A Canadian Commentary on Constructive Expropriation Law Under NAFTA Article 1110

<jats:p>By virtue of the Constitution Act, 1982. Canada has established that some rights andfreedoms are beyond the reach ofgovernment. However, the protection of properly, especially with regard to the guaranteeing of compensation ifproperty is taken by the state, has not been elevated to this same level of constitutional protection. This article examines regulatory takings claims under Article 1110 ofthe North American Free Trade Agreement and provides an exposition of the law insofar as it has developed in the NAFTA context. It begins with a survey of constructive takings in international and domestic U.S. law and concludes by highlighting the obvious differences between the protection afforded to foreign NAFTA investors in Canada and domestic owners of properly when property is taken.</jats:p>

section_content: at 39. Sec also Authorson v. (Canada) Attorney General, [2003] 2 S. C. R. 40,2003 SCC 39 [Authorson],

which by expressly negating any claim for payment of past interest owed to individual war veterans on their pensions paid and invested on their behalf by the government, clearly illustrates the indefeasible nature of the principle of parliamentary sovereignty. Less relevant, but equally illustrative of parliamentary sovereignty, the Supreme Court of Canada in Authorson refused to read into the procedural due process provisions of the Canadian Bill ofRights (S. C. 1960, c. 44, reprinted in R. S. C. 19SS, App. Ill) any substantive due process compelling Parliament to actually provide for an adjudicative process before extinguishing property rights without compensation. Lastly, it is important to note that the general nature of the ownership rights involved in Authorson arose out of statutory benefits conferred by legislation. Such benefits themselves have not consistently been seen as "property" in the U. S. See Pittman v. Chicago Bd. ofEducation, 64 F. 3d 1098 (7th Cir. 1995) ; (cert, denied) 517 U. S. 571 (1978), where the Court commented: "If a statutory benefit could not be rescinded without the payment of compensation to the beneficiaries, it would be extremely difficult to amend or repeal statutes" (at 1104-1105). Similar views were expressed in McKinley v. United Slates, 828 l-. Supp. 888 (D. N. M. 1993). Of course in Authorson, what was at issue was the extinguishment of a right to interest that ought to have accrued. This clearly was property -the extinguishment of ownership of it was quite different than a mere prospective reduction or extinguishment oflhc statutory arising from excessively onerous regulations or prohibition, being a judicial construct, is necessarily a body of law that is created incrementally and which evolves slowly. Canadian judicial thinking around the issues raised by constructive expropriation is far from fully formed. 

The main characteristics8 ofCanadian constructive takings arising from excess regulation are:

1. there must be a complete deprivation of ownership in the sense of exclusivity, access and use;4

2. such deprivation must be accompanied by an identifiable consequent acquisition in specie by the regulatory authority or its beneficiary;10 3. there is a presumption that fair compensation must be paid when property is so

taken, but such presumption may be rebutted on a finding by a court of legislative intent to deny compensation regardless of the onerous effect of the regulation on ownership;" and 4. the regulation affecting the constructive expropriation must be otherwise valid in order to have any takings cITcct at all, and what is taken must be property. 12

This article examines regulatory takings claims under art. 1110 of the North American

Free Trade Agreement (NAFTA)n and provides an exposition of the law insofar as it has developed in the NAFTA context. It concludes by highlighting the obvious differences between the protection afforded to foreign NAFTA investors in Canada and domestic owners of property when property is constructively taken. 88,2002 ABCA 283 at para. 20 [Nilsson], where the Alberta Court of Appeal noted "that the test for de facto expropriation is a complete 'taking' or total extinguishment of rights, without payment of compensation. " Despite this blunt assertion in Nilsson. a majority in the Nova Scotia Court of Appeal in Mariner Real Estate Ltd v. Nova Scotia (A. C. ) (1999). 178 N. S. R. (2d) 294 [Mariner Real Estate] agreed in obiter that the right to build a summer cottage on a beach-front lot could constitute a taking, despite the fact that family camping or picnicking might still be allowed as recreational uses. Sec Tener, ibid. ; Manitoba Fisheries, ibid. ; Nilsson, ibid, and also Steer Holdings v. Manitoba (1992), 83 Man. R. (2d) 171 (C. A. ) at 177, where the Manitoba Court of Appeal failed to find a taking, stating: "But in my opinion there was no corresponding benelit or acquisition by the Province of Manitoba. . . . To qualify for compensation there must be an expropriation, ifnot in name, then in effect. The limitation on usage must be balanced by some corresponding acquisition by the authority1. " Similarly, a majority in Mariner Real Estate, ibid., did not perceive any need to identify an acquisition in specie where all rights to build a summer cottage on a waterfront lot was denied. While the focus of this article is a comparison between NAFTA's, regime for constructive expropriation and Canadian law, both a short exposition of current American law and of international law in respect of takings will be useful to illustrate NAFTA's affinity to principles applied in international law and the substantial difference between it and the two major common law jurisdictions in North America. 

