The NGO Pocket Trade Lawyer For the Multilateral Agreement on Investment

By Lori Wallach, Juris Doctor, Harvard Law School
Courtesy of Public Citizen's Global Trade Watch

Legal Tricks of the Trade, Words with Special Meanings, Reservations, Exceptions and Carve-outs

The most important tool to making an informed judgement about the Multilateral Agreement on Investment (MAI) is the ability to understand what the MAI's proposed terms mean. The Organization for Economic Cooperation and Development (OECD) has recently launched a public relations campaign which we have dubbed the "charm offensive," to convince the public that the nearly completed MAI text is harmless, if not beneficial. This guide to MAI language is intended to launch a countering educational offensive so people can read the actual MAI text and come to their own conclusions about its merits and threats.

Unfortunately, as with all of today's complex international commercial agreements, understanding the MAI's legal jargon is not an easy task. First, the agreements are written in a technical language in which words with a clear meaning in common usage have entirely different meanings or implications. In some cases, terms are shorthand for whole bodies of legal jurisprudence that is not evident on the face of the term.

Second, words used in trade and investment agreements have extremely precise meanings which can turn on the slight difference in a verb's tense. Since draft agreement texts are often only available in English (or perhaps also French), non-native speakers are put at a disadvantage from the start. Third, there are certain basics of legal interpretation that most non-lawyers simply do not know which can completely mask the meaning of agreement language.

The MAI's terms are so drastic in their actual meaning that simply being able to understand their implications on a country's laws and policies is the NGO's strongest argument in criticizing the agreement. Innocent errors in interpretation are often used by MAI proponents to undermine the credibility of legitimate criticisms. This Pocket Trade Lawyer is a guide to some of the most essential specialized terms, language, legal quirks and potential pitfalls in the MAI. Its goal is to empower the maximum number of people to be able to make their own informed decisions about the MAI's often intentionally murky provisions.

I. Legal Tricks of the Trade

A. Preambular Language:
Preambular language is not legally binding. It does not create any obligations or privileges that are enforceable through dispute resolution. The only legal effect of such language is for use in disputes to guide interpretation of binding clauses. Pro-human rights, development, employment, health or environment language is often contained in the preamble of trade and investment agreements. This is a way to include the language that citizens demand without creating binding obligations on such issues as labor rights or environmental protection. MAI negotiators have added some such language to MAI's preamble and continue to offer to add more. Sadly, this language is not enforceable. In fact, to the extent binding MAI provisions in the core of the text conflict with preambular language, the preambular language is entirely trumped.

B. "And" versus "Or":
How sentences or phrases are connected often determines their meaning. When "and" is used, it connotes that all of the clauses or provisions connected must be satisfied. Thus, the MAI expropriation language says that a

"contracting party shall not expropriate...or take any measure having equivalent effect except: for a purpose which is in the public interest, on a non-discriminatory basis, in accordance with due process of law, andaccompanied by payment..." (MAI Article IV(2.1)(a-d).)

C. Interpretive notes and footnotes:
The MAI negotiators have not decided what legal value, if any, interpretive notes and footnotes will have (some interpretive notes are set off by asterisks while others are specifically labeled as "interpretive notes.") This is stated in footnote 29 of the April 1998 MAI text: ("One delegation notes that the question of the status of footnotes and interpretive notes for the MAI remains to be determined.") In some international agreements, both interpretive notes and footnotes have the same non-binding nature as preambular language. (Used only to interpret binding language in the context of a dispute proceeding.) Thus, requested language placed in footnotes or interpretive notes will not necessarily have binding effect. This is a point that must be closely watched; both the notion that expropriation rules do not cover regular government regulatory actions and the notion that performance requirement restrictions do not limit investment targets for minorities, poor regions and women are stated only in footnotes.

