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TransCanada Corporation’s Arbitration Against the U.S. is Worrying for Democracy

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By Nathalie Bernasconi-Osterwalder, Damon Vis-Dunbar, January 11, 2016

Each year companies lodge dozens of legal cases against governments under a little-known mechanism called investor-state dispute settlement (ISDS).

Few make headlines. But occasionally these cases do break through to the public’s attention, given the money at stake and the public interest involved.

The latest case to fit that bill is by TransCanada Corporation—the Calgary-based energy firm—against the United States. The company seeks US$ 15 billion in damages over President Barack Obama’s decision to deny a permit for the Keystone XL pipeline.

Readers in Canada may also recall the case by the U.S. company Bilcon against the Canadian government for rejecting a mining and marine terminal project in Canada. And in Germany you may have heard about Vattenfall, the Swedish energy company, suing the German government for damages over environmental measures imposed on a coal-fired power plant to avoid overheating the Elbe River (this is in addition to another case by Vattenfall suing Germany for phasing out of nuclear power). 


There are threads that tie these cases together. First, they all involve government decisions in the public interest related to project approvals. The U.S. was motivated by the Keystone XL pipeline’s impact on climate change and security. Canadian authorities refused to move ahead with Bilcon’s project for environmental and social reasons. Germany was acting to meet EU directives on water quality. Second, they all negatively impact a company’s bottom line. And thirdly, they all have resulted in various legal challenges as the affected companies seek to reverse the government’s decision, or obtain monetary damages. Including through the use of ISDS. 

We don’t deny that businesses should be protected against unfair or discriminatory behaviour by governments, with the necessary legal tools to assert their interests. But the ISDS system plays a troublesome role within the broader legal regime that relates to foreign investment. Particularly its relationship with domestic courts and processes.

U.S. courts and other adjudicative bodies are far from perfect. But they are formed over centuries, with multiple checks and balances built into the system. In contrast, ISDS involves three democratically unaccountable arbitrators who are untethered to legal precedence. Strikingly, the decisions of these arbitrators can supersede the decisions made by a country’s highest court of law—the U.S. Supreme Court in this case. 

If Obama’s decision to deny construction of Keystone XL exceeded his power under the U.S. Constitution—as TransCanada alleges—then U.S. courts offer a much sounder and legitimate forum in which to weigh that complaint, and this forum should not be overshadowed by a parallel international claim. 

ISDS is enshrined in trade and investment treaties among states. TransCanada draws on the North American Free Trade Agreement to assert its claim. As treaties that are designed and agreed by governments, it is in the hands of governments to reform them. Unfortunately, many governments—including Canada and the United States­­—are moving full steam ahead to place ISDS in more and more treaties. These include Canada and the EU’s Comprehensive Economic Trade Agreement; the EU and U.S. Transatlantic Trade and Investment Partnership; and the Trans-Pacific Partnership (involving 12 countries, including Canada and the U.S.).

US$15 billion is not small change. We hope it’s enough to open up the eyes of U.S. and Canadian governments that the risks of ISDS far outweigh the perceived benefits.