As with both Canada and the U. K., the modern genesis for regulatory takings in the U. S. In Penn Central, New York City refused to permit a railway to build office towers over its operating railway station. The station was a protected landmark. The court accepted (and has not as yet changed its mind) that there is no bright line to demarcate a regulation that goes too far, and one that does not. Each case must be decided on its facts, and involves an ad hoc inquiry that engages athree-part balancing test: the economic impact ofthe regulation on the property owner,16 the character of the government action17 and the extent to which the regulation interferes with distinct investment-backed expectations. 18 There are three circumstances in which a taking will not be subject to the Penn Central three-part balancing test: formal expropriation, physical occupation or possession of the property by the government," and where regulatory restrictions so affect property that no See supra note 3. 438 U. S. 104 (1978) [Penn Central]. U. S. courts applying Penn Central have rarely found a taking where the diminution in value did not exceed at least 75 percent. See Florida Rock Industries Inc. v. United States, 243 F. 3d 555 (U. S. App. 2000 ) and Lucas v. South Carolina Coastal Council, 505 U. S. 1003 at 1019 (1991) [Lucas], where the U. S. Supreme Court suggested that upwards of 95 percent loss in value might be sufficient. This test includes an analysis of the public interest, the purposes served by the regulation and their importance. See Tahoe-Sierra Preservation Council v. Tahoe Regional Planning Agency, 535 U. S. 302 (2002) [Tahoe-Sierra], in the District Court where the purpose of the moratorium was weighed against economic impact on the owner. Sec also Bernardsville Quarry Inc. v. Borough ofBernardsville, 129 N. J. 221 (Sup. Ct. 1992). 

"Distinct" is used in this lest to mean "highly visible" or imminent as opposed to abstract or speculative viable use whatsoever can be made of it. 20 These three situations are referred to as per se takings because the rule applied to them is based on a categorical duty to pay compensation. 21

section_content: While international arbitral tribunals have often prefaced any views expressed in respect ofconstructive takings with words of caution and care, they have accepted the principle that regulation (the police power) may have substantial effects tantamount to expropriation:

It is undisputed in this case that the Government of Iron did not issue any law or decree. . . . However, it is recognized in international law that measures taken by a State can interfere with properly rights to such an extent that these rights are rendered so useless that they must be deemed to have been expropriated, even though the Stale does not purport to have expropriated them and the legal title to the properly formally remains with the original owner. "

The oft-cited Third Restatement ofForeign Relations Law ofthe U. S. is a common entry to discussion of constructive expropriation claims in international law: Subsection (I) [relating to responsibility for injury from improper takings] applies not only to avowed expropriations in which the government formally takes title to property, but also to other actions of the government that have the effect of "taking" the property, in whole or in large part, outright or in stages ("creeping expropriation"). A state is responsible as for an expropriation of property under Subsection (I) when it subjects alien property to taxation, regulation, or other action that is confiscatory. or that prevents, unreasonably interferes with, or unduly delays, effective enjoyment ofan al icn "s properly or its removal from ihc state's territory. "
section_name: III. Constructive Takings in International Law

section_content: Injuries to the Economic Interests of Aliens, is a frequent citation -in particular art. 

Lucas, supra note 16. Also sec Tahoe-Sierra, supra note 17, where at 330 Ihe court noted that the categorical rule in Lucas "was limited to 'the extraordinary circumstances when no productive or economically beneficial use of land is permitted. '. . . The emphasis on the word 'no' in the text of the opinion, was in effect, reiterated in a footnote explaining that the categorical rule would not apply [to anything less than a total loss]. "

It is noteworthy that Mariner Real Estate, supra note 9, is akin to Lucas, ibid. Lucas was cited and followed at least by the trial court judge. Both Mariner Real Estate and Lucas arise out of beach and dune preservation regulations that have the effect of severely restricting or prohibiting construction of summer cottages and houses on beachfront lots. Two appellate judges on a panel of three in Mariner agreed in obiter that a complete extinguishment of a right to construct even a modest cottage could constitute a taking. Mariner is, however, really a "ripeness" case as it was not clear that new applications to build cottages designed to be more sensitive to dune preservation would not ultimately be issued, the property owners had to make further applications before the majority would agree that a taking had occurred. See discussion of Mariner Real Estate in Young, supra note 7. Restatement (Third) ofForeign Relations Law § 712 (1987), comment g. 

A "taking of property" includes not only an outright taking of properly but also any such unreasonable interference with the use, enjoyment, or disposal of property as to justify an inference that the owner thereof will not be able to use, enjoy, or dispose of the property within a reasonable period oftime alter the inception of such interference. 24

The ways in which an international constructive taking may occur are many. Some of the well-recognized ones have been noted as:

Economic exercises of public power, regardless if they actually serve in particular instances as the functional equivalents of deprivations for which compensation traditionally has been expected, can be conveniently, although not rigidly, grouped according to the techniques governments commonly use to affect not title to, but (a) participation in, (b) use of, and (c) benefit or yield from wealth processes and values. Compared to diplomatic, ideological, and military exercises of public power, they provoke, as earlier stated, by far the greatest number of "constructive taking" / "creeping expropriation" claims. Falling into the first ("participation in") subcatcgory have been, for example, so-called Stale administration measures, the creation of public and private monopolies, the granting of exclusive concessions, and the non-renewal of previously authorized licenses and charters. Palling into the second ("use of) subcategory have been, inter alia, restrictions upon the entry of capital and labor, wage and price controls, distribution and sales prohibitions, the "freezing" or "blocking" ofassets, land-use zoning, and the imposition of "servitudes. " And falling into the third ("benefit or yield from") subcalcgory have been such other familiar measures as taxation (in diverse forms) and monetary revaluation. As might be expected, "constructive takings" have been most often determined when these kinds of "regulations" have operated, singly or in combination, so as to span or embrace all three of the above subcategorics. 

