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Performance Requirements

NAFTA Article 1106 prohibits the imposition of performance requirements on investments of an investor of a party or of a non-party. Thus, unlike Articles 11021105, Article 1106 creates obligations regarding investors of non-parties, not just investors of NAFTA parties. The prohibited performance requirements include: minimum levels ofdomestic content; preference for domestic goods or services; and requirements to transfer technology, a production process, or other proprietary knowledge. Regarding technology transfer, there is an exception for measures that require an investment to use a technology to meet generally applicable health, safety or environmental requirements, as long as the measure complies with the nondiscrimination obligations in Articles 1102 and 1103.

In Mobil Investments Canada Inc. & Murphy Oil Corporation v. Canada, the investors alleged that Guidelines for Research and Development Expenditures adopted in 2004 by the Canadian Newfoundland and Labrador Offshore Petroleum Board (the 2004 Guidelines) were more restrictive and onerous than the provisions of existing agreements concerning two offshore petroleum development projects. The 2004 Guidelines required the investors in offshore petroleum projects to pay millions of dollars per year for research and development in the Province of Newfoundland and Labrador. The Tribunal held that the 2004 Guidelines violated Article 1106.[1]

The Mobil Tribunal found that the 2004 Guidelines purported to impose conditions on the Claimants with respect to their management, conduct, or operation in the Province. The question before the Tribunal was whether the 2004 Guidelines imposed requirements “to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory” within the meaning of Article 1106(1)(c), and whether Research and Development (R&D) and Education and Training (E&T) constitute “services” within the meaning of Article 1106(1)(c).[2] The Tribunal found that, while the policy purposes may differ between different types of performance requirements, the requirement to use domestic sources of R&D and E&T was a performance requirement imposed on an investor. An interpretation that would exclude R&D and E&T from a definition of “services,” based on whether the transmission was cross-border or the policy purpose not just strictly economic, is not supported by the NAFTA text, the NAFTA classification system for services, or the ordinary meaning of the term “services.”[3] Moreover, the Tribunal gave a broad interpretation to the term “requirement,” finding that the requirement to spend millions of dollars on R&D and E&T in the Province would in practice require the investor to purchase, use, or accord a preference to, domestic goods or services.[4]

The Tribunal noted that in most of the other cases that have involved NAFTA performance requirements, the requirements were incidental effects. The central purpose of the 2004 Guidelines was to require expenditures in the Province.[5] In contrast, in S.D. Myers, the Claimant argued that a Canadian export ban was a violation of Article 1106 because it required carrying out the physical disposal of PCB waste in Canada, requiring it to consume goods and services in Canada. However, the majority of the Tribunal noted that the ban “was not cast in the form of an express condition attached to a regulatory approval” and found that no requirements were imposed.[6] In Pope & Talbot Inc., Canada introduced a regime to comply with the US-Canada Softwood Lumber Agreement, which permitted a certain level of softwood lumber to be exported from Canada without any fees, but imposed fees above that level. The Pope & Talbot Inc. Tribunal found that, while these fees deterred exports, there was no requirement to export at any particular level in return for the right to operate in Canada and thus the regime did not breach Article 1106(1)(a).[7] In Merrill & Ring, the Claimant argued that the implementation of Canada’s Log Export Regime imposed performance requirements in breach of Article 1106, notably in connection with the obligation to cut and sort timber, to scale timber rafts metrically, and to follow certain other rules for properties located in remote areas, all of which impacted the way it managed its investments. The Tribunal held that a requirement related to the advertisement of goods as a step in the process of obtaining an export permit cannot be seen as a restriction on exports themselves. It further held that the cutting requirements are not a performance requirement designed to restrict or enhance exports, and that metric scaling is a measurement system used throughout Canada. Thus, while these requirements may have an incidentally adverse effect, they do not amount to the kind of prohibited performance requirement banned by Article 1106.[8] In ADF Group Inc. v. United States of America, a Canadian company challenged the Buy America clause that applied to the fabrication of steel. The Tribunal ruled that the US measures were local content requirements contrary to Article 1106(1)(b), as well as a requirement to accord a preference to goods or services produced or provided in the US under Article 1106(1)(a), but came within Article 1108 reservations.[9] In the Mobil case, the 2004 Guidelines were designed to ensure that expenditures for R&D and E&T services occur in the Province, and thereby implied a legal requirement for the purposes of Article 1106. Such spending on R&D and E&T in the Province was a central feature of the 2004 Guidelines, and not an ancillary objective or consequence.[10]

The foregoing cases provide examples of the types of performance requirements that may be inconsistent with performance requirement obligations in IIAs.

