, of a territorial governmental entity or of an entity empowered to exercise elements of the Gov-
ernmental authority, such organ having acted in that capacity, shall be considered as an act of the State
under international law even if, in the particular case, the organ exceeded its competence according to
interval [sic] law or contravened instructions concerning its activity?’
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 981
tional law. Article 1131 states: “A Tribunal established under this Section shall decide
the issues in dispute in accordance with this Agreement and applicable rules of inter-
national law” Similarly, NAFTA article 1105 (Minimum Standard of Treatment)
states: “Each Party shall accord to investments of investors of another Party treatment
in accordance with international law, including fair and equitable treatment and full
protection and security.”” Principles of good faith'” and transparency’2 are elements
of this notion of fair treatment and have already been cited in at least one NAFTA
arbitration.'”
The notion of an international minimum standard including fair and equitable
treatment and full protection and security is incorporated in NAFTA article 1110, the
controversial expropriation of an investment provision. Expropriation, including na-
tionalization, has been dealt with extensively over the past century by international
tribunals and derives much of its content from customary international law. ‘6
” The Free Trade Commission, made up of cabinet-level representatives of the NAFTA Parties (art.
2001(1)), issued an interpretation of art. 1105(1) as prescribing the customary international law mini-
mum standard of treatment of aliens as the standard to be applied under art. 1105(1), and that the con-
cepts of “fair and equitable treatment” and “full protection and security” do not require treatment in ad-
dition to or beyond that which is required by the customary international legal standard. See e.g.
NAFFA Free Trade Commission, Notes of Interpretation of Certain Chapter 11 Provisions, 31 July
2001, online: DFAIT
October 2002). The status of this interpretation has caused great controversy in subsequent NAFrA ar-
bitrations and in academic fora. Professor Sir Robert Jennings, former President of the International
Court of Justice, referred to elements of the interpretation as “self-serving” and “preposterous” and that
it sought to amend the treaty to curtail investor protection. See Methanex Corp. v. United States (Opin-
ion of Professor Sir Robert Jennings, Q.C.), 6 September 2001, online: NAFTALAW
October 2002). The Pope & Talbot arbitration has been particularly concerned with the issue as the
investor argued that article 1105 was not limited to customary international law and the tribunal it-
self found that it has the right to question whether the commission was merely “interpreting” article
1105 or seeking to amend it. See Pope & Talbot, supra note 95 (Award of Damages), 31 May 2001.
,3 See Behring Fur SealArbitration (Great Britain v. United States) (1893), 1 Moore’s Int. Arb. 755.
124 United States-Import Prohibition of Certain Shrimp and Shrimp Products (Complaint by Ma-
laysia) (1998), WTO Doe. WT/DS58/AB/R at paras. 177-83 (Panel Report), online: WTO
,z Metalclad, supra note 95 at paras. 70-71.
: American Law Institute, Restatement of the Law (Third): The Foreign Relations Law of the
United States, vol. 2 (St. Paul, Minn.: American Law Institute Publishers, 1987), s. 712; R. Jennings
& A. Watts, eds., Oppenheim’s International Law, 9th ed., vol. 2 (London: Longman Group UK,
1992) at 911-22; Brownlie, supra note 65 at 533-38. See also Southern Pacific Properties (Middle
East) Limited v. Egypt (1992), I.C.S.I.D. Case No. ARB/84/3, 32 I.L.M. 933; Starrett Housing Corp.
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NAFTA investors have legally enforceable rights based substantially in interna-
tional law and, given the ability of arbitral awards to be enforced pursuant to the New
York Convention, the practical exercise of those rights is no longer in the exclusive
domain of government lawyers. The concepts of national treatment and most-
favoured-nation treatment, for example, derive their status not only from the NAFTA
but also from rulings of international courts and tribunals. Thus, a province that dis-
criminates against a NAFTA investor will be judged not only on the terms of the
treaty but also by international legal norms.'”
How Canada’s federal and provincial governments will deal with Chapter 11 ‘s
powerful presence in the federal framework remains to be seen. The federal govern-
ment is clearly liable to pay damages to an investor for its breach of the NAFTA
and/or international law because it has signed and ratified the treaty. Meanwhile, the
provinces are not directly liable at international law.1 It is clear, however, that in order
for the investment provisions to function for the benefit of Canada as a whole and for
v. Iran (1983), 4 Iran-U.S. C.T.R. 122, 23 I.L.M. 1090 [hereinafter Starrett Housing]; Amoco Inter-
national Finance Corporation v. Iran (1987), 15 Iran-U.S. C.T.R. 189, 27 I.L.M. 1314. The Pope &
Talbot arbitration under Chapter 11, supra note 95 (Interim Award) at para. 104, recently found that
the term “tantamount to” an expropriation, as used in article 1110(1), meant nothing more than
“equivalent” (the term used in the equally authentic French and Spanish texts of article 1110) and that
the NAFFA does not broaden the ordinary conception of expropriation under international law, as
counsel for Pope & Talbot had argued. Accordingly, the tribunal found that although export quotas
certainly interfered with Pope & Talbot’s ability to export softwood lumber to the U.S., and even
caused it financial harm, it was not enough to constitute an expropriation under international law. See
also Azinian, supra note 95.
(1985),
‘2’ Two GATT panels regarding gold coins and liquor are prime examples of local provincial
legislation taking on an international status. Canada-Measures Affecting the Sale of Gold Coins
(Complaint by South Africa)
GAaTY Doc. L’5863, online: WorldTradeLaw.net
Canada-Panel on Import, Distribution and Sale of Alcoholic Drinks by Canadian Provincial
Marketing Agencies (1988), GATT Doc. L16304, 35th Supp. B.I.S.D. (1998) 37, online:
WorldTradeLaw.net
(date
accessed: 20 October 2002); Canada-Import, Distribution, and Sale of Certain Alcoholic Drinks by
Provincial Marketing Agencies (1992), GATT DS17/R, 39th Supp. B.I.S.D. (1992) 27, online:
WorldTradeLaw.net
accessed: 20 October 2002).
