Treatment No Less Favorable Provisions

Issues respecting “no less favourable treatment” in the National Treatment Obligation under NAFTA

By Jon R. Johnson Goodmans LLP (December 2, 2001)

If circumstances are “like”, Articles 1102(1) and (2) require Parties to accord to investors of other Parties and their investments treatment that is no less favourable than treatment accorded to their own investors and their investments. The “no less favourable” treatment standard is the classic formulation of a “national treatment” non-discrimination provision. Seemingly a violation must be based on some form of discrimination, where foreign investors are discriminated against on the basis of their nationality. However, the practical application of the non-discrimination national treatment obligations in Articles 1102(1) and (2) in the NAFTA case law to date is not that straightforward.

Discrimination

De Jure Discrimination

De jure discrimination is discrimination that occurs on the face of a measure. In terms of Articles 1102(1) and (2), the basis for de jure discrimination exists when a measure subjects foreign investors and their investments to a different regime of treatment than domestic investors and their investments. The only issue in this situation is whether the different treatment accorded to the foreign investors and their investments is less favourable. The GATT/WTO jurisprudence establishes a general principle that treatment may be different but must afford equal competitive opportunities. Equality of competitive opportunities is expressly referenced in Article 1405(5) in respect of the financial services national treatment obligation in Article 1405. While a panel or tribunal could conceivably conclude that the specific reference to equality of competitive opportunities in Article 1405(5) and the absence of a reference to competitive opportunities in Article 1102 means that some other test applies, the more likely approach would be that the references to equality of competitive opportunities in Article 1405(5) reinforces its status as the test to be applied. Differences in wording like this that are not clearly intended add to uncertainty.

Another GATT principle that will be applied is that less favourable aspects in some respects of treatment of foreign investors cannot be offset by more favourable aspects of treatment in other respects: United States – Section 337 of the Tariff Act of 1930 (“Section 337”) Adopted 7 November 1989, BISD 36S/345. The Pope & Talbot Tribunal managed to treat what was unequivocally a de jure case as a de facto case in that they used this case to refute Canada’s position on d facto discrimination. See Pope & Talbot Award Second Phase paragraph 68.

De Facto Discrimination

The GATT/WTO jurisprudence establishes that breaches of the various non-discrimination obligations in the WTO agreements (national treatment as well as most-favoured-nation treatment) can occur even if a measure is not discriminatory on its face. This is known as de facto discrimination. While the concept of de facto discrimination clearly exists in the GATT/WTO jurisprudence, it has been applied on a case by case basis. It is difficult from those cases to draw a clear set of principles as to when de facto discrimination exists and when it does not.

Governments have any number of valid reasons for treating different situations differently, with goods, services, investors and investments in some situations being less favourably treated than in others. The question is, absent discrimination on the face of a measure providing for differential treatment, when does that differential treatment amount to discrimination that breaches a national treatment obligation and when does it not.

The fact situation in Pope & Talbot illustrates the difficulties in applying the concept of de facto discrimination. In Pope & Talbot, lumber exported from covered provinces (one of which was British Columbia, where the investment was located) were subject to a charge (The charges were levied on exports over certain volumes which were determined by export quotas which were allocated to lumber producers. The fact situation presented here is just one of the fact situations that was before the Tribunal in Pope & Talbot, but the theme throughout all the various fact situations in Pope & Talbot was pretty much the same) while lumber exported from non-covered provinces were not subject to charges. The charge levied on B.C. exports was higher than the charges exported from other covered provinces. The treatment of producers exporting from British Columbia was clearly less favourable than producers exporting from non-covered provinces (no charge) or from the other covered provinces (a lower charge).

Canada argued that for de facto discrimination to exist, the less favourable treatment (that in the covered provinces, particularly in British Columbia) had to fall disproportionately on foreign investors, as would be the case if most of the investments in British Columbia were foreign-owned and most of the investments in the non-covered provinces were domestically-owned. As there was no evidence whatsoever that this was in fact the case, there was no de facto discrimination. This position is most strongly supported by the Panel and Appellate Body decisions in EC-Bananas.(Notwithstanding the Tribunal’s curious spin on this case. See Pope & Talbot Award Phase 2 paragraphs 46 to 57) The decision of the Myers Tribunal also supports this position.