There are many risks for foreign investors in strange lands and most of these lie at the investor's doorstep. In relation to foreign investment, what international law protects against is loss from governmental action or conduct that so substantially impairs ownership rights that it can be said to be clear that those rights have been taken away, or so reduced that it can be characterized as a deprivation of ownership. Not every political risk that destroys an investment is a taking. For example, in Starrett,26 the Tribunal found no compensate loss or taking as a result of severe civil disruption and physical interference arising from a revolution, but subsequently did find a taking when the revolutionary government enacted laws wresting control (but technically not ownership) over the investments from the shareholders:

The succinct language of this act makes it clear that the appointment of [a temporary manager] in accordance with its provisions deprived the shareholders of their right to manage. . . . As a result of these measures the Claimants could no longer exercise their rights to manage and were deprived. While temporary measures may effect a taking, the public purpose and transitory nature of them may militate against any such finding. Whether core elements of ownership of exclusive possession, right to transfer, control and right to reasonable use and enjoyment are substantially interfered with is fact sensitive, and the degree and extent to which the complained of measures interfere with an investment is essential to any finding of a constructive taking. 28 It is clear that the interference must be significant and substantial. 

However, the ascertainablc single test eludes international jurists as it docs domestic courts in both Canada and the U. S. 2* IV. Construing NAFTA Article 1110

The model from which the wording of NAFTA's art. 1110 has emerged is based on the evolution of preferred language used by western industrial nations in the latter half of the twentieth century in innumerable bilateral investment treaties (BITS). The U. S. and other western European nations rejected the CALVO Doctrine, which favoured the view that the law of the host state should govern domestic as well as foreign investors. BITS became popular even among states that espoused the CALVO Doctrine because even though they neutralized the CALVO doctrine, their result was to effectively promote western (particularly U. S. ) investment. As of 2000, some 1500 BITS have been documented, many of which contain language similar, ifnot identical, to NAFTA'sari. 1110. 30The current language found in NAFTA's art. 1110, coupled with the novelty of investor-state (rather than state-to-state) arbitration is coming under some attack both in Canada and in the U. S. as leading to results requiring compensation never intended and quite different from U. S. domestic law. 31 The negotiators tried for some time to consider putting in a line in the text that would distinguish between legitimate regulation on the one hand, boiia fide and nondiscriminatory. and a taking on the other hand. 

We quickly gave up that enterprise. If the U. S. Supreme Court could not do it in over 150 years, it was unlikely that we were going to do it in a matter of weeks with one exception. 

Vicki Been & Joel C. Beauvais, "The Global Fifth Amendment? NAFTA's Investment Protections and the Misguided Quest for an International 'Regulatory Takings ' Doctrine" (2003) 78 N. Y. U. L. Rev. 30. 

Ibid. The authors not only question Ihc necessity for any protection in international law for regulatory taking, but also raise significant concerns about Ihc differences apparent between U. S. constitutional treatment of regulatory takings, and the approach taken by NAFTA tribunals. In particular. Been and Bcauvais note that NAFTA itself intentionally broadens the nature of compensable property interests,
section_name: Similarly, the Harvard Draft Convention on International Responsibility of States for

section_content: There is, of course, authority, in international judicial and arbitral decisions, in the expressions of national governments, and among commentators for the view that a taking is improper under international law if it is not for a public purpose, is discriminatory, or is without provision for prompt, adequate, and effective compensation. 32

In fact, with the additional conditions ofdue process and minimum standard oftreatment, art. 1110( 1) ofNAFTA appears to be worded to reflect the view that in order to be lawful, an expropriation must meet the general tests identified in many of the international arbitral decisions: I. 

No party may directly or indirectly nationalize or expropriate an investment ofan investor ofanother Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment, except:

(a) for a public purpose;

(b) on a non-discriminaloiy basis;

(c) in accordance with due process of law and Article 1105( 1); and

(d) on payment of compensation in accordance with paragraphs 2 through 6. 

Despite its conventional appearance, it is surprising that art. 1110( 1 ) is framed as a prohibition. It is not, and could not be, a prohibition. For all practical purposes, NAFTA tribunals may only award full and fair compensation when a taking occurs, and may only compensate in accordance with art. 1110. No injunctive, declaratory or prerogative relief is available and no punitive awards may be made. While a NAFTA tribunal may order restitution of property, the host state may opt, at its discretion, to substitute compensation. 34

In any event, in respect ofconstructive takings another factor militates against any restitution of property -it is difficult in constructive takings where title remains in the investor to identify how restitution would be affected, except by repeal in whole or sufficient part ofthe regulation giving effect to the taking. Such order could not be made by a NAFTA tribunal. 