D. Latest in Time:
A key rule of treaty legal interpretation is that "later in time rules the line." That means that provisions in the most recent treaty trump those of past existing treaties unless a specific measure in the later treaty provides otherwise. For instance, the MAI's preamble includes a phrase: "Renewing their commitment to the Copenhagen Declaration..." However, unless in a binding portion of the MAI text a specific "hold harmless clause" is inserted for the Copenhagen Declaration, a binding MAI provision that conflicts with a Copenhagen Declaration commitment by a government is overruled in priority. This later-in-time rule is why environmental NGOs are calling for a broad "hold harmless clause" for all existing Multilateral Environmental Agreements (MEAs) and their domestic enforcement. Without such a safeguard, MAI provisions and commitment would trump MEA commitments assumed earlier.

E. Hold harmless clauses:
A legal construct used in treaties is called a "hold harmless clause." This is language that states that certain named existing treaties are not to be affected by otherwise conflicting language. The model language in this regard is usually: "To the extent of conflict, X treaty's provisions shall be given precedent over the terms of this treaty."

F. Ministerial Declarations:
The April 1998 MAI Ministerial Declaration contains some interesting language about what certain MAI provisions mean. Unfortunately, the Declaration has no binding legal effect on the actual MAI text. Thus, any useful language from the declaration must be agreed to and inserted into the legal MAI text for it to have effect. Indeed, no documents outside of a treaty's core text have binding effect on a treaty's provisions unless the treaty's provisions specifically adopt such external language. Thus, no OECD side letters, papers or other texts have binding legal effect on the MAI text unless referenced in the MAI text itself.

G. Brackets versus parenthesis:
Look carefully to see if a clause is set off by square brackets "[ ]" or is in parenthesis "( )". Square brackets mean that the language is only proposed, and has not been agreed. Thus, the many square bracketed versions of language on not lowering standards to attract investment now included in the text are not provisions the negotiators have agreed, but rather a listing of different countries' proposals. Parenthesis, on the other hand, are generally used for clarification or simply punctuation in binding text.

H. The Vienna Convention on the Interpretation of Treaties:
This is a multilateral treaty setting forth standard procedure for interpretation of treaties. Think of it as the rules of procedure and interpretation. The terms of the Vienna Convention, such as the types of votes (majority, consensus, etc.) that must be used to take certain decisions, are generally binding on all other treaties unless such a treaty sets forth other specific rules. Chapter XI of the MAI sets forth the MAI's specific voting requirements.

I. New York Convention:
This is shorthand for the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards. This is a treaty that binds its signatories to submit international rulings to its domestic court system for enforcement. Reference to the New York Convention is made in MAI Chapter V (Investor-to-State Dispute Resolution). Article V(D)(5) states that countries' consent in Article V(D)(3) to the MAI dispute resolution also binds them to the New York Convention. This is a key detail. Often MAI proponents challenge critics by suggesting that even if a corporation wins an MAI challenge against a country, there is no way to "collect" on the monetary award. The New York Convention is how the corporation can enforce its win by access to a country's own domestic legal system.

II. Words with Special Meanings

A. Operative Verbs:
One must scrutinize both the precise verb and that verb's tense to determine if a clause is binding or not. A classic example that many of the most fluent English-as- a-second-language speakers often miss is the drastic legal difference between "shall" and "should" and "must" and "may." "Shall" and "must" are binding and mandatory but "should" and "may" are non-binding and permissive.

Shall: If a clause uses the verb "shall" it is almost always binding with the exception being provisions that use the formulation: "a contracting party shall strive to do X, Y or Z." In that instance, the binding commitment is only to try to do X, Y, or Z, not to actually do X, Y or Z.

Must: Must is almost always binding unless it is used in the constructive noted immediately above.

Should: The subjunctive tense in this verb makes it not binding, but advisory, i.e.. a country ought to try to do X, Y or Z.

May: May is never binding. It is entirely permissive and discretionary. Thus, a clause that says: "a country may take into consideration..." creates no obligation for a country to do so.

