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Copyright© 2020 Emond Montgomery Publications, Toronto, ON.
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
LEGAL ASPECTS OF
INTERNATIONAL
BUSINESS
ACanadian Perspective
Fourth Edition
EVGUENIA ISKRA
MARY JO NICHOLSON
Contributors
Timothy M. Lowman
Adam Armstrong
@on d •
Toronto, Canada • 202 0
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Library and Archives Canada Cataloguing in Publication
Title: Legal aspects of international business I Evguenia Iskra, Mary Jo Nicholson.
Names: Nicholson, Mary Jo, 1943- author. I Iskra, Evguenia, 1987- author.
Description: Fourth edition. J Includes index.
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Subjects: LCSH: Commercial law- Textbooks. I LCSH: Commercial law-Canada-Textbooks. I LCSH:
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© [2020) Emond Montgomery Publications. All Rights Reserved.
Preface to the Fourth Edition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xi
xv
PART I
PUBLIC INTERNATIONAL LAW....................
1
Chapter 1
International Law and International Organizations . . . . . . . . . . . . . . .
3
Chapter 2
The World Trade Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
Chapter 3
The North American Free Trade Agreement (NAFTA) . . . . . . . . . . . . .
61
Chapter 4
The European Union and Other Regional
Trade Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95
Canada's Response to Global Rules: Domestic Rules
for Imports and Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
Chapter 5
PART II
PRIVATE INTERNATIONAL LAW................... 163
Chapter 6
Negotiation of International Contracts (Part 1):
Pre-Contractual Instruments and Sale of Goods Contracts
165
Negotiation of International Contracts (Part 2):
Contract Challenges and Risk Management . . . . . . . . . . . . . . . . . . . . .
201
Chapter 8
Intellectual Property and International Business . . . . . . . . . . . . . . . . .
235
Chapter 9
Legal Aspects of Different Foreign Market Strategies . . . . . . . . . . . . .
273
Chapter 10
Settlement of International Business Disputes . . . . . . . . . . . . . . . . . . .
303
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
325
Index . . . . . . . . . ... . . . .. . . . . . . . . .. ...... . . . . . . . . . .. . .. .. . . . . . .. ... . . ... . . . ... . . .
331
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
343
Chapter 7
iii
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
Preface to the Fourth Edition . . . . . •. . • . . . . . . . . . . . . . . . . . . . . . . • . . • . . •. . • . . . . . . . . . . . . . . . . . . . . . . • . . • . . •. .
New to This Edition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . . . .
ACaution . . . . . . . . . . . • . . •. . • . . . . . . . . . . . . . . . . . . . . . . . . . • . . •. . • . . . . . . . . . . . . . . . . . . . . . . . . . • . . •. .
Acknowledgments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . • . . . . .
ANote from the Publisher . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . • . . •. . • . . . . . . . . . . . . . . . . . . . . . . . . . • . . •. .
About the Authors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
xi
xi
xii
xiii
xiii
xv
PARTI
Public International Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
CHAPTER 1: International Law and International
Organizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Why the Study of Legal Aspects of International Business Is Important . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
3
3
4
What Is Law? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4
How Is International Law Enforced Internationally?. .. . . ..... .. ... . ... .. ... . . . . . .. . ..... ... . . .. ... . . .. .
How Are Treaties Created Generally? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
8
12
Significant International Organizations and Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
15
24
Review Questions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
24
Notes..... . .... . . ... . . ....... . ... ... . . . ... . .... . . .... . ..... . . . ...... . . . . . . . . . ... .. .. . . .... . . . . . .
Further Reading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
25
26
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
List of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
26
27
CHAPTER 2: The World Trade Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
29
Rules Governing International Trade and Where They Come From . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
29
The Establishment of the World Trade Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The Fundamental Rules of GATT 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
30
32
Fair Competition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
WTO Exceptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
36
40
WTO Rules Relating to Trade in Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
49
Protection of Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
v
© [2020) Emond Montgomery Publications. All Rights Reserved.
vi
Contents
Ensuring Transparency: Trade Policy Reviews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dispute Settlement in the WTO . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
50
51
WTO Achievements and Challenges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
53
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
56
Notes . . . .. . . .. ... .... . . . .. . . .. . . . . ... .. . .. . .. . . . . .. .. . . .. .... . . ...... .. . .. ... . . . . .. .. . ... .... . . .