In this context, it does not, despite the wording of art. 1110, make any sense to treat the Conversely, it is equally clear that if a regulatory measure has an impact that rises to the level of a substantial, if not total, deprivation of an investment, adherence by the host state to the principles enunciated in art. 1110( 1 ) (a), (b) and (c) will not avoid the obligation to pay The Article 1110 language is ofsuch generality as to be difficult to apply in specific cases. In the Tribunal's view, the essential determination is whether the actions of the Mexican government constitute an expropriation ornationalization, or are valid governmental activity. Ifthere is no cxpropriatory action, factors Ibid, at para. 205. 

Supra note 37. 

a-d are oflimited relevance, except to the extent that they have helped to differentiate between governmental acts that arc expropriation and those that arc not, or are parallel to violations of NAFTA Articles 1102 to 1105. If there is a finding of expropriation, compensation is required, even if the taking is for a public purpose, non-discriminatory and in accordance with due process of law and Article 1105( I ). 4>

Whether there is in law a "taking" is a threshold issue and, as the NAFTA awards will show, such a finding turns primarily (if not overwhelmingly) upon the substantive effect of regulatory measures on the investment, and not on intent42 or lack of public purpose, or whether the measure was non-discriminatory or arrived at through due process. Indeed, a lawful, non-discriminatory regulation enacted in good faith for a public purpose and having a severe effect on both domestic and NAFTA party foreign investors may attract compensation for the latter, regardless of the result under domestic law. Pope and Talboi, supra note 36 at para. 96, where the Tribunal labels "access to the U. S. market" as a "property interest subject to protection under Article 1110. "

While Canada suggests that the ability to sell softwood lumber from British Columbia to the US is an abstraction, it is, in fact, a very important part of the "business" of the Investment. Interference with that business would necessarily have an adverse effect on the property that the Investor has acquired in Canada, which of course, constitutes the Investment. While Canada's focus on the "access to the U. S. market" may reflects only the Investor's own terminology, that terminology should not mask the fact that the true interests at stake are the Investment's asset base, the value of which is largely dependent on its export business. The Tribunal concludes that the Investor properly asserts that Canada has taken measures affecting its "investment," as that term is defined in Article 1139 and used in Article 111(>. 48

While A key element of art. 1110 relating to constructive takings is found in the words "take a measure tantamount to. . . expropriation. " With reference to the meaning of"tantamount to,"

the Tribunals in Pope and Talbot51 and in S. D. Myers52 found that "tantamount" means equivalent to, and thus did not extend the established expropriator/ test of substantial interference or deprivation. The term "measure" is defined in NAFTA quite broadly as including "any law, regulation, procedure, requirement or practice. "53

In Ethyl Corp. v. Canada,54 Canada attempted to limit the scope of the term, and argued that "no legislative action short of a statute that has passed both the House of Commons and the Senate and has received Royal Assent constitutes a 'measure' subject to arbitration under Chapter II. " In commenting on this position, the Tribunal pointedly noted Canada's own briefing notes (to its own government) explained "measure" very broadly:

The term "measure" is a non-exhaustive definition of the ways in which governments impose discipline in their respective jurisdictions. 55

Ibid at para. 98. 

(1992), [1997] 106 I. L. R. 501 (International Centre for the Settlement of Investment Disputes.
section_name: A common refrain is:

section_content: A valid contract is certainly property in the U. S. pursuant to the Fifth Amendment. In Lynch v. U. S., 292 U. S. 571 (1933), a cancellation of rights under the contract can be u compensable taking. 

Supra note 36 at 337. Recognizing direct expropriation is relatively easy: governmental authorities lake over u mine or factory, depriving the investor of all meaningful benefits of ownership and control. However, it is much less clear when governmental action that interferes with broadly-defined property rights -an "investment" under NAFTA, Article 1139 -crosses the line from valid regulation to a compensablc taking, and it is fair to say that no one has come up with a fully satisfactory means of drawing this line. 58

All of the current awards do, however, display a recognition and acceptance of the view that bonafide (as to public purpose) regulatory measures may result in impacts on investment that rise to the level ofa taking "tantamount to expropriation. " Except in Metalclad (the most egregious of the fact situations), claims under art. 1110 have not been made out. In some part, this is because art. 1110 itself must be construed in the context of c. 11 as a whole, and other provisions of c. 11 often provide, on the same facts, sufficient remedies to obviate the necessity of finding a taking under art. 1110. It is, however, also fair to say that tribunals have displayed very real caution in endorsing a successful invocation of art. 111O. S9 Unless that line has been so clearly passed (in which case there being still no need to locate it with any precision), tribunals have not found a taking. 6'1 It seems clear, too, that despite "popular fears," the bar to finding a substantial deprivation is set quite high. In S. D. Myers both the majority and the dissent made the point that excess of regulation, rising to a taking will be Ethyl, ibid For a discussion on the various possible tests to determine whether a constructive taking has occurred in international law, see Weston, supra note 25; Christie, supra note 28; Dolzer, supra note 28. Karpa, supra note 37 at para. 100. This is clear from the fact that of the five full considerations of art. 1110 to date, all but one have been rejected. The only one accepted was a complete sterilization of a multi-million dollar capital investment. Also see reasons of Schwartz in S. D. \fyers, supra note 38, where he expresses concern over the uncommon, the majority stating: "Regulatory conduct by public authorities is unlikely to be the subject of legitimate complaint under Article 1110 ofthe NAFTA, although the Tribunal does not rule out that possibility. "61

In considering the factors to be taken into account in determining whether "measures tantamount to an expropriation" are in play, the decisions overwhelmingly rely on effect or impact analysis based on the factual context of each situation. In this regard, while lacking the structured balancing undertaken by American courts arising out of application of the Perm Central tests, the ad hoc factual analysis is an important commonality. 