“‘ As the Supreme Court pointed out in Reference Re Offshore Mineral Rights of British Columbia,
[1967] S.C.R. 792 at 821, 65 D.L.R. (2d) 353 [hereinafter Offshore Minerals Reference cited to
S.C.R.]: “[I]t is Canada, not the Province of British Columbia, that will have to answer the claims of
other members of the international community for breach of the obligations and responsibilities im-
posed by the Convention.” See also Compaiia de Aguas del Aconquija, S.A. v. Argentine Republic
(2001), ICSID Case No. ARB/97/3, 40 I.L.M. 426 at paras. 48-50.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 983
the federal government to avoid liability for transgressions, the provinces must act in
accordance with international legal standards. As such, globalization in the form of
Canada’s newest trade and investment treaties in effect “removes” individuals from
exclusive provincial jurisdiction even when they would otherwise be jurisdictionally
and territorially bounded by provincial borders.
Both Mexico and the United States have been respondents in arbitrations involv-
ing alleged breaches of the NAFIA. Mexico lost an arbitration against the Metalclad
Corporation for violations of articles 1105 and 1110 by a municipality in the state of
San Luis Potosi.” Of great interest is the ongoing Loewen arbitration, where the tri-
bunal found that it has jurisdiction to hear the complaint of a Canadian funeral home
company claiming that it suffered from an egregious damages award by a Mississippi
jury out of a trial that violated basic standards of fairness.’0 A Canadian investor has
also submitted a claim for alleged breaches of the NAFTA by Massachusetts courts.’1
‘” Metalclad, supra note 95. The Metalclad Corporation was awarded close to $16.7 million in
compensation for unfair treatment and the expropriation of their investment in a hazardous waste
landfill in the Mexican municipality of Guadalcazar in the state of San Luis Potosi. After having re-
ceived the requisite federal construction permit, state land use permit, environmental regulatory ap-
proval, and apparent political support from the state government, the municipality ordered a halt to
construction despite federal government assurances that there was no legal barrier to continuing the
project (there was apparently no known administrative procedure for obtaining a municipal construc-
tion permit in Guadalcazar, which the local government argued was needed even though there was no
evidence to show that it had ever been required for any other construction project in the municipality).
Pressure from the municipal government forced Metalclad to stop construction on the landfill and
prompted it to launch a suit pursuant to NAFTA Chapter 11. The tribunal found that the actions of the
municipality of Guadalcazar were below the minimum standard of treatment owed to investors ac-
cording to international law (art. 1105), not only because there were no established rules regarding the
need or application process for a municipal construction permit (which Metalclad was pressured to
obtain notwithstanding doubts as to whether the municipality could even legally regulate in this par-
ticular issue area), but because it relied to its detriment on the representations of government officials
that it had fulfilled all legal and environmental requirements (ibiL at paras. 74-101).
‘”0Loewven Group, Inc. and Raymond L Loewen v. United States (Decision on Jurisdiction), 5 Janu-
ary 2001), ICSID Case No. ARB(AF)/98/3, online: U.S. Department of State
“‘ Mondev International, a Canadian real estate development company, has initiated a NAFTA arbi-
tration against the United States for alleged breaches of Chapter 11 by the City of Boston, the Com-
monwealth of Massachusetts, and the Supreme Judicial Court of Massachusetts. See Mondev Interna-
tional v. United States (Notice of Arbitration), 1 September 1999, online: U.S. Department of State
has been only one arbitration initiated against Canada for an alleged violation of the NAFTA by a
province. Sun Belt Water, Inc., a California-based company, initiated arbitration against Canada in 1999
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While the law does not prohibit provincial governments from violating interna-
tional law if done so explicitly in legislation, the fact that doing so could incur signifi-
cant monetary liability for the federal government will provide significant incentives
for the provinces to act in accordance with the NAFTA and the standards of custom-
ary international law incorporated therein. As such, the federal government will seek
to exercise its constitutional authority to regulate and police general provincial eco-
nomic activity, and in certain circumstances it could act to correct specific transgres-
sions of the NAFTA by a province.
B. Territoriality of Provincial Powers
The previous discussion highlights the inevitable problems that Canada will face
as it enters into trade and investment treaties that intrude deeply into local parts of the
economy. Individuals will be the driving force behind the implementation of NAFTA
Chapter 11 and the embedding of rules of international law into provincial spheres via
federal legislation where they were otherwise dormant. While the resurrection of the
general trade and commerce power opens the door for the federal government to im-
plement such treaties legally and impose standards of international law on the prov-
inces, it would do so through the doctrine of federal paramountcy in certain cases.
While this is nothing unique in Canada’s federal system, this is only the beginning of
localized globalism and the long-term entrenchment of federal authority in spheres of
exclusive provincial jurisdiction.
Wolf points out that opening a local economy to the global market requires gov-
ernments to loosen three forms of economic controls: capital flows, goods and serv-
ices, and people. “2 In Canada’s federal structure, the provincial governments have
much of the legal power to legislate in these areas under subsection 92(13) of the
Constitution Act, 1867.” Thus, on the one hand they are key actors in the process of
globalizing the Canadian economy, but on the other hand they stand to lose the most
legal authority to act.'”
for an alleged breach of Chapter 11 by British Columbia in relation to a ban on bulk water exports, but
there is no indication that this arbitration ever proceeded. Sun Belt’s Notice of Claim and Demand for
Arbitration can be found online:
132 Wolf, supra note 88 at 184.
,33Supra note 103.
