Full text: Trading away democracy

How CETA’s investor protection rules could result in a boom of investor claims against Canada and the EU
Definition of investment: « ‘Investment’ means every 
kind of asset that an investor owns or controls, directly 
or indirectly, that has the characteristics of an invest-
ment [...]. » Then follows a long, non-exhaustive list of 
« forms that an investment may take », ranging from 
shares over debt instruments to intellectual property 
rights. (Chapter 8, Article 1)
The definition of « investment » is very important 
because it determines which foreign capital is pro-
tected. A broad – and open-ended – definition such 
as in CETA not only covers actual enterprises in the 
host state, but a vast universe ranging from the value 
of a trademark, alleged promises made by a state 
controlled entity or government authority in a secret 
contract to sovereign debt. This exposes states to 
unpredictable legal risks.
Definition of investor: « Investor means a Party, a 
natural person or an enterprise of a Party [...] that 
seeks to make, is making or has made an investment 
in the territory of the other Party ». An « enterprise 
of a Party » must either have « substantial business 
activities in the territory of that Party » or « be directly 
or indirectly owned or controlled » by a natural person 
of or an enterprise with substantial business activity in 
that Party (Chapter 8, Article 1) 
The definition of « investor » is important because 
it determines who is protected. While much will de-
pend on the arbitrators’ interpretation of « substantial 
business activities », CETA does prevent blatant 
treaty abuse through mailbox companies (such as a 
Canadian firm suing Canada via a shall construction 
in the Netherlands). But this will not prevent the 
thousands of US- and EU- owned corporations with 
subsidiaries in Canada to sue EU governments via 
CETA and vice versa (see page 9). That an investor 
is also protected if he/she only indirectly owns or 
controls the investment further opens the gate to 
treaty shopping.  
National treatment: “Each party shall accord to an 
investor of the other Party and to a covered investment, 
treatment no less favourable than the treatment it 
accords, in like situations to its own investors and to 
their investments with respect to the establishment, 
acquisition, expansion, conduct, operation, management, 
maintenance, use, enjoyment and sale or disposal of 
their investments in its territory” (Chapter 8, Article 6)
Foreign investors have to be treated at least as 
favourably as domestic ones. This has been inter-
preted as a prohibition of any measure that de facto 
disadvantages foreigners – even if not on purpose. 
For example, a Canadian ban on the export of a toxic 
waste (applying to all investors and in line with an 
international environmental treaty) was found to 
favour Canadian firms because they could continue 
their business while a US competitor could not ship 
the waste to the US to treat it there (see page 5) 
Fair and equitable treatment (FET): “Each Party 
shall accord in its territory to covered investments of 
the other Party and to investors with respect to their 
covered investments fair and equitable treatment (…).” 
Then follows a list of examples which would constitute 
a breach of this obligation: “denial of justice”, “funda-
mental breach of due process”, “manifest arbitrariness,” 
“targeted discrimination” and “abusive treatment of 
investors.” (Chapter 8, Article 10) 
This potentially catch-all clause is the most danger-
ous for taxpayers and regulators: it is used most 
often and successfully by investors when attacking 
public interest measures. The inclusion of “manifest 
arbitrariness” as one of the criteria that investors 
can invoke as a breach of this clause in CETA leaves 
the door wide open for investors to sue and for 
arbitrators to interpret it to their discretion. 
When studying what investors have argued in 
emblematic public interest cases, we found that it 
is not uncommon for companies to argue that the 
measures sanctioned by the State were “arbitrary”64. 
In three-quarters of cases won by US investors, 
tribunals found an FET violation65.

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