In Azinian v. United Mexican States,62 the first in the art. 1110 chronology, the Tribunal's award turned on a finding that a contract that was invalid under domestic law was no contract at all, and could not thus be the subject ofan expropriation. The Mexican courts had held that the concession contract at issue was invalid as a result of the claimant's misrepresentations. 

Because the claimant did not assert that the domestic decision of the Mexican courts was itself a breach of art. 1110, the Tribunal did not need to go further. While not decided by the Tribunal, Mexico had also raised the defence that a contract repudiated for failure to perform could not be said to have been expropriated. The Tribunal had evidence before it of the claimant's breach of the contract, and it seems apparent from the tenor of the reasons for the award that the Tribunal would have agreed with this proposition as well. 

On the issue of whether repudiation of a contract is per se a taking (had it in fact been wrongly repudiated by the Mexican municipality), the Tribunal demanded an analysis based on substance and not form. The claimant sought to cast the annulment of the contract not as a mere breach, but as confiscatory of the contractual rights forming the investment. The Tribunal's approach was to distinguish between breaches ofcontract that were confiscatory, and those that were not:

The problem is (hat the Claimants' fundamental complaint is that they arc the victims of a breach or the Concession Contract. NAFTA docs not, however, allow investors to seek international arbitration for mere contractual breaches. Indeed, NAFTA cannot possibly be read to create such a regime, which would have elevated a multitude of ordinary transactions with public authorities into potential international disputes. 63 In respect of the claimants' argument that there was a confiscatory breach, the Tribunal disagreed, noting that "labeling" was no substitute for analysis:

The words, "confiscatory," "destroy contractual rights as an asset", or "repudiation" may serve as a way to describe breaches which are to be treated as extraordinary, and therefore as acts of expropriation, but they S. D. Myers, supra note 38 at para. 281. See also Schwartz in separate reasons where he notes at para. 207: "There may be some cases where a measure that is presented as a regulation must, in law and or contract is to be made. 64

As the contract was invalid, it was not necessary for the Tribunal to go on to consider whether the annulment by the Mexican authorities was proper because ofthe claimant's nonperformance, or whether it was merely a breach of contract that did not rise to the level of a taking. 

In Pope and Talbol, the claimant argued that the phrase "measure tantamount to expropriation" had the effect of lowering the bar for what constitutes an expropriation from substantial deprivation to the level of that of any measure merely interfering with an investment. On the latter basis the claimant asserted that, although such interference need not be severe enough to constitute a substantial or total deprivation, it was nevertheless caught by art. 1110. The Tribunal rejected that notion. 65 The claim in Pope and Talbot was based on the Canadian government's imposition of an export fee on softwood lumber going from some provinces to the U. S. While the evidence was that the fee as it affected the claimant diminished its profits (although it was still profitable), the Tribunal had no hesitation in arriving at the conclusion that the effects of this measure were not tantamount (equal) to expropriation. In examining the evidence, the Tribunal found that there was no loss ofcontrol of the enterprise or of the investment, and that the reduction of profits per se in this case Metalclad, supra note 31 at para. 109. 

Ibid, at para. 131. 

significant part, of the use or reasonably to be expected economic benefit of property even if not necessarily to the obvious benefit of the host State. 71

The Tribunal clearly applied an effects analysis in respect ofthe Ecological Decree, and was not concerned with purpose:

The Tribunal need not decide or consider the motivation or intent ofthe adoption ofthe Ecological Decree. . . . However, the Tribunal considers that the implementation of the Ecological Decree would, in and of itself, conslitute an act tantamount to expropriation. *

In this, the Tribunal was quite correct on the facts. The cactus reserve certainly served a public purpose, and whether it was a trivial or weighty public purpose is irrelevant on the facts. As earlier tribunals had noted, non-discriminatory, lawful (having a valid public purpose) regulation may effect a taking. Indeed, one certainly expects formal expropriations to be in the public interest, and the fact that they are, and the fact that the public interest at stake is significant and important, in no way militates against there being a dejure and de facto expropriation followed by a duty to compensate. 73 In addition, given the complete deprivation of the investment, intent was equally irrelevant. Whether the Decree was intended as a colourable device to take under an environmental guise, or a bona fide expression of environmental concern, the result was "a take" all the same. Metalclad does not stand alone; it simply confirms that constructive takings are governed by an effect-based test that requires substantial, if not complete, deprivation ofan investment. In this regard, on the facts as found by the Tribunal, the result in Metalclad does not deviate from the parameters set by other awards in international law, or under art. 1110 of NAFTA. 