”
In Liquidators of the Maritime Bank of Canada v. Receiver-General of New Brunsvick, [1892]
A.C. 437 at 441 (P.C.) [hereinafter Maritime Bank], Lord Watson described the object of the Consti-
tution Act, 1867 as “neither to weld the provinces into one, nor to subordinate provincial governments
to a central authority.” See also Hodge v. The Queen (1883), 9 A.C. 117 at 132 (P.C.); Re The Initia-
tive and Referendum Act, [1919] A.C. 935 at 942, 48 D.L.R. 18 (P.C.). Lord Watson stated that
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 985
While the global economy is becoming less territorial, Canadian provinces main-
tain a primarily territorial economic regulatory power. Indeed, the power relating to
“property and civil rights in the province” is necessarily territorially bound. In Shan-
non v. Lower Mainland Dairy Products Board,'” the Privy Council confirmed the ter-
ritorial confinement of provincial powers over property and civil rights as compared
to the federal trade and commerce power. Unlike the power of Parliament,” provin-
cial legislatures do not have the constitutional authority to legislate extraterritorially:'”
“[A]uthority is under every head expressly or impliedly restricted to the provincial
territory.”‘ Once a provincial law can be classified as being inter-provincial or inter-
national in pith and substance, the law is ultra vires the province.’39 Notwithstanding
the basic territorial limitation of provincial power, provincial legislation can have in-
cidental effects outside its borders without being ultra vires, as long as the provincial
law is in pith and substance related to a provincial head of power.”
The premise that provinces are legislatively bound within their jurisdictions has
important implications for their ability to deal with the realities of globalization. As
typified by the NAFTA, subject matters that would have traditionally fallen into pro-
vincial power now take on an importance that transcends provincial boundaries. As
outlined above, an investment or an investor covered by Chapter 11 can certainly be
“within the limits assigned by section 92 of the Act of 1867, these powers are exclusive and supreme”
(Maritime Bank, ibiL at 443).
. [1938] A.C. 708 at 718-20, [1938] 4 D.L.R. 81 (P.C.).
‘ Statue of Westminster, 1931 (U.KC), 22 Geo. V, c. 4, reprinted in R.S.C. 1985, App. II. Section 3
states that the Parliament of a Dominion “has full power to make laws having extra-territorial opera-
tion” See Croft v. Dunphy (1932), [1933] A.C. 156, [1933] 1 D.L.R. 225 (P.C.).
‘ Offshore Minerals Reference, supra note 128; Newfoundland Reference, supra note 112 at 115-
16.
‘ Interprovincial Co-operatives Ltt v. R, [1976] 1 S.C.R. 477 at 513, 53 D.L.R. (3d) 321 [herein-
after Interprovincial Co-operatives cited to S.C.R.]; Royal Bank of Canada v. The King, [1913] A.C.
283, 9 D.L.R. 337 (P.C.); Reference Re Upper Churchill Water Rights Reversion Act, [1984] 1 S.C.R.
297, 8 D.L.R. (4th) 1 [hereinafter Upper Churchill Reference cited to S.C.R.].
‘ Manitoba (A.G.) v. Manitoba Egg and Poultry Association, [1971] S.C.R. 689, 19 D.L.R. (3d)
169 [hereinafter Manitoba Egg and Poultry]; Burns Foods Ltd v. Manitoba (A.G.) (1973), [1975] 1
S.C.R. 494, 40 D.L.R. (3d) 731; Interprovincial Co-operatives, ibiL; Multiple Access LtL v.
McCutcheon, [1982] 2 S.C.R. 161, 138 D.L.R. (3d) 1.
“o Global Securities Corp. v. British Columbia (Securities Commission), [2000] 1 S.C.R. 494 at
paras. 22-24, 185 D.L.R. (4th) 439 [hereinafter Global Securities]; Upper Churchill Reference, supra
note 138 at 332; Carnation Co. v. Quebec Agricultural Marketing Board, [1968] S.C.R. 238, 67
D.L.R. (2d) I [hereinafter Carnation Co.]. However, “the impairment of extra-provincial rights …
may be validly accomplished by a provincial Legislature as an incidental effect of a statute that is in
relation to a matter territorially within the province and within a head of provincial legislative power”
Hogg, supra note 107 at 13-8.
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strictly intraprovincial. If Chapter 11 falls legitimately within the federal trade and
commerce power, however, and incorporates principles of customary international
law, investors in fact have civil rights that are “extra-provincial”; that is, they enjoy
rights and privileges that exist by virtue of federal legislation and international law but
operate in an intraprovincial context. The NAFJ’A has granted investors access to a
new international mechanism of dispute resolution that is independent from the con-
trol of the respondent governments. This reality goes beyond their “foreign investor”
status. However, for those investors who qualify under the terms of Chapter 11, their
remedy is international, based on the NAFA. The enforcement of any arbitral awards
is based on international conventions (ICSID, New York Convention, Inter-American
Convention), some of which have been directly adopted into domestic law. Thus, it
can no longer be asserted that these are “local investors” in the sense that they are ter-
ritorially bounded by provincial jurisdiction. The rules applicable to those individuals
are in fact extraterritorial.
How and whether provinces will be able to legislate in violation of these inves-
tors’ rights when acting within their exclusive sphere of jurisdiction could prove to be
a difficult legal question. In situations where a provincial law or action in pith and
substance aims either to give a local investor preferential treatment or to distort the
playing field in favor of a domestic investor, the pith and substance analysis could
render it ultra vires. Further, where the province enacts legislation within its jurisdic-
tion and only incidentally affects extraprovincial rights, that legislation may not nec-
essarily be sacrosanct by virtue of the general trade and commerce power.
The realities of globalization and the territorial limitation of provincial legislative
jurisdiction have been the subject of several Supreme Court cases in which economic
integration was used as a justification for reinforcing federal power. Morguard In-
vestments v. De Savoye”‘ and Hunt v. T&N plc’42 fundamentally changed the status of
conflict of laws and recognition of judgments of other provinces on the basis that
Canada cannot function with such barriers existing between provincial borders.’43
In both cases, the finding that the provincial laws in question were ultra vires was
largely justified on the premise that there was a greater need for economic co-
ordination amongst the provinces who should no longer be seen as having sovereignty
in the classic sense. The themes of globalization and economic integration were
,41 [1990] 3 S.C.R. 1077,76 D.L.R. (4th) 256 [hereinafter Morguard cited to S.C.R.].