The investor argued that de facto discrimination existed when a single foreign-owned investment (such as its investment in British Columbia) was less favourably treated than a single domestically-owned investment (such as an investment in a non-covered provinces) even though domestically-owned investments in British Columbia also received the less favourable British Columbia treatment and the foreign-owned investments in non-covered provinces also received the non-covered province treatment. This view of de facto discrimination is supported by a number of fact situations in the Malt Beverages case. The Tribunal also cited the Section 337 case as supporting this view, in apparent disregard of the fact that Section 337 was unequivocally a de jure situation.

The Tribunal accepted the investor’s position and rejected that of Canada. However, as indicated above, the Tribunal found in Canada’s favour on “like circumstances” by holding that any difference in treatment was acceptable (i.e. represented a situation of unlike circumstances) if it “bears a reasonable relationship to rational policies not motivated by preference of domestic over foreign owned investments”.

Where does Pope & Talbot leave us as regards de facto discrimination? Canada’s position seems intuitively correct and was supported by the other two Parties. The measures in Pope & Talbot clearly did not discriminate against U.S. investors in any sense that the Parties could have had in mind when they agreed to the text of Article 1102. However, given that there is a concept of de facto discrimination, what is there in the NAFTA text or in the case law that says that Canada’s position was correct and that adopted by the Tribunal was wrong?. The Tribunal misinterpreted both Section 337 and EC-Bananas, but they could have come to the same conclusion without making these errors.

Also, suppose that the facts had been that most of the producers in British Columbia just happened to be U.S.-owned and most of the producers in the non-covered provinces just happened to be Canadian-owned?. This would have been unlikely in Pope & Talbot because there were a relatively large number of producers. However, this is a very real possibility when differential treatment is applied in an industry where there are few producers. Would there have been de facto discrimination, even though there was a total absence of a discriminatory motivation? Also, what is disproportionate? Would 60% U.S. ownership in British Columbia versus 60% Canadian-ownership in the non-covered provinces be disproportionate? Or would it have to be 70% or 80%?

The situation was saved in Pope & Talbot only because the Tribunal ignored the WTO “aims and effects” jurisprudence and introduced a concept of discriminatory motivation into its analysis of “in like circumstances”. If the Tribunal had adopted the view of “in like circumstances” applied by the Panel in Trucking Services (i.e. that it is an exception to be narrowly interpreted), Canada would have lost.

Best in Jurisdiction Treatment

The decision in Pope & Talbot leads to the question as to whether Articles 1102(1) and (2) impose a best-in-jurisdiction treatment obligation. The Tribunal in Pope & Talbot held that Articles 1102(1) and (2) do impose this obligation(See Pope & Talbot Award Phase 2 paragraph 42, where the Tribunal expressly states this) and used the “most favourable treatment” language in Article 1102(3) to support this conclusion.(Pope & Talbot Award Phase 2 paragraph 41) Under the best-in-jurisdiction interpretation, in any situation in which there is different levels of treatment, the foreign investor is entitled to the best treatment even though the different levels of treatment fall even-handedly on both domestic investors and foreign investors. This question is obviously of concern to government, and should be of equal concern to the governments of all three NAFTA countries, as well as to governments of provinces and states. The more hawkish supporters of investor rights would take issue with this and argue that governments should simply be made to pay for any measure that inconvenience investors i.e., imposes on an investor’s investment any cost structure that is higher than the lowest cost structure.

The best-in-jurisdiction theory raises the issue as to how governments can provide in their laws for different levels of treatment for legitimate policy reasons having nothing to do with the nationality of investors or investments without breaching Article 1102. The answer of the Pope & Talbot Tribunal to this question was that any difference in treatment that was linked to a rational government policy and was not motivated by discrimination on the basis of nationality created a situation of unlike circumstances. This solution seems perfectly acceptable so long as it is consistently applied from case to case. However, an untenable situation would arise if a best-in-jurisdiction approach to de facto discrimination is coupled with a narrow interpretation of “in like circumstances”.