On appeal to the Supreme Court of British Columbia, the Court commented on the Tribunal's effect-based test:

[T]he Tribunal held that expropriation under the NAFTA includes covert or incidental interference with the use of property which has the effect of depriving the owner, in whole or in significant part, of the use or reasonably-to-be-expected economic benefit of property. This definition is sufficiently broad to include a legitimate re-zoning of property by a municipality or other zoning authority. However, the definition of expropriation is a question of law with which this Court is not entitled lo interfere under the International CAA. 1A On its face, the Court's comments appear alarming. However, given the facts from which they arise, and on which their persuasive authority is dependant, they are not apt. Certainly in all American municipal jurisdictions north of Mexico, rights in respect of a newly constructed industrial facility (having all necessary approvals as found by the Tribunal)75 would have vested. 76 In Canada, changes in land use regulations affected by subsequent rezoning would not preclude either the commencement of a use, or its continued operation where there had been a clear commitment to use evidenced by lawful construction. 77 S. D. Myers1* involved a Canadian company owned by Americans incorporated to export PCBs from Canada to a related company's remediation facility in the U. S. The related American company was successful in having a U. S. prohibition against importation of PCBs lifted in respect of its facility for a two-year period. Canada, which at the time had no regulations prohibiting export of PCBs, promptly prohibited such exports by Order of Council. After about IS months, Canada relented. However, as a result of a judicial ruling in the U. S., the U. S. border was subsequently again closed to the importation of PCB waste. 

The Tribunal held in favor of S. D. Myers' claims under art. 1102 (national treatment) because of discrimination against a U. S. investor, and under art. 1105 for failing to provide the minimum standard oftreatment in accordance with international law. However, it denied any award for takings under art. 1110. 

The majority of the panel played with the general concepts of regulatory taking like Goldilocks with porridge -nothing was ruled out, "hot," "cold" or "just right!" In respect of regulatory measures, the Tribunal noted that "regulatory conduct. . . is unlikely to be the subject of legitimate complaint under Article 1110 of the NAFTA, although the Tribunal does not rule out that possibility. "7' It also commented that "[a]n expropriation usually amounts to a lasting removal [of economic rights] although. . . in some contexts and circumstances, it would be appropriate to view a deprivation as amounting to an expropriation even if it were partial or temporary. "80 Metalclad, supra note 31 at paras. 1 OS-106, where the Tribunal held that the exclusive authority for permitting a hazardous waste landfill resided with the Mexican federal government and that the municipality (if it had authority at all in respect of building permits) acted outside its authority in refusing to issue the building permit. Given the publicity and volume of informed and uninformed commentary on the case, it is important lo note that whether the very experienced judicial members of the tribunal got the real facts wrong is irrelevant in the assessment of art. 1110 because the case (if it is a precedent for anything) only extends to subsequent situations where the facts as found are equally egregious. 

Even if the Tribunal's finding that Mctalclad had all the permits it required in law was wrong and a building permit was required, its incidental finding that such permits had been wrongly denied would not in Canada support governmental action to demolish or remove the facility. Any such intent would have been rebuffed and mandamus would lie to compel issuance ofthe necessary permit. Vesting would not be jeopardized by a highly technical defect such as the absence of a permit when the cause of such defect was a wrong of the permit issuer. Sec Cowichan Valley (Regional District) v. >V)/e(l988),4l M. P. L. R. 78at8l (B. C. C. A. ). For example, only if the legislature of British Columbia enacted a statute to prohibit the continuation of an existing land use and expressly provided that no compensation should be paid would a foreign investor protected by NAFTA be advantaged over a domestic user of land in identical circumstances. Supra note 38. 

Ibid at para. 281. 

Ibid, at para. 283. 

Continuing to cover all the bases, the majority ofthe Tribunal also paid cursory lip service to the idea that "purpose and effect" of governmental measures ought to be examined. 81 In contrast, however, in determining that there was no taking, the Tribunal made no reference to "purpose" (or improper purpose given its parallel finding of discrimination under art. 1102). 82 Rather, the Tribunal focused on effect only, and concluded correctly that the export ban did not affect a transfer of property, and that it was temporary in nature and of no direct benefit to others. "

The last effect cited by the Tribunal (no direct benefit to others) echoes an earlier general comment by the majority that:

In general, the term "expropriation" carries with it the connotation of a "taking" by a governmental-type authority of a person's "property" with a view to transferring ownership of that property to another person. 

Of usually the authority that exercised its dejure or defacto power to do the "taking. '

In a similar vein, the minority member of the panel also noted that takings tend to deprive the owner and to enrich -by a corresponding amount -the public authority or the third party to whom the property is given.
section_name: Arbitration Tribunal). Final Award [Southern Pacific Properties].

section_content: Ibid.
section_name: "

section_content: The idea that the nature of the public purpose ought to be a factor weighed together with effect is attractive to those having concern for the protection of health, safely, the environment and other public interest issues to which the police power is so often remedially or protectively directed. Sec Oolzer, supra note 28, where the author, acknowledging the current primacy ofeffects-based analysis, suggests that a balancing lest, according some weight to public purpose, might be appropriate. Other commentators have gone further and proposed wording for a complete "carve out" from art. 1110 of all measures having a valid public purpose that adhere to due process and that are non-discriminatory (H. This approach to a taking, requiring an acquisition, certainly reflects the current Canadian position and it is perhaps no accident that two or the three panel members were Canadians. The existence of an acquisition in international law is certainly a common fact found in expropriations by the state, in nationalization and in the cancelling of concessions and their transfer to third parties. It seems the better view that the Tribunal was only observing that an acquisition was a tendency, but not an essential element of a taking. The minority member's views on acquisition were certainly framed this way, although transfer is obviously an important indicator that would point to a finding of a taking. "6

On the issue of "acquisition" the Metalclad Tribunal did not see any need for there to be a finding of transfer or acquisition. It was sufficient that the investment had been wholly sterilized, and as the Tribunal noted in respect of takings generally, the deprivation need not be "to the obvious benefit of the host state. "87 It is not apparent at all that any acquisition in specie is required before a regulatory taking may be found in international law. There was no transfer or acquisition of any rights to the state or any third party in Southern Pacific

Properties,M where the contracts were simply cancelled and the projects abandoned. 