Further Reading... .. ....... . . .. . . . ......... . .. .. . .. . .......... . . . . ....... ....... . . .. .......... .. .
57
58
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
List of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
58
59
CHAPTER 3: The North American Free Trade
Agreement (NAFTA) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
From NAFTA (1994) to CUSMA (2019): ABrief History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
61
61
62
The Relationship between NAFTA and the GATT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
63
Rules Relating to Trade in Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Rules Relating to Trade in Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
64
72
Rules Relating to Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
75
Protection of the Environment and Labour: The Side Agreements..... . . .. ....... .. ... . . . . .. .. . .. ... . .. . .
76
Dispute Settlement Under NAFTA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
77
Rules Relating to Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
82
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
90
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notes..... ........ . .. . .... . . . .... ......... . .. . . . .. . .. . ....... .. . . ........ . .. ... . .. . .. . ....... .. .
90
91
Further Reading . . . .. .. . .. . . .. ... ... . .... . .. .. ... . .. . .. . . . . . .. ... . . . . .. . .. .. .. .. . . . .. .. . . ... .. ... .
Websites . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . . . . .
94
94
List of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
94
CHAPTER 4: The European Union and Other Regional
Trade Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95
95
The Historical Development of the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
95
Governance of the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Law Enforcement in the European Union . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
99
103
CETA and Canadian Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
European Union Legal Provisions Relevant to Canadian Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
104
109
Brexit and the EU .......... .. ........... . . ..... ........ . . . ..... . . .. . ... .. . .. ... ..... . .. . . .. ..... . .
118
Other Regional Trade Arrangements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
119
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
126
© [2020) Emond Montgomery Publications. All Rights Reserved.
Contents
Notes............. ..... ... . ..... . ... .............................. . ... ... . .......... ............
Further Reading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
127
131
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
131
List of Cases. . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. .
131
CHAPTER 5: Canada's Response to Global Rules: Domestic
Rules for Imports and Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
133
Domestic Legislation Governing Imports and Exports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
133
How to Import: Practical Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
140
Canadian Services for the Exporter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
156
Chapter Summary . . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. .
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159
159
Notes. .... .. . .... ..... .. . ....... . ... . ... . ...... ......... ........ . ... . ...... ......... ....... .....
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
159
161
List of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
161
PART II
Private International Law.......................................... 163
CHAPTER 6: Negotiation of International Contracts (Part 1):
Pre-Contractual Instruments and Sale
of Goods Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
165
165
Pre-Contractual Legal Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sale-of-Goods Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
166
168
Convention on Contracts for the International Sale of Goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
AComparative Look at Sale-of-Goods Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
169
172
Drafting International Sale-of-Goods Contracts-Common Clauses and Practical Considerations ...... .. . . ... .
180
Chapter Summary. .... . ... ...... . . ... . . ... .... .. . . .... . ....... . .. . ... . . .............. . . ..........
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
198
198
Notes.... .. .. ... . .. ... .. . .. . . . . .. .. ... . . ... .. ... . .. ..... . .. . . . .. . .. . . . . . ... . . ... . .. . . . ... .. . . . ..
Further Reading. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
199
199
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
199
List of Cases. . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. . . . . . . . . . . . . . . . . . . . . . . . . . . .. . . .. .
199
CHAPTER 7: Negotiation of International Contracts (Part 2):
Contract Challenges and Risk Management . . . . . . . . . . . . . . . . . . . . . .
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
201
201
Letter of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
lnternationalTransportation Considerations ....... .. . . . .... .. ....... .. ... . .... . ....... ... . . .. ....... .