"A contracting Party shall not, in connection with the establishment, acquisition, expansion....of an investment... impose, enforce, or maintain any of the following requirements..." (MAI Chapter III, Performance Requirements, (1)).

C. Necessary:
Under jurisprudence developed in numerous cases over the past decade, the term "necessary" triggers what is called the "least trade restrictive" test. The GATT-WTO exception about "measures necessary to protect animal, plant or human health or life" that is being considered for inclusion in MAI has been rendered through the string of GATT and WTO cases to require that a country prove the negative in order to safeguard a law using that exception. A country must prove that no less trade restrictive means for obtaining an objective could exist. (In addition, the legitimacy of the objective, not only the means used to obtain it, must separately stand up to a legal test.) It is important to be aware of the use of the term "necessary," as it can in effect eviscerate otherwise binding provisions. The NAFTA text contained a limited "hold harmless clause" for three specific Multilateral Environmental Agreements. But that provision was rendered largely meaningless by being prefaced by the clause "measure necessary to..."

III. Reservations, Exceptions and Carve-outs

Each of the terms "reservation," "exception," and "carve-out" means something entirely different. It is important to carefully choose the legal term that expresses your intent and also to understand what precisely these different mechanisms mean in regard to their ability to safeguard laws and policies that conflict with the MAI's terms.

A. Reservations:
Reservations are exemptions for individual laws or policies that violate the terms of international agreements. Each country puts forward lists of laws for which it would like to take a reservation and then these lists are negotiated among trade/investment partners. Once agreed upon, reservations are annexed to the completed agreement. One must be very careful to notice which MAI provisions are noted as those from which reservations are taken. Negotiators have, so far, only agreed that MAI signatories can reserve laws from the National Treatment and Most Favored Nation (MFN) treatment provisions. This means that reserved laws must still comply with expropriation, general treatment, and performance requirements provisions.

In U.S. investment agreements such as the NAFTA and its Bilateral Investment Treaties, two types of reservations have been utilized: narrow or closed reservations (Type A) to protect existing laws and open-ended reservations (Type B) to enable legislatures to adopt new laws in a certain policy area or make current laws stronger.

Type A reservations would normally enable a government to maintain a law that conflicts with an agreement, but governments can not expand the law or adopt it in other contexts. EXAMPLE: A state has a law banning foreign ownership of real estate above a certain number of acres. The government has decided to claim a Type A reservation for this law. While the law may be able to stand, the legislature will not be able to promulgate new laws in the future along these same lines. For example, it would be unable to impose a ban on foreign ownership of agricultural land. It would also not be allowed to make the law more restrictive. For example, it would be unable to reduce the amount of land that a foreign firm could own.

Type B reservations would enable a legislature to violate the terms of the MAI when formulating public policy in certain areas after the agreement is signed. EXAMPLE: Under the NAFTA, the United States claimed an open-ended reservation for what it termed "minority affairs." This reservation enables the U.S. government to continue to make laws addressing the economic effects of institutionalized discrimination against minority populations, even if such laws involve, for instance, favoring minority businesses over other investors in the awarding of contracts and loans -- practices that would clearly violate the provisions of the MAI.

Currently, OECD delegates have agreed to include only Type A reservations in the agreement. Additionally, under the current MAI text reservations are temporary. When a country claims a law or policy area as a reservation, it is admitting that such law or policy area conflicts with the terms of the agreement. This is the first step in the eventual "roll back" of laws inconsistent with MAI. The elimination of reservations is the primary mechanism through which the MAI will obligate governments to "liberalize" in the future.