14 [1993] 4 S.C.R. 289, 109 D.L.R. (4th) 16 [hereinafter Hunt cited to S.C.R.].
,4′ Both judgments were written by La Forest J. Elements of his argument in the Canadian Bar Re-
view-that the provinces cannot legislate in violation of international law-are clearly present. See La
Forest, supra note 118.
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 987
prominent in Morguard: “The business community operates in a world economy and
we correctly speak of a world community even in the face of decentralized political
and legal power. Accommodating the flow of wealth, skills and people across state
lines has now become imperative”” La Forest J. continued this same theme in Hunt:
“Greater comity is required in our modem era when international transactions involve
a constant flow of products, wealth and people across the globe’ ’45
In Global Securities, the Supreme Court recognized that technologies such as the
Internet defy traditional conceptions of jurisdiction and territory and that regulators
need to be able to “surmount borders where legally possible:”‘ In that case, provin-
cial legislation relating to the ability of the British Columbia Securities Commission
to order a registrant to produce records “to assist in the administration of the securities
laws of another jurisdiction’ 7 was upheld as in pith and substance relating to the pro-
vincial right to regulate securities.
The principle that valid legislation may have incidental extraterritorial effects is
just as applicable to the provinces as it is to the federal government, but as the inte-
gration of economies demands greater regulation at the international level, the prov-
inces will inevitably be confronted with international problems that section 92 re-
stricts them from dealing with.
C. Implicated Federal Powers
This brings us to the question of how the NAFTA’s investment provisions are ac-
tually implemented by the federal government and to what extent the provinces are
hindered in their capacity to legislate within their exclusive spheres of jurisdiction.
The primary purpose of the next section is not to argue the constitutionality of the
NAFTA per se. Rather, we seek to address two federal powers that are likely to be im-
plicated in the broader context of globalization.
1. Trade and Commerce Power
Although Chapter 11 incorporates standards of international law and is applicable
to the provinces, this does not in itself make the NAFTA’s investment provisions
binding on the provinces. Labour Conventions still requires the treaty to be enacted
‘” Morguard, supra note 141 at 1098.
14 Hunt, supra note 142 at 322, citing Morguard in part.
Global Securities, supra note 140 at para. 28.
,47Ibid at para. 2.
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into domestic legislation and to fall within a federal head of power.4
1 Many important
areas of investment policy fall within exclusive provincial jurisdiction and yet feder-
ally-enacted trade and investment treaties are becoming increasingly regulatory, com-
plex, legally binding, and necessarily embedded in domestic legal systems.'”
Instead of overturning the rule established in Labour Conventions, it is likely that
globalization will bring about an expansion of federal powers that could intrude
deeply into areas of exclusive provincial jurisdiction. A prime candidate in this re-
spect will be subsection 91(2) of the Constitution Act, 1867, and in particular, the
general branch of the trade and commerce power. Indeed, the re-emergence of the
second branch of the trade and commerce power after decades of neglect indicates the
growing integration of Canada’s economy with the global network of capital and in-
vestment.
Unlike the trade and commerce power in the United States, which has been inter-
preted expansively as a result of the lack of enumerated state powers in the tenth
amendment,'” subsection 91(2) has been treated with judicial caution given its poten-
tial to engulf realms of economic activity at the expense of the provincial power in
relation to property and civil rights in the province. The Canadian federal trade and
commerce power is made up of two branches covering “interprovincial and interna-
tional trade and commerce” and the “general regulation of trade affecting the whole
dominion.”‘5’ The Privy Council in Citizens Insurance did not establish what the
boundaries of the federal authority were but rather stipulated that “its authority to
legislate for the regulation of trade and commerce does not comprehend the power to
regulate by legislation the contracts of a particular business or trade” 2
“‘ Supra note 108. Section 5 of the North American Free Trade Agreement Implementation Act,
S.C. 1993, c. 44, states: ‘T7his Act is binding on Her Majesty in right of Canada” Section 9 of the act,
however, reserves the right of the government of Canada to enact legislation to implement provisions
of NAFTA or to fulfill any of its obligations under that agreement.
49 See generally Chayes & Chayes, supra note 38.
0 U.S. Const. amend. X.
‘ Citizens Insurance Co. of Canada v. Parsons (1881), 7 A.C. 96 at 113 (P.C.) [hereinafter Citizens
Insurance]. See also British Columbia (A.G.) v. Canada (A.G.), [1937] A.C. 377 at 386-87, [1937] 1
D.L.R. 691 (P.C.), Lord Atdn [hereinafter Natural Products Marketing]; Reference Re Alberta Stat-
utes, [1938] S.C.R. 100 at 119-20, [1938] 2 D.L.R. 81, Duff C.J.C.
,52 Citizens Insurance, ibid at 113 [emphasis added]. See also John Deere Plow Co. v. Wharton
(1914), [1915] A.C. 330 at 340, 18 D.L.R. 353 (P.C.) [hereinafter John Deere Plow]; Canada (A.G.)
v. Alberta (A.G.), [1916] 1 A.C. 588 at 596, 26 D.L.R. 288 (P.C.) [hereinafter Insurance Reference
cited to A.C.] where Viscount Haldane wrote that “the authority to legislate for the regulation of trade
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 989
The development of the federal trade and commerce power was left to subsequent
case law, which consistently revealed a concern for ensuring that provincial powers
were not unduly infringed by an expansive reading of subsection 91(2). The Privy
Council ruled in two early cases that there was no independent content in the federal
trade and commerce power and that it could only be invoked as ancillary to other
enumerated federal powers, 3 but this interpretation was eventually relaxed.'” What
was not compromised was the basic premise that the federal power cannot regulate
specific industries within a province. As Dickson J. noted in Canadian National
Transportation, “[t]he reason why the regulation of a single trade or business in the
province cannot be a question of general interest throughout the Dominion, is that it
lies at the very heart of the local autonomy envisaged in the Constitution Act, 1867’.”‘
In respect of the first branch established by Citizens Insurance, the federal power
to regulate international and interprovincial trade has not been directly interpreted to
include a federal trade treaty implementation power.'” Rather, the courts have adopted
a pith and substance approach that allows for incidental effects on wholly intraprovin-
cial transactions or businesses if the primary goal of the federal legislation is inter-
provincial or international trade. In R. v. Klassen,'” the Manitoba Court of Appeal
held that the Canadian Wheat Board Act could be validly applied to strictly intra-
provincial transactions of wheat even when it was used only for local consumption.