202
215
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Contents
International Insurance Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tort Principles and Special Rules Relating to Product Liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
219
220
Privacy Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
223
Competition Law: Implications for Contract Negotiations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
226
E-commerce Considerations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
227
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
231
231
Notes....... .. . . . ........... ..... . . .. ........ . . . . ....... ..... . . . .. . .......... . . .............. . . .
Further Reading... .. .. . .. .. .. .. . . . . ...... .. . .. . . . . .. .. . .. ... . .. . . . . ...... .. ... . . . . .. .. . .. ... . .. . .
232
233
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233
List of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
233
CHAPTER 8: Intellectual Property and International Business . . . . . . . . . . . . . . .
Tmothy M. Lowman
235
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
235
The International Intellectual Property Framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
237
Trade Secrets/Confidential Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
238
Patents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
242
Trademarks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Copyright . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
247
253
Industrial Designs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
259
Geographical Indications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
262
Personality Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
264
Choice of Intellectual Property Rights: AFinal Word . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Chapter Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
265
268
Review Questions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
268
Notes... .. . .. . ... .... . .. .. .. .. . . . ....... .. . .. . . . . .. .. . .. ... . .. . . . ....... ..... . . . . .. .. . .. ... . .. . .
269
Further Reading. . . ... . . ..... . .. ... . . .. . . . ... . ... .. .... . . ... .. .. ... . .. . .. . .. . . ... .. .. .. . . .. . . . .. . .
271
Websites . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
271
List of Cases. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
272
CHAPTER 9: Legal Aspects of Different Foreign Market Strategies .. .. .. ... .
Adam Armstrong
273
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Distributorship . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
273
279
Licensing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
280
Franchising. . . . .. .. . .. . .. .. . . .. . ... . .. . . . .. . . .. . ..... .. . . .. .. .. . ... . ... . . ... . .. . . . ... . . . . ... ... . .
Joint Venture Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
287
288
Outsourcing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
292
Foreign Direct Investment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
295
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Contents
Chapter Summary .. ..... . .... . ... . ... . . . .. . .... . . . ... ... . .... .. .. . .. . . . . .. . . . . .. . .. . . . .. .... . .. . .
Review Questions. . .... . ... .•.. .. .•.. . . . . .. . . ... . . . .... . ... .•.. .. .•.. . . . . . .. . . .. . .. .. . . . ... .•. . .. .
300
300
Websites . .. ... . . . .... . .. .. •..• . .•. . •. . . .. .. .. .. . . .... . .. ..•..• . .•... . . . . .. .. . .. .. ... . . .. ..• . . •. .
301
302
302
List of Cases. .. .. . . .... . .. . .. . .... . .. . . . . .. . .. . .. . . .. .. . .. . ... .. .. . .. . . .. .. .. . . .... ... . . .. . .. . .. . .
302
CHAPTER 10: Settlement of International Business Disputes .... .. .. ... .... .
303
303
304
305
Notes.. .. .. .. .. . . .... . ... .•.. •. .•.. . . . . .. .. .. .. . . .... . ... .•..• ..•.. .... . ... . . ... . ... . . .. ..• . . •..
Further Reading. . . .... . .. ..•. . .. . .. .. . . . .. . . . . .. . . ..... .... •. . ... . .. . . ...... . . ....... . . .... •. .. ..
Introduction . . .. .. .. .. .. . . ... . .. .. .... . .. .... . .. .. .. . .. .. .... . .. .. ... . . .. . ... . ... . .. . . . .. . .. . . .. .
How Will the Dispute BeSettled: Litigation or Alternative Dispute Resolution?. . . .... . . . .. .. ... . . .•. .•. . •. .
Arbitration: Preferred Method of International Dispute Resolution .... .. . . . . . . . .. .. .. . .. .. .. . . . .. .. •. . .. .
Actions in DomesticCourts: Suing and Being Sued . .. . . .... . ... . . . . .. . . ... . . ... .. . . .. . .... . . .. . .•. .. . .