Similarly in Tippeltx, Abbott, McCarthy, Stratton v. TAMS-AFFA Consulting Engineers of Iran,1" the Tribunal expressly denied any necessity for acquisition, asserting it to be a general principle of international law:

The claimant is entitled under international law and general principles of law to compensation For the full value of the property of which it was deprived. The Tribunal prefers the term "deprivation" to the term "taking" although they arc largely synonymous, because the latter may be understood to imply that the Government has acquired something of value, which is not required. '"'

In the end, the majority in S. D. Myers held that the export ban was a temporary measure that delayed the benefits flowing from the exercise of economic rights. However, it was not a deprivation of ownership. Such delay damages as there were, were appropriately subject to an award under art. 1102 of NAFTA. 91 The minority member concurred in not finding a taking. His reasons were that the export ban was temporary; there was no clear transfer of The most recent NAFTA award to date considering art. 1110 in relation to the merits of a claim is the award in Karpa. 92 At issue in the claim was a denial of tax rebates by Mexico Ibid, at para 221: "Another difficulty here is that there was not a clear transfer of wealth from S. D. Myers to cither the government or to its Canadian competitors. Denying S. D. Myers the ability to carry out its business did not necessarily shift that same business to its Canadian competitors. " rights of ordinary Canadians, is rendered irrelevant by NAFTA in relation to the rights of foreign NAFTA party investors in Canada. Without breaching its international obligations under the treaty, or alternatively negotiating amendments to NAFTA, Parliament cannot override or negate its duty to compensate foreign investors under c. 11, art. 1110 when measures are found by an international tribunal (appointed pursuant to the investor-state dispute provisions) to have an effect tantamount to expropriation. The practical result ofthis status is to elevate art. 1110 above domestic common law, and transfer the evolution and development of the jurisprudence away from domestic courts and into the hands of international jurists. 

Similarly, the "presumption" in favour of compensation that is so prominent and problematic in Canadian constructive takings law is wholly unnecessary in respect ofNAFTA claims. Article 1110, like the just compensation clause of the Fifth Amendment to the American Constitution, is self-executing and expressly provides for compensation to be paid. 

Investors do not need to urge a Tribunal under NAFTA to find a clear legislative intention to compensate, it is the rule. 1" Unlike the law in either Canada or the U. S., there is no need for the concept of regulatory takings to be judicially constructed by extension of rules related to formal expropriation. 

Article 111 OofNAFTA contains a direct reference to "measures tantamount to expropriation" and thus the concept of regulatory taking is expressly recognized. Just as significantly, the broad definition ofthe word "measures" in the NAFTA context extends far beyond regulation and includes custom, practice and also laws, orders and decisions of the host state's judiciary. '"' It has also been suggested that NAFTA can be breached when domestic courts fulfilling a review function under NAFTA do not show sufficient curial deference to the original Tribunal's decision. 44

In Canada, while the government inevitably makes provision Tor compensation and its determination when formally expropriating, constructive expropriation is always unintended (when the regulations arc enacted in good faith), and thus there is often no provision for compensation or for a process to determine it. In such circumstances, the presumption in favour of compensation comes into play. To what extent legislative intention must be clear to rebut the presumption remains a somewhat open question. Whether silence is sufficient to rebut the presumption or whether express words arc necessary (in addition to intention gleaned from surroundingcircumstanccs) still requiresjudicial clarification. Sec BCMSA and Rock Resources, supra note 11. 

It was accepted in Azinian, supra note 62 at paras. 99-103, that the conduct of domestic courts can cause a host state to breach NAFTA. The Tribunal observed that undue delay, or where justice was "seriously inadequate," or where there was a clear and malicious misapplication of the law, a claim might be made. 

In Loewen Group Inc. v. U. S. A. ( 2002 In Canadian law, regulatory takings claims are necessarily restricted to takings ofproperly -or more accurately, core ownership rights pertaining to property. While Canadian courts have taken a broad and liberal approach to what constitutes property, the scope of that concept is still firmly anchored within the bounds of what the common law would treat as property -that is, real property, personal property and other things of value in respect of which an owner may claim exclusive possession, right to transfer and transmit, access and some reasonable use, at least to the extent of the ownership right. 100