Similarly, in Caloil Inc. v. Canada (A.G.),'” the Supreme Court upheld a federal law
that prohibited the transportation or sale of imported oil west of the Ottawa Valley. In
and commerce does not extend to the regulation by a licensing system of a particular trade in which
Canadians would otherwise be free to engage in the provinces.”
“‘ Re Board of Commerce Act (1921), [1922] 1 A.C. 191, (sub nom. Canada (A.G.) v. Alberta
(A.G.)) 60 D.L.R. 513 (P.C.); Toronto Electric Commissioners v. Snider, [1925] A.C. 396 at 410,
[1925] 2 D.L.R. 5 (P.C.) [hereinafter Snider].
“4 Natural Products Marketing, supra note 151; Canadian Federation of Agriculture v. Quebec
(A.G.) (1950), [1951] A.C. 179, [1950]4 D.LR. 689 (P.C.).
‘ Canada (A.G.) v. Canadian National Transportation, [1983] 2 S.C.R. 206 at 267,3 D.L.R. (4th)
16 [hereinafter Canadian National Transportation cited to S.C.R.].
‘” Those who argue that it does include RE. Sullivan, “Jurisdiction to Negotiate and Implement
Free Trade Agreements in Canada. Calling the Provincial Bluff’ (1987) 24 U.W.O. L. Rev. 63; S.A.
Scott, “NAFTA, the Canadian Constitution, and the Implementation of International Trade Arrange-
ments” in A.R. Riggs & T. Velk, eds., Beyond NAFTA: An Economic, Political and Sociological Per-
spective (Vancouver. Fraser Institute, 1993) 238.
‘” (1959), 20 D.L.R. (2d) 406,29 W.W.R. 369 (Man. C.A.). See also the earlier case of Murphy v.
Canadian Pacific Railway, [1958] S.C.R. 626, 15 D.L.R. (2d) 145, which upheld the federal Cana-
dian Wheat Board Act, R.S.C. 1952, c. 44 as a legitimate use of the federal trade and commerce
power as applied to shipments of grain from one province to another.
‘ [1971] S.C.R. 543,20 D.L.R. (3d) 472.
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both cases, the regulation of local transactions was incidental to the primary purpose
of, in the first case, regulating the wheat export market, and in the second case, regu-
lating the importation of oil, and was therefore valid.”9
The ffipside of this is that provincial legislation can, if it is aimed at an
intraprovincial activity within a provincial head of power, incidentally affect
transactions or entities that would otherwise fall under federal jurisdiction.’ ‘ For
example, legislation that fixed the price of raw milk in Quebec was upheld even
though it imposed a price control on processed milk that was mostly exported from
the province.” Since the law was not aimed at the regulation of trade in matters of
interprovincial concern, the Supreme Court found it to be valid. On the other hand, if
provincial legislation is in pith and substance aimed at affecting interprovincial or
international trade, it may be ruled invalid.’ 2
The second branch of the federal trade and commerce power lay dormant for dec-
ades after early Privy Council decisions nearly extinguished it as a separate branch of
federal power. 3 Only in the 1976 case of Vapor Canada” did the general trade and
commerce power start to gain judicial support at the Supreme Court level. Laskin C.J.,
in obiter dicta, suggested the possibility of upholding unfair competition provisions in
the federal Trade Marks Act” had there been a regulatory agency overseeing the im-
plementation of a general regulatory scheme concerned with trade as a whole rather
than a particular industry.'” This was taken up by Dickson J. (as he then was) seven
‘ See also Reference Re Agricultural Products Marketing Act, [1978] 2 S.C.R. 1198, 84 D.L.R.
’60 See Canadian Indemnity Co. v. British Columbia (A.G.) (1976), [1977] 2 S.C.R. 504, 73 D.L.R.
(3d) 257.
(3d) 111.
‘6’ Carnation Co., supra note 140.
.62 As was Manitoba’s egg marketing scheme to protect provincial producers, Manitoba Egg and
Poultry, supra note 139, and Saskatchewan’s potash export price control regulating scheme in Central
Canada Potash v. Saskatchewan, [1979] 1 S.C.R. 42, 88 D.L.R. (3d) 609. See Sullivan, supra note
156 at 77.
’63 Insurance Reference, supra note 152; Re Board of Commerce Act, supra note 153; Snider, supra
note 153; R. v. Eastern Terminal Elevator, [1925] S.C.R. 434, [1925] 3 D.L.R. 1; Proprietary Articles
Trade Association v. Canada (A.G.), [1931] A.C. 310, [1931] 2 D.L.R. 1 (P.C.); Natural Products
Marketing, supra note 151. The only cases that found the general trade and commerce power to have
independent content were John Deere Plow, supra note 152 and Ontario (A.G.) v. Canada (A.G.),
[1937] A.C. 405, [1937] 1 D.L.R. 702 (P.C.).
‘6’ Supra note 110.
‘0 R.S.C. 1970, c. T-10.
’66Vapor Canada, supra note 110 at 165-66.