Enforcement of Foreign Judgments . . .. . . . ... .. .. .. . . .... . ... .•.. •. .•.. . . . .. .. .. . .. .. .. . . . .. ..• . . •. .
Actions Involving Foreign States . .. . . .. . . . .. .... . .. . . .. .. .. . .. . . .. . . . .. . . . . . ... . . .. . . .. . . .. . .. . . . .. .
Selecting a Dispute-Resolution Mechanism .... . .. .. . . . ... . ... .•.. .. .•.. . . . . . .. . . . .. .. ... . . .... •. . .. .
Chapter Summary . .. .. . .. .. . . . .. . ... . . . . . . ... . .. .. .. . .. .. . .•. . •. .•.. . . . .. . .. . . .. . . .. . . . .. . .•. . •. .
Notes. ... . ... .. . . .... . ....•.. ... . ... . . ... ... . .. . . .... . .... •. .. .. . .. . . .... .. . . ....... . . .... •. .. ..
Further Reading. . . . ... . ... .•.. •. .•... . . ... . . .. .. . . .... . ... .•.. •..•. . . . .. .. .. . . .. .. ... . . .... •. . •. .
310
316
319
320
323
323
324
List of Cases. .. .. . . . . .. . ... .. .. .. .. .. . . . . .. . . .. .. . . .. ... ... .. .. .. . . .. .. . . .. . . . . .. .. . . . . . .... . . . .. .
324
324
Glossary . .. ... ... . ... .. .. .. ....... ... .... .. .. ... .. ... .. .. .. ..... ..... .. .. .. .. .. ... ... .. .. . ..
325
Index .. ... .. .... .. . ... .. .. .. .. ... ...... ... .. .. ..... ... .. .. .. .. ... ..... . ... .. .. ... .. .... .. . . ..
331
Credits ... .. .. ... .. ... ... ...... . ......... . .. .. .... . ...... ... .. .. ........ .. ....... .. .... . ... ..
343
Websites . . .. . .. . . .. .. . .. . .. . . .. . . .. . . . . . .. .. . .. . . .. . . . .. . .. . . .. ... . . . . . . .. .. . ... .. . . . . .. . .. . ... .
© [2020) Emond Montgomery Publications. All Rights Reserved.
ix
© [2020] Emond Montgomery Publications. All Rights Reserved.
This is the fourth edition of this book, the first edition having been published in 1997.
This book is intended primarily for students of international business, which should
now include all business students. The content can be approached at different levels
and, for this reason, it should be suitable for students in undergraduate programs at
colleges and universities, as well as those in graduate business programs. The book can
be used for a number of different courses, not only those addressing the legal aspects of
international trade. Much of the material is relevant to related courses, such as an introduction to international business or international business strategy; courses in international relations, economics, and politics; as well as public administration programs.
It is not intended as a law school textbook; rather, it is designed for readers who require
accessible information to assist them in understanding global business.
Our approach is to present the material from a Canadian point of view. We are a
nation that, at least historically, has supported international cooperation: in peacekeeping operations, protection of the environment, membership in multinational organizations, and the development of common rules for international trade. We are a nation
influenced by our European roots, with a tradition of common law and civil law, but we
are also a nation with strong ties to the United States and, increasingly, Asia and Latin
America.
New to This Edition
The new text has been condensed from 11 chapters into 10 chapters to account for
the needs of students, on suggestions from instructors, and to reflect best pedagogical
practices. It is now divided into two main parts. Part I is entitled "Public International
Law" and deals with international organizations and international law; the World Trade
Organization; the North American Free Trade Agreement and its new incarnation as
the Canada-United States-Mexico Agreement (CUSMA); and the global movement
to trade integration through free trade agreements. These are all arrangements made
between governments of different countries. This part also includes a chapter on how
Canada's international commitments are reflected in our domestic legislation. In Part II,
"Private International Law;' we deal with laws that have a more direct impact on companies engaged in international business, such as international sale of goods contracts,
intellectual property protection, different market-entry strategies, and settlement of
private international business disputes. Also in this new edition, ethical business considerations are explored throughout the text, rather than in one chapter.