Regarding domestic content requirements and preferences for domestic goods or services, Article 1106(6) establishes an exception that incorporates language from GATT Article XX:

Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1(b) or (c) or 3(a) or (b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures:

  • (a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement;
  • (b) necessary to protect human, animal or plant life or health; or
  • (c) necessary for the conservation of living or non-living exhaustible natural resources.

The introductory paragraph of Article 1106(6) differs from the language of the GATT Article XX chapeau in three important respects: (1) it eliminates the reference to discrimination between countries where the same conditions prevail;

(2) it adds a reference to investment, in addition to the reference to international trade; and (3) it clarifies that the term “measures” includes environmental measures. The second and third differences are relatively minor. The reference to investment is an understandably necessary adaptation to incorporate the exception into an investment chapter. Subsequent WTO jurisprudence has applied GATT Article XX to environmental measures, which means that the Article 1106(6) clarification is consistent with WTO jurisprudence. However, the first difference is more significant. In GATT Article XX, the reference to discrimination between countries where the same conditions prevail has been interpreted to require flexibility in the application of environmental measures to take into account differences in prevailing conditions in different countries.[11] The absence of this requirement in Article 1106 suggests that the conditions prevailing in the home State of a foreign investor need not be taken into consideration in the design of environmental measures that may affect the foreign investor in the host State. This makes sense if one assumes that the relevant environmental measures are aimed at protecting the environment of the host State.

Article 1106(6)(c) modifies the language of GATT Article XX(g) in three ways:

(1) it replaces the term “relating to” with the stricter necessity requirement; (2) it clarifies that exhaustible natural resources may be living or non-living; and (3) it eliminates the evenhandedness requirement of GATT Article XX(g), which requires that conservation measures include restrictions on domestic production or consumption. Unlike the first and third modifications, the second modification is consistent with the interpretation of the term “exhaustible natural resources” in subsequent WTO jurisprudence regarding GATT Article XX(g). The first modification places a stricter test on environmental measures than GATT Article XX(g), whereas the third modification suggests that performance requirements can be applied to foreign investors without being applied to domestic investors. The absence of the GATT Article XX language regarding discrimination in the introductory paragraph of Article 1106(6) confirms this interpretation.

What types of climate change measures might be justifiable under Article 1106(6)? It is unlikely that the local content requirements of Ontario’s FIT program could be justified under Article 1106(6). Measures aimed at promoting investment in clean energy sources could qualify as measures aimed at protecting human, animal or plant life or health from the effects of climate change or the conservation of the climate as an exhaustible natural resource. However, the FIT program’s local content requirements are unlikely to qualify as necessary to meet these objectives, since they create a barrier to technology transfer from more efficient suppliers. It is necessary to reduce the cost of clean energy technology in order to transition to a green economy and thereby combat climate change. By requiring sourcing from less efficient suppliers, the Ontario requirement would achieve the opposite effect. Moreover, it likely would constitute a disguised restriction on international trade. The WTO panel ruling that the FIT program’s local content requirement violates the national treatment obligations of TRIMS and GATT provides evidence of a restriction on international trade, although it does not prove that the restriction is a disguised one. What about a hypothetical requirement to use low-carbon inputs, which happens to favor local suppliers because they are the most efficient suppliers? That might pass these tests, as long as there was no restriction on the source of the low-carbon inputs and the method of measuring the carbon footprint of the inputs favors the lowest carbon footprint and not the local suppliers.

  • [1] Mobil Investments Canada Inc. & Murphy Oil Corporation v Government of Canada, ICSID CaseNo. ARB(AF)/07/4, Decision on Liability and on Principles of Quantum (May 22, 2012).
  • [2] Mobil v. Canada, Liability and Quantum, paras. 211-12.
  • [3] Mobil v. Canada, Liability and Quantum, para. 222.
  • [4] Mobil v. Canada, Liability and Quantum, para. 238.
  • [5] Mobil v. Canada, Liability and Quantum, paras. 240-2.
  • [6] S.D. Myers v. Canada, Partial Award, para. 273.
  • [7] Pope & Talbot, Award in relation to Preliminary Motion paras. 74-5.
  • [8] Merrill & Ring Forestry v. The Government of Canada, UNCITRAL, Award (March 31, 2010)paras. 114-16, 118.
  • [9] ADF Group Inc. v. United States, ICSID Case No. ARB(AF)/00/1, Award (January 9, 2003)paras. 159—60, 170—4.
  • [10] Mobil v. Canada, Liability and Quantum, para. 242.
  • [11] Appellate Body Report, US—Shrimp.
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