2002] M.A. Luz& C.M. MILLER-THE NAFTA AND CANADIAN FEDERALISM 991
years later in Canadian National Transportation.’6″ In addition to the three factors
suggested by Laskin C.J. in Vapor Canada, Dickson J. stated that if the legislation
was of such a nature that the provinces, jointly or severally, would be incapable of en-
acting it and if the failure to include one or more provinces in the legislative scheme
would jeopardize the successful operation of the scheme as a whole, then a federal
law could be upheld under the general trade and commerce power.”
The general trade and commerce power was brought back to life in General Mo-
tors of Canada v. City National Leasing,'” which dealt with the validity of a provision
that allowed for a civil right of action for unfair
in the Combines Investigation Act’
competitive practices. The provision for a civil remedy falls under property and civil
rights in the province, and General Motors (accused of anti-competitive practices) and
the intervening provincial attorneys general argued that it could not be characterized
as ancillary to the exercise of federal power. The Supreme Court held that a federal
regulatory scheme with such characteristics could justify an encroachment on a
strictly local economic activity. The notion that when the legislation is general in na-
ture and “aimed at the economy as a single integrated national unit rather than as a
collection of separate local enterprises”‘”‘ is reflective of a newfound interest at the
Supreme Court level for buttressing the internal Canadian market. Hunt and Mor-
guard contained explicit references to this goal'” and the resurrection of the general
trade and commerce power is another step in this direction.
What does this have to do with globalization? As supranational norms begin to
play an even greater role at the most local levels of the economy and local actors gain
rights based in international law and have the procedural mechanisms to enforce
them, the tension between the federal trade and commerce power and provincial pow-
ers over property and civil rights will become aggravated by the territorial nature of
provincial powers.
’67Supra note 155.
‘ Ibid at 267-68.
169 [1989] 1 S.C.R. 641, 58 D.L.R. (4th) 255 [hereinafter City National Leasing cited to S.C.R.].
,70 R.S.C. 1970, c. C-23.
‘.’ Canadian National Transportation, supra note 155 at 267. In Bank ofMontreal v. Hall, [1990] 1
S.C.R. 121 at 145-46, 65 D.L.R. (4th) 361 [hereinafter Hall cited to S.C.R.], the Court said: “The fact
that a given aspect of federal banking legislation cannot operate without having an impact on property
and civil rights in the provinces cannot ground a conclusion that that legislation is ultra vires as inter-
fering with provincial law where the matter concerned constitutes an integral element of federal leg-
islative competence”
” Hunt, supra note 142 at 130; Morguard, supra note 141 at 1099.
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The tests that the Supreme Court has developed thus far may not be sufficient to
deal with this reality. While it has been accepted that strictly intraprovincial transac-
tions may be regulated by federal legislation if part of a broad regulatory scheme and
ancilliary to valid federal regulation of external and interprovincial trade, the realities
of globalization and the new type of treaties described above may result in a serious
impairment of provincial powers.
City National Leasing set out a test to balance federal and provincial rights. First,
the court must determine if there was an intrusion into provincial powers. Second, the
court must determine if the provision in question was part of a valid legislative
scheme enacted under a federal head of power. Lastly, the court must determine if the
impugned provision was “sufficiently integrated with the scheme that it can be upheld
by virtue of that relationship”‘7 3 Some authors find it unnecessary to question whether
there is a significant intrusion into provincial powers, arguing that if the law is valid
under a federal head of power or ancillary to a valid federal law then there is no en-
croachment of provincial powers.”‘ Nevertheless, that Dickson C.J. included this test
indicates that the Supreme Court had the foresight to think that there may be cases
where the federal intrusion significantly impairs provincial powers. It remains to be
seen whether this test will be able to cope adequately with the realities of modem
trade treaties like the NAFFA.
Assuming that standards of treatment for foreign investors fall legitimately into
the federal trade and commerce power because of their general nature’5 and that the
federal government may stipulate standards of treatment for foreign investors as an-
cillary to its ability to regulate the entry of foreign investment, “‘ the breadth of eco-
“‘ City National Leasing, supra note 169 at 672; Reference Re Goods and Services Tax, [1992] 2
S.C.R. 445 at 470-71, 94 D.L.R. (4th) 51; Global Securities, supra note 140 at para. 19.
‘”4 N. Finkelstein, “Note: General Motors of Canada Limited v. City National Leasing; Quebec
Ready Mix Inc. v. Rocois Construction Inc.” (1989) 68 Can. Bar Rev. 802 at 814-16.
“‘ See M.A. Luz, “NAFTA, Investment and the Constitution of Canada: Will the Watertight Com-
partments Spring a Leak?” (2000-2001) 32 Ottawa L. Rev. 35. See also R. Howse, “The Labour Con-
ventions Doctrine in an Era of Global Interdependence: Rethinking the Constitutional Dimensions of
Canada’s External Economic Relations” (1990) 16 Can. Bus. L.J. 160 at 182; H.S. Fairley, “Imple-
menting the Canada-United States Free Trade Agreement” in D.M. McRae & D.P. Steger, eds., Un-
derstanding the Free Trade Agreement (Halifax: Institute for Research on Public Policy, 1988) 193 at
200.
,76 Investment Canada Act, R.S.C. 1985 (1st Supp.), c. 28. See J.B. Nixon & J.H. Bums, “An Ex-
amination of the Legality of the Use of the Foreign Investment Review Act by the Government of
Canada to Control Intra- and Extraterritorial Commercial Activity by Aliens” (1984) 33 I.C.L.Q. 57.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 993
nomic activity that the NAFTA’s concept of investment covers” will certainly capture
decisions that are absolutely within exclusive provincial jurisdiction and that other-
wise have no extraprovincial effect.