Adopters of this book may choose to use only those chapters relating to the subject
matter of their particular course or interest- for example, an international business
transactions course, or a course on import and export (instructors can contact Emond
Publishing to discuss custom publishing options). A more general course on, say, the
global environment for business might choose to use only Part I. Chapter 8, Intellectual
xi
© [2020) Emond Montgomery Publications. All Rights Reserved.
xii
Preface to the Fourth Edition
Property and International Business, which has been revised and updated for this edition, is included in Part II because it is an essential part of so many international business transactions, but could also be included in Part I because it reflects the global rules
that have been established for intellectual property. Although the book is a relatively
modest length, there is a great deal of material-more than enough for two coursesparticularly if the instructor requires students to enrich their study with current and
practical examples of international business transactions.
In response to suggestions from instructors, this edition includes new features such
as business law and ethical analysis boxes, chapter summaries, and additional case highlights, along with practical checklists, sample forms and contractual clauses, a revised
glossary, and new, captivating visuals. We have also added more practical examples for
the purpose of providing some background to assist students in comprehending current events, and to serve as cautionary tales in the hope that readers will learn from the
costly experiences of others.
There are numerous other changes to this edition and what follows are some of the
highlights. Chapter 1 reflects a more user-friendly organizational structure and includes
current legal and political examples. It delves deeper into the sources of international
law, discusses the importance of soft law for businesses, and explores additional international organizations that businesses need to pay attention to. Chapter 2 provides a
much more in-depth analysis of key GATT principles and explores their economic
rationale and legal complexity. Chapter 3 illustrates the differences between the NAFTA
and the recently negotiated, but yet to be ratified, CUSMA. Chapter 4 incorporates a
new detailed discussion of reasoning behind the creation of the European Union, reviews key provisions of CETA, and includes an explanation of Brexit and its effects on
businesses. Chapter 5 includes a detailed practical section on the process of importing
goods into Canada, helping the reader grasp how the legislation affects the procedure.
Chapter 6 includes a new section on pre-contractual instruments, additional examples
illustrating the problems businesses can run into they don't pay attention to the conflict
of laws issue, an updated discussion of Incoterms, clearer comparison between different uniform laws, and examples of critical clauses in a sale of goods contract. Chapter 7
provides a wider comparison between the different payment methods available to
businesses.
We hope that these and other changes have contributed to achieving our goal: to help
readers become confident, knowledgeable, and successful Canadian businesspeople.
A Caution
Although the material in this book is meant to help readers identify potential risk
management issues and avoid common mistakes, it is not intended as a substitute for
legal advice and should not be relied on as such. This is particularly true because the
subject matter is dynamic; rules are changed and modified continually. The analysis
presented here represents the views and opinions of the authors. If legal advice or
other professional advice is appropriate, the services of a qualified professional adviser
should be sought.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Preface t o the Fourth Edition
Acknowledgments
A big thanks to everyone on the Emond team who helped me so much on this project.
Special thanks to the editor, Mike Thompson, for believing that I was the right author
for the new edition; the ever-patient content developer and project manager, Joanne
Sutherland, for keeping me on track and providing valuable feedback with respect to
chapter learning objectives; and to the copy editor, Joanne Haskins, and the proofreader, Una Verdandi, for their attention to detail and assistance in making the fourth
edition as easy to read as possible.
I am also grateful to our two specialist contributors, Tim Lowman, author of Chapter
8 on intellectual property, and Adam Armstrong, author of Chapter 9 on foreign market
strategies for their continued commitment to this text. Thank you as well to Mary Jo
Nicholson, whose authorship of the previous edition of this text provided a solid foundation on which to build.
I would also like to thank my family for their constant love and unwavering support and belief in me without which this book would not have been finished. A special
thanks to my mother, who was the first person to read and edit Chapter 1 and who
provided me with the encouragement to keep going.