B. Exceptions:
Exceptions are binding provisions on all signatories built into the core text of an agreement that list the circumstances when a country may violate a term of an agreement without penalty. Exceptions only come into play as a defense when a country's law or policy has been challenged in dispute resolution as a violation of an agreement. GATT Article XX lists the exceptions to that agreement, allowing countries to take some otherwise GATT-illegal actions necessary to protect human, animal or plant health or life or in relation to preservation of a national treasure or public order or morals. The MAI draft text, Chapter VI, contains the fewest exceptions of all the multilateral economic agreements, including the GATT and WTO. Moreover, the MAI's few exceptions do not apply to the MAI's expropriation clause at all.

Currently, only government actions "necessary for the protection of its essential security interests" or "in pursuance of its obligations under the UN Charter for the maintenance of internal peace and security" are protected with exceptions in MAI. As noted above, GATT Article XX exceptions for laws necessary to protect public health and safety and for laws relating to the conservation of natural resources have also been suggested for addition. Unfortunately, neither of these GATT exceptions have been used with success under the GATT.

Past trade dispute panels often have not respected exceptions as a legitimate protection for nations choosing to elevate valued social objectives above commerce. Countries have unsuccessfully invoked both of the GATT Article XX exceptions relating to the environment in the two GATT Tuna-Dolphin cases, the CAFE standards challenge and the WTO challenges on Beef Hormones, Reformulated Gasoline Cleanliness and Turtle/Shrimp, only to be ruled against in each instance. The latest Turtle-Shrimp ruling goes so far as to disqualify use of the Article XX exceptions for any laws or policies that conflict with the WTO's primary goal of trade liberalization. This interpretation would gut the exceptions altogether, as protecting just such laws is precisely their intent. The long string of GATT and WTO rulings voiding exception claims highlight the problem of such decisions being made in tribunals without due process, openness, balanced judges or other safeguards.

C. Carve-outs:
A carve-out takes an entire economic sector or industry or topic out from under MAI coverage. A full carve-out essentially serves to narrow the scope of the agreement by declaring some matters off-limits. Because the MAI is a "top-down" agreement covering almost all economic sectors, there will be very few, if any, industries or policy areas placed outside its scope. A partial carve-out could remove an industry or topic from any coverage by specific MAI provisions. Currently, the MAI contains a very narrow carve-out for taxation. A country's taxes per se are not covered by MAI disciplines, although an investor/country can challenge a country's tax laws under the expropriation clause (i.e. the investor could argue that the taxes effectively "seize" the investment). France and Canada have been battling hard for a full carve-out for their cultural industries. This means that the MAI would not confer upon investors the right to compete in the cultural industries of signatory countries. Of all the ways to protect laws from MAI attack, the carve-out is the only potentially effective, lasting approach. However, as with reservations, it is vital to ensure that anything less than a complete carve-out applies to all necessary provisions. For instance, Canada took a reservation under the 1988 Canada-US Free Trade Agreement's (CUSTA) entire agreement on Trade in Goods for its laws banning the export of raw logs. The U.S. then successfully challenged that very law by using provisions under the CUSTA's Subsidies Agreement, arguing that the raw log export ban was an illegal subsidy for Canadian furniture, home building and other industries.

D. Some Other Key Facts About Reservations, Exceptions and Carve-outs:
None of the mechanisms described above prevent a corporation or country from challenging a law or policy under the MAI. Nations would have to bear the expense of defending their cases at the forum of the corporate challengers' choice or at an MAI International Tribunal. It is not yet determined if the challenger or the defender will carry the burden of proof. The WTO places the burden on the defending country in many instances, as highlighted in the recent WTO Beef Hormone ruling. The right to challenge laws in international court would even include legal challenges arising out of a disagreement as to the scope of a carve-out (i.e., would the cultural carve-out include the computer industry?). Also, none of the above mechanisms stop an investor from threatening a suit to discourage a government from promulgating or enforcing a certain law it doesn't like. In addition, subfederal governments will have to rely on their federal governments to defend their laws, should they be faced with a legal challenge under MAI. There is no guarantee that the federal government will have supported the law in the first place, and thus no guarantee that it would put up a good defense.

For more information contact: Public Citizen's Global Trade Watch