This is tantamount to a permanent entrenchment of federal jurisdiction in areas
previously reserved exclusively for the provinces. In cases where legitimate federal
and provincial laws conflict, paramountcy of federal law will prevail.”8 While this
certainly could help to create a common set of standards for the entire country for the
treatment of foreign investment (which may be economically laudible), one can en-
visage scenarios whereby a province would be significantly hindered, or even pre-
vented, from exercising its constitutional powers if the federal government decided to
take pre-emptive action in anticipation of a provincial activity that could incur liability
for the federal government under the NAFTA. In other words, strictly intraprovincial
transactions suddenly take on national concern and implicate international rights that
are “extraterritorial” to the province.
While the resurrection of the general trade and commerce power may open the
door to greater federal regulation of the economy, it will also require a rethinking of
the balance between the federal power to implement treaties and the ability of prov-
inces to exercise their powers. While the Supreme Court may find a middle ground by
standing by its position that a regulation under the federal trade and commerce power
that intrudes too greatly into provincial jurisdiction cannot be justified under subsec-
tion 91(2), this may be insufficient. Such a position could leave Canada in the position
of having to pay considerable damages to a foreign investor.’79
‘” NAFTA, supra note 1, art. 1139 (Definitions) stipulates that an “investmenf’ means, among other
things, an enterprise or share or interest therein, a loan to an enterprise, real estate, or other tangible or
intangible property, commitment of capital or other resources, etc. This does not include claims for
money arising solely from commercial contracts for the sale of goods or services, the extension of
credit for financing (unless it qualifies as a loan), or other claims to money unless it qualifies under
another category of investment in the definition.
‘ The doctrine of paramountcy applies when there is a federal law and a provincial law that are
both valid but that are inconsistent with each other. When federal and provincial laws are found to be
inconsistent, the doctrine of federal paramountcy will render the provincial law inoperative only to the
extent of the inconsistency. Hogg, supra note 107 at 16-2 to 16-3. See also Hall, supra note 171.
179 From a more theoretical perspective, it is interesting to note that the pressures exerted on Can-
ada’s federal structure by treaties such as the NAFTA will come from below through individual in-
vestors or corporate entities and from above through friction between states as well as the various lev-
els of government, thus epitomizing what we described as “globalization”. See Part I, above.
994
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2. Peace, Order, and Good Government Power
A strong argument can be made for federal jurisdiction to implement international
trade treaties under subsection 91(2) of the Constitution Act, 1867, but this would not
apply to treaties generally given that subsection 91(2) simply addresses trade and
commerce.” Attempting to implement every international treaty entered into by Can-
ada on the basis of the peace, order, and good government power, however, could
threaten provincial heads of power. Without provincial consent, the federal legislature
could assume powers otherwise of a provincial nature by simply entering into inter-
national treaties. Any argument involving invocation of the peace, order, and good
government power calls into question its very nature: is it simply a residual power to
be used where there is a vacuum or a full-fledged head of federal competency? Be-
cause of its seemingly comprehensive nature, the Supreme Court has generally sought
to restrict its scope.
In order to secure a power for Parliament to implement any kind of international
treaty, it would have to be argued that the treaty was of national concern. The national
concern dimension of the introductory paragraph to section 91 of the Constitution Act,
1867 was first articulated by Lord Watson in Ontario (A.G.) v. Canada (A.G.):
“[G]reat caution must be observed in distinguishing between that which is local and
provincial … and that which has ceased to be merely local or provincial, and has be-
come matter of national concern, in such sense as to bring it within the jurisdiction of
the Parliament of Canada.” ‘ This note of caution radiated through the Privy Council’s
subsequent jurisprudence, which restricted the exercise of the peace, order, and good
government clause to emergency situations until 1946. In Ontario (A.G.) v. Canada
Temperance Federation,'” the Privy Council maintained the existence of a peace, or-
der, and good government power outside emergency situations. Viscount Simon em-
phasized that the true test to the exercise of this power must be found in the real sub-
ject matter of the legislation, and that if it were such as to go beyond the local or pro-
vincial concern or interest and were from its inherent nature to be the concern of the
Dominion as a whole, it would fall within the competency of Parliament.”3 This defi-
nition would serve to entrench the existence of a national concern branch under the
introductory clause of section 91 of the Consitution.
“‘ J.S. Ziegel, “Treaty Making and Implementing Powers in Canada: The Continuing Dilemma” in
B. Cheng & E.D. Brown, eds., Contemporary Problems of International Law: Essays in Honour of
Georg Schwarzenberger on his Eightieth Birthday (London: Stevens & Sons, 1988) 333 at 348.
[1896] A.C. 348 at 361 (P.C.).
2 [1946] A.C. 193, [1946] 2 D.L.R. 1 (P.C.) [hereinafter cited to A.C.].
83Ibid. at 205.
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 995
In Crown Zellerbach, the Supreme Court articulated a test that considered the ef-
fect of the federal legislation when deciding whether an act came within the national
concern doctrine. Le Dain J. for the majority drew the following conclusions regard-
ing the national concern test:
1. The national concern doctrine is separate and distinct from the national
emergency doctrine of the peace, order and good government power …;
2. The national concern doctrine applies to both new matters which did not
exist at Confederation and to matters which, although originally matters of
a local or private nature in a province, have since, in the absence of national
emergency, become matters of national concern;
3. For a matter to qualify as a matter of national concern in either sense it
must have a singleness, distinctiveness and indivisibility that clearly distin-
guishes it from matters of provincial concern and a scale of impact on pro-
vincial jurisdiction that is reconcilable with the fundamental distribution of
legislative power under the Constitution;
4. In determining whether a matter has attained the required degree of single-
ness, distinctiveness and indivisibility that clearly distinguishes it from
matters of provincial concern it is relevant to consider what would be the
effect on extra-provincial interests of a provincial failure to deal effectively
with the control or regulation of the intraprovincial aspects of the matter.”m
The Supreme Court later held that the Atomic Energy Control Ace’ was a valid
exercise of federal jurisdiction, in part under the national concern doctrine.'” La For-
est J. pointed to the production, use, and application of atomic energy as a matter of
national concern because it was predominantly extraprovincial and international in its
character and implication.’