Evguenia Iskra
Edmonton
A Note from the Publisher
The publisher wishes to thank the following people for providing their feedback, suggestions, or other assistance during the development of this book: Daniele Bertolini
(Ryerson University), Lora Freeman (Douglas College), and Dean Palmer (British
Columbia Institute of Technology).
For more information on this book, please visit the accompanying website at www
.emond.ca/LAIB4. Additional teaching resources are also available for instructors who
have chosen this book for their courses. Instructors should contact their Emond Publishing representative for more information, or contact us via the website.
© [2020) Emond Montgomery Publications. All Rights Reserved.
xiii
© [2020] Emond Montgomery Publications. All Rights Reserved.
Evguenia Iskra is an assistant professor at the School of Business at MacEwan University in Edmonton, Alberta. After practising in one of Alberta's leading law firms, she
completed her Masters in Law degree in International Legal Studies at the University
of Vienna, Austria.
Mary Jo Nicholson taught international business law at Ryerson University for over 20
years prior to her retirement, and has lectured at several universities around the world.
Timothy M. Lowman is a partner with Sim Lowman Ashton & MacKay LLP and Sim &
McBurney (SIM IP Practice), and adjunct faculty at the Ted Rogers School of Management, Ryerson University.
Adam Armstrong is a partner with Torys LLP in Toronto.
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© [2020] Emond Montgomery Publications. All Rights Reserved.
PART I
Public International Law
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
CHAPTER 1
International Law and
Internationa I Organizations
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand
• why it is necessary for all businesses to possess a current knowledge of the
global business environment
• the characteristics of law and what international law is- and is not
• how international law is enforced and implemented
• how international agreements and treaties are created
Introduction 3
Why theStudyof Legal Aspects of International Business Is
Important 4
What IsLaw7 4
How IsInternational Law Enforced Internationally? 8
How Are Treaties Created Generally? 12
Significant International Organizations and Agreements 15
Chapter Summary 24
Review Questions 24
Notes 25
Further Reading 26
Websites 26
List of Cases 27
• the history, characteristics, and purpose of some well-known international
organizations and agreements, and their limitations
Introduction
Effective management in today's global business environment requires that Canadian decisionmakers have a current and comprehensive knowledge base that extends well beyond our own
borders or even North America. Today's businesses, even iflocated entirely within Canada, face
competition from the rest of the world and will quite likely deal with suppliers or services that
are located outside this country.
The growing complexity, interconnectedness, and diversity of the global business environment, coupled with a borderless workforce, advances in information technology, and the
increasing importance of trade agreements, have transformed the business environment. To
compete effectively, businesses must be supported by a knowledge of the geography, politics,
law, and economics of the world at large. Because the global business environment is in a state of
constant flux, today's business person must be an astute observer of international organizations
and events that may directly or indirectly affect the success of any business venture.
This chapter introduces the concept of international law and describes the two traditionally
recognized branches of this discipline- public international law and private international law,
with emphasis on the latter's sources and enforcement. The chapter continues with a description
of some of the organizations and agreements that are significant for business today and discusses
their history, purpose, and limitations.
3
© [2020) Emond Montgomery Publications. All Rights Reserved.
4
Part I
Public International Law
Why the Study of Legal Aspects of International Business Is Important
By studying law, the business person has a better understanding of the levers of power in society.
It is important to understand the different legal and political systems in the world that affect your
business. So many business situations are influenced by the law. Whether it is reading and truly
understanding a media report, developing the best strategy for a foreign market entry, or resolving a conflict with an entity in another country, knowledge and understanding of the underlying
law will assist you in making the right decision.
In addition to the obvious advantage of knowing and understanding the rules that directly
affect you, the study of law is an excellent way to develop the critical thinking skills that are so
necessary for a successful business career. Practice in abstract thinking combined with a practical problem-solving approach will build your intellectual strength and contribute to a habit of
disciplined thinking. Learning how to recognize and seek out primary sources and keeping an
open mind when faced with a supposedly factual situation are habits that will contribute to wise
decision-making.