The truly expansive definitions of the terms "investment" and "investor" under NAFTA extend the reach of its protections far beyond that found in Canadian law in relation to protection of property interests and in relation to those who have standing to assert a taking of a property. 101 The protection under NAFTA is a protection of "investment," and that concept includes almost all property at law,102 and even related abstractions such as "market share" and "access to market. "103 NAFTA shares with the law in both Canada and the U. S. the problem that there is no bright line demarcating regulation that takes, and regulation that does not take. 104 In addition, as with domestic courts in the U. S. and Canada, NAFTA tribunals have not shown any significant interest in formulating a test that weighs purpose and intent against impact and effect on property or on investment. The primary, if not sole, factor considered by NAFTA tribunals has been the effect of the impugned measures on the investment, and on the ownership rights of the investor in respect of the investment. The issues are examined in a fact-based inquiry specific to the case at hand. Ifmeasures substantially deprive the investor of use or the ability to operate (prohibition, denial of access to the border or markets), or deprive the investor of ownership or control, enjoyment, access to or right to dispose of the investment, a taking may be found. The fact that the impugned measure was enacted or implemented for a bonafide public purpose, as is the case in domestic law, would not be a determinative factor in finding a right to compensation. 

Not only have NAFTA tribunals not been overly concerned with the public purpose or value of the measures complained of as giving rise to compensation, NAFTA tribunals have no jurisdiction to judge the validity ofthe host state's measures, or to invalidate or otherwise set aside measures taken by a host state. Thus, unlike domestic courts, which ought to avoid m See Manitoba Fisheries, supra note 9, where "goodwill" was considered properly capable of being constructively taken. Also sec Tener, supra note 9 where Crown-granted mineral claims were similarly considered property. In Belfast, supra note I at 519, Viscount Simnionds had to settle for Holmes J. 's very general observation in Pennsylvania Coal, supra note 2 at 415, that: "The general rule at least is, that while property may be regulated to a certain extent, if regulation goes too far it will be recognized as a taking. " (2006) 43:4 the takings issue altogether if the measure is itself invalid for any reason, NAFTA tribunals are compelled under art. 1110 to determine only if the measure gives rise to such substantial deprivation that compensation ought to be paid. 

Lastly, it is a significant difference that NAFTA tribunals have not required any acquisition or constructive acquisition in specie as a consequence of and an essential element of a regulatory taking. It is sufficient if the deprivation itself is substantial enough to vitiate essential characteristics ofownership. Measures tantamount to expropriation under art. 1110 require compensation even if their effect is not one of transfer of the investment, but is merely an augmentation of public benefit generally. 

It is clear in the end that the NAFTA regime does establish a scheme for compensation in respect of regulatory takings that is substantially different, far broader and much more protective than similar law applying to domestic investors in Canada. In large part, it may well be that the major differences apparent between the NAFTA takings regime and those of Canada, Mexico and the U. S., have a great deal to do with the fact that all three domestic systems arc so different. In addition, because the CALVO Doctrine espoused by Mexico presented a major disincentive to Canada-U. S. investment in Mexico, Mexico would gain no advantage by insisting upon its incorporation into NAFTA. One might assume that Canada and the U. S. each would have accepted their own system; however, compromise reflective of the then-current development of the language in use in innumerable BITS avoided any attempt at an amalgam of Canadian and American domestic law.
section_name: 82

section_name: VIII. Comparison of Canada's and NAFTA's Constructive Takings Law

section_content: to a cigarette re-seller (not a producer) on export of cigarettes from Mexico. The facts were complex; however, a key finding was that rebates were not available to the claimant because under Mexican law (although not necessarily enforced consistently) rebates required production of invoices from suppliers. The claimant could not obtain such invoices from its suppliers who, for their own reasons, would not provide them. 

The Tribunal noted that there were no significant breaches ofthe conduct required by art. 1110(a) to (c) and, even if there had been, they would not elevate the case to one of a taking in the face of a failure of the effects of the regulation to rise to a level of substantial deprivation. The Tribunal characterized the rebate denial as a business problem (legitimate under Mexican law) in respect of a "gray market" in cigarettes. Most tellingly, the Tribunal noted that there was no loss of control over the enterprise, and that the investment still profited by exporting many other products besides cigarettes. While the cigarette trade may have become uneconomic, there was no deprivation of ownership of the investment that could be said to rise to the level of a taking. The Tribunal in Karpa also echoes a strong refrain often heard from the U. S. Supreme Court in relation to the application of the threepart Penn Central test to takings claims. '3 Ultimately, decisions as to when regulatory action becomes compensate under Article 1110 and similar provisions in other agreements appear to be made based on the facts of specific cases. This Tribunal must necessarily take the same approach. '4 Again, in respect of the issue of acquisition, the Tribunal in Karpa would seem not to have considered it a prerequisite to a finding of a taking, commenting that '"creeping expropriation' [includes]. . . a state seeking 'to achieve the same result [as in an outright taking] by taxation and regulatory measures designed to make continued operation of a project uneconomical so that it is abandoned. ""5 The reference to "abandonment" is clearly suggestive ofsome recognition ofa dispersed public benefit arising from the cessation ofthe investment activity rather than from any transfer to, or acquisition of, continuing rights by some public authority or even a third party.

section_content: Loss of sovereignty has been a recurring theme of critics of the NAFTA regime. 

Coincidentally, some commentators have described international trade agreements like NAFTA as akin to constitutional documents. 96 In this regard, it is significant that the doctrine of Parliamentary sovereignty, which plays such a defining role in relation to the property
section_name: VIII. Comparison of Canada's and NAFTA's Constructive Takings Law