Arguing that globalization satisfies Le Dain J.’s criteria of singleness, distinctive-
ness, and indivisibility is not only highly suspect, but it would essentially overturn
Labour Conventions by creating a federal treaty implementation power more or less
identical to section 132 of the Constitution Act, 1867. The same would seem to apply
to Le Dain J*’s fourth criterion. Indeed, it would be difficult to make the argument that
the effects on extraprovincial interests, created by Parliament upon signature and rati-
fication, would cloak the federal government with the power to deal with the subject
matter over which it would otherwise have no jurisdiction under the division of pow-
” Crown Zellerbach, supra note 110 at 431-32.
i R.S.C. 1985, c. A-16.
” Ontario Hydro v. Ontario (Labour Relations Board), [1993] 3 S.C.R. 327, 107 D.L.R. (4th) 457
[hereinafter cited to S.C.R.].
‘ Ibid. at 379.
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ers.” Simply creating a power based on the federal government’s failure to consult the
provinces where an issue of international importance has provincial repercussions of-
fends the architecture of the Constitution.
Nonetheless, the Supreme Court might consider whether the importance of FDI in
Canada and the need for Canadian foreign investors to enjoy reciprocal treatment in
other countries brings certain international legal standards of treatment of foreign in-
vestment (including “national treatment” and “fair and equitable treatment”) under the
rubric of the peace, order, and good government power.
Effective implementation of treaty obligations is a highly desirable goal. Labour
Conventions weighs heavily when assessing the federal government’s ability to enter
into extensive rule-based treaties. Given the presence of the indicators outlined above,
however, which are requiring new structures to be set in place in Canada, it would not
be surprising if in the near future the trade and commerce power and the peace, order,
and good government power are re-evaluated. Furthermore, the Supreme Court, per-
haps unfairly, will find itself in the centre of tensions brought on by a new generation
of treaties that will severely challenge the federal structure. The simple solution to this
problem may be that provinces will be asked to implement Canadian treaties on an
individual basis.
Conclusion
Much of the controversy over NAFTA Chapter 11 has glossed over the effect it
will have on the federal-provincial balance, perhaps in part because the provinces
are only indirectly liable for violations. We argue, however, that the nature of the
NAFTA investment provisions will inevitably erode the traditional boundaries be-
tween federal and provincial jurisdiction because of the unique ability of investors
to invoke binding arbitration against Canada for alleged violations of Chapter 11.
Over time, provincial policy decisions and actions will become the subject of
NAFTA arbitrations (as have those of several U.S. and Mexican states), and the
courts might be dragged into a dispute between the federal government and a
province responsible for a NAFTA violation, especially if the federal government
wants the province to back down from the policy decision in question or wishes to
be compensated by the province for a NAFTA arbitral award.
“‘ For example, supposing a province decides to allow NAFTA investors to invest in its health care
system, does this require all the other provinces to accord like treatment? If so, could it be argued that
the extraprovincial effects of such an action were so grave as to create national concern and therefore
to give Parliament the authority to step in despite the fact that it had set the framework for this possi-
bility?
2002] M.A. Luz& C.M. MILLER- THE NAFTA AND CANADIAN FEDERALISM 997
We argue that a judicial balancing solution is preferable to overturning Labour
Conventions to give the federal government a treaty-making power. Furthermore, an
orthodox application of paramountcy in an era of globalization may be more of a
threat to provincial autonomy than when supranational rules were virtually irrelevant
in Canadian domestic law. While federal measures will certainly be employed to en-
sure that provinces “toe the NAFTA line”, there may be instances where “a federal
measure would severely disrupt the equilibrium of Canadian federalism to a degree
unwarranted by the national interest.”” While we have argued that globalization is a
theory blind to federalism, this does not mean that the basic tenets of Canadian fed-
eralism should be cast aside. As La Forest J. put it in Crown Zellerbach, “[t]he
challenge for the courts … will be to allow the federal Parliament sufficient scope to
acquit itself of its duties to deal with national and international problems while re-
specting the scheme of federalism provided by the Constitution.””‘
The courts should look to the federal trade and commerce power or to the
peace, order, and good government power, or both, in order to justify the establish-
ment of basic standards of treatment for foreign investors in NAFTA Chapter 11.
The courts may further develop the notion of national concern elucidated by Le Dain
J. in Crown Zellerbach as a means of balancing the federal ability to regulate the
treatment of foreign investment in Canada with the right of a province to legislate in
spheres of exclusive jurisdiction without fundamental impairment of its objectives. 9’
Some authors suggest a reliance on the federal government’s peace, order, and good
government power where treaty matters “have an identity and unity that is quite lim-
ited and particular in its extent,”‘ and this has received some judicial support.’93 In so
doing, the provinces will still be able to exercise their section 92 powers, but will be
as constrained by the international legal norms embodied in Chapter 11 as is the fed-
eral government.
‘ D. Gibson, “The Free Trade Agreement and the Provinces: A Counter for the Sale of Constitu-
tional Wares?” in M. Gold & D. Leyton-Brown, eds., Trade-Offs on Free Trade: The Canada-U.S.
Free Trade Agreement (Toronto: Carswell, 1988) 117 at 124.
‘ Supra note 110 at 448.
For example, provincial incapacity was particularly important in both Crown Zellerbach, ibid.
and City National Leasing, supra note 169 and that could be a key criterion in defining a “national
concern” when it comes to treaty implementation.
” W.R. Lederman, “Legislative Power to Implement Treaty Obligations in Canada” in W.R.
Lederman, Continuing Canadian Constitutional Dilemmas: Essays on the Constitutional History,
Public Law and Federal System of Canada (Toronto: Butterworths, 1981) 350.
“‘ Reference Re Anti-Inflation Act, [1976] 2 S.C.R. 373 at 451-52, 68 D.L.R. (3d) 452, Beetz J.