What ls Law?
There has always been some controversy over the definition of law. Most people agree that laws
are rules, but of course not all rules are laws. How do we differentiate between rules and laws?
William Blackstone, one of the definitive jurists of the English common law, defined the law as "a
rule of civil conduct, prescribed by the supreme power in a state, commanding what is right and
prohibiting what is wrong:' 1 A second definition is that a law is a rule that can be enforced by
the courts.2 Another accepted definition is that the law is a body of enacted or customary rules
recognized by a community as binding.
There are many different categories of law. The law with which we are most familiar is the
national or domestic law of Canada. We see examples of this law in our daily lives, whether we
read of it in the media or experience it when we receive a traffic ticket or go to court to enforce
a debt. This domestic or national law can be distinguished from international law, which will be
discussed further below. The primary sources of our national or domestic law are
• constitutional law that is found in our constitution acts of 1867 and 1982;
• legislation passed by either the federal or provincial government; and
• the common law or judge-made law (sometimes described as case law) that we have inherited from the common law tradition of England.
Our domestic law is subdivided into public law and private law. Public law governs the relationship between individuals and the state, and the law that determines the way the state is governed. Public law includes constitutional law, criminal law, and administrative law. Private law
involves relationships between private legal persons- that is, individuals or corporate entities.
This area of the law includes the law of contract.
Legal scholars also distinguish between public and private categories in international law. As
a result, Part I of this textbook is titled "Public International Law" and deals with international
public law, international organizations, the World Trade Organization, the global movement
toward trade integration through free trade agreements, and Canada's response to the global
trade rules as reflected in domestic policy and legislation.
In Part II, we deal with private international law issues, such as international contracts, intellectual property protection, different market entry strategies, and settlement of private international business disputes. Below, international public law is discussed in detail and briefly
contrasted with international private law.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizations
What Is International Public Law?
The international community is most prominently divided into nation states. There are 1953
sovereign nation states in the world. Sovereignty is the supreme and independent power and
authority claimed by a nation state over its own territory. Sovereignty means a nation state can
choose its political, economic, and social structures free from interference and coercion by
other nation states. Each sovereign state is equal to any other nation state and can decide how
to conduct its internal and external affairs. The principle of state sovereignty underpins international law.
Public international law has been traditionally defined as the law regulating relations among
nations. It is a set of rules and principles that states follow when dealing with each other. These
rules are derived from practice and codified in treaties and conventions. Public international
law's most basic purpose is to ensure order and peaceful coexistence among the nation states,
and it provides the means for states to maintain diplomatic, economic, and political relations
among themselves.
What Is Private International Law?
Private international law is law regulating the affairs of private persons (including corporations) located in different countries. It is also described as conflict of laws-it addresses the
question of whose country's laws will govern a transaction. This area will be dealt with further
when we discuss international business transactions in Chapter 7, Negotiation oflnternational
Contracts (Part 2): Contract Challenges and Risk Management.
In recent years the line between public and private international law has become somewhat
blurred because of the proliferation of conventions and bilateral and multilateral trade agreements, which have the effect of directly making rules for businesses or requiring signatory countries to pass legislation that affects the rights of private persons and businesses in signatory
countries.
The Significance of Public and Private International Law for Business
International business now must grapple with the consequences of both types of law. Public
international law, which in the past involved only government activities in the global political
sphere, now influences decision-making at the firm level. This is because the growth of global
treaty activity as well as the increasing desire on the part of countries to increase and regulate
global trade and to assert a moral dimension in global business has led to an explosion of rules
or laws enforceable at the domestic level.
Where Does International Public Law Come from?