The other way of approaching the issue of de facto discrimination is to reject the best-in-jurisdiction theory and adopt the position that there can be no de facto discrimination unless there is discrimination on the basis of nationality. In a curious way, the decision in Pope & Talbot supports this position. Following the Tribunal’s logic, in order for there to be discrimination, there must be a difference in treatment. The Tribunal found, in effect, that a difference in treatment linked to a rational government policy and was not motivated by discrimination was a situation of unlike circumstances. On this logic, “like circumstances” can only exist with a difference in treatment that is not linked to a rational government policy and is motivated by discrimination.

Aims and Effects

The foregoing discussion brings us back to aims and effects. As noted earlier, the Pope & Talbot made discriminatory motivation (or the absence of it) the basis for their “like circumstances” analysis. Absence of discriminatory motivation would seem an equally reasonable basis for a finding that there was no de facto discrimination. The difficulty that WTO panels and the Appellate Body have had with the concept of “motivation” or “intent” is that ascertaining the intention of a government in enacting a measure may difficult, and in any event it is the effect of the measure that should matter and not the intention behind the measure. However, basing de facto discrimination on the effect of the measure alone can have its problems. Suppose, for example, that there are only two producers of a particular product. One producer, which is U.S. owned, is located in an environmentally sensitive area and is subject to certain stringent environmental controls, with a resulting higher cost structure. The Canadian producer is not located in such an area and is not subject to those controls. On these facts, 100% of the foreign investors are subject to less favourable treatment than 100% of domestic investors. However, foreign ownership has no relevance whatsoever to the application of the measure or the motivation for its being enacted.(Note also the view of the Pope & Talbot Tribunal as regards singularity expressed in paragraph 56 of the Pope & Talbot Phase 2 Award) The situation would be exactly the same if the ownership were reversed.

Basing de facto discrimination on the effects of a measure alone may be appropriate with goods because there will usually be many goods and situations such as that just described will not arise. However, in applying national treatment obligations to investors and investments, application of a pure “effects” approach to de facto discrimination will result in situations being characterized as de facto discrimination that were never intended by the NAFTA Parties.

Sub-National Governments

As indicated above, the most favourable treatment language in Article 1102(3) was intended to address the phenomenon that provincial and state governments sometimes treat investors and investments from other provinces and states within the same country less favourably than their own investors and investments. The “most favourable treatment” language sets the standard at the level of treatment of domestic investors and investments within the province or state, and not at the standard applied to domestic investors and investments of other provinces or states. While Article 1102(3) does not say this, it is probably a safe assumption that if there is a difference in treatment by a province or state of domestic investors and investments, the province or state will accord the more rather than the less favourable treatment to its own investors and investments rather than those of other provinces or states.

As discussed above, the Pope & Talbot Tribunal adopted a different view, and used Article 1102(3) to support its best-in-jurisdiction interpretation. The one observation in this regard made by the Tribunal that was correct was the view that the national treatment standard cannot be different for provinces and states than it is for federal governments.(Pope & Talbot Phase 2 Award paragraphs 40-41) The Tribunal used the “most favourable” language in Article 1102(3) to support its best-in-jurisdiction finding respecting the national treatment obligations of federal levels of governments. The Tribunal’s reasoning can be applied to reach the opposite conclusion, namely that since it is clear from Articles 1102(1) and (2) that a best-in-jurisdiction treatment standard was not intended, the same applies to provincial and state measures under Article 1102(3).

The one other question that arises with respect to provinces and states is the extent, if any, to which treatment by other provinces and states can set a standard of treatment that must be observed by other provinces and other states. Consider the Newfoundland/Ontario water example described above under item B(2)5 above. Does the Newfoundland standard of allowing water extraction permits set the standard so that a breach of Article 1102 occurs when Ontario does not grant such permits? The answer must clearly be that it does not. As described above in item B(2)5, the comparison of treatment that Articles 1102(1) and (2), when read together with Article 1102(3) is the treatment accorded by “that state or province” i.e., Ontario, and not the treatment accorded by some other province, such as Newfoundland. The same observation applies to measures of local governments. In the example described in item B(2)5 above, the action of the first municipality in deciding to privatize water supply does not set the standard for the second municipality that chooses retain public control.