In Canada, Parliament and the provincial legislatures are the primary law makers. Since each
nation state is sovereign, there is no supra-national world authority that transcends national
borders and makes international laws for all countries to follow. Nation states are the principal
state: in the international context, asovereign country
sovereignty: the supreme and independent power and authority claimed by anation state inits own territory
public international law: the law regulating relations among nations
private international law: the law applicable to private parties involved ininternational transactions
conflict of laws: where individualsor corporations from different jurisdictions have a dispute and it isnot clear what law applies
to thetransaction
© [2020) Emond Montgomery Publications. All Rights Reserved.
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actors in the creation of international law. The two most important sources of international law
are treaties and customary law. Nation states create both and choose to abide by them in recognition that they serve their interests and the interests of the greater international community.
Additionally, international law is distilled from general principles followed by states, domestic
courts decisions, and legal scholarship.
Article 38( 1) of the Statute of the International Court of Justice lists the sources oflaw that the
International Court of Justice is permitted to use in its adjudication of interstate disputes. This
provides us with a useful summary of the sources of international law. They are the following:
•
•
•
•
conventions establishing rules between or among contracting states;
international custom as evidence of a general practice accepted as law;
general principles recognized by civilized nations; and
judicial decisions and teachings of various nations as subsidiary means for determining
the rules of law.
It is important to note that sources of law listed above are stated here in order of their importance, with conventions carrying the most weight. Only where the first-named source is not
available or determinative of the dispute will the court proceed down the list. Each is discussed
in greater detail below.
Treaties
A treaty is a legally binding written agreement between two or more states. The word "treaty"
is a generic term. There are many other names used to describe treaties, such as "international
agreements;' "accords;' "protocols;' "covenants;' "conventions;' and even "an exchange of letters
or notes:' All indicate the same notion that two or more states are entering into a legally binding
relationship intended to set out their rights and obligations in relation to one another.
Treaties cover a variety of topics- for example, trade, investment, human rights, the environment, control of nuclear weapons, the law of treaties, and international banking and mail.
Treaties are negotiated on either a bilateral basis, meaning between two states, or a multilateral
basis, meaning between several states. In December 2015 at the Paris climate conference, 195
countries, including Canada, signed the first-ever universal legally binding global climate deal.
The Paris Climate Agreement is an example of a multilateral treaty, while the Canada-Bahrain
Foreign Investment Promotion and Protection Agreement is an example of a bilateral treaty.
Treaty provisions will set out the obligations between the signatory states and the method by
which the treaty is to be enforced, such as through arbitration or a predetermined international
organization, like the International Court of Justice or the World Trade Organization.
Limitation of Sovereignty
International treaty arrangements commit national governments to certain actions and policies that will affect their domestic policies. These commitments also limit a national government's ability to implement domestic policies that conflict with international obligations they've
undertaken. Treaty commitments represent a limitation on the sovereignty or freedom of action
for the signatory government. In a democratic country, governments and policies change in
response to the opinions of the voting public, and the idea of constraining future government
policy does not always sit well with the voting public.
treaty: a binding agreement between two or more countries (states)
bilateral agreement: an agreement between two states
multilateral agreement: an agreement among three or more states
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Treaties are usually indefinite and have no termination date; a country may only withdraw,
and such withdrawal is often complicated.
Customary Law
Customary international law includes a wide variety of uncodified rules that are binding upon
all states irrespective of their explicit consent. Customary law is said to exist when a significant
number of countries follow a particular rule in their dealings with each other, understand that
the particular rule should be followed, and recognize that they will face sanctions if they do not
follow it.
Customary international law is uncodified, meaning it is not written in a treaty or convention. However, frequent or habitual performance of certain actions and a belief that acting otherwise would be illegal makes the customary international rules no less binding than
the written rules codified in treaties. Customary law is normally observed by most states
most of the time. Box 1.1 provides an example of a customary law that is well established
around the world.
Customary international law includes jus cogens, also called peremptory norms, which are
international norms that are considered so fundamental that states are not permitted to derogate
from them by way of treaty. The most common examples are peremptory norms against torture,
slavery, genocide, and aggression.
As long as they do not conflict with existing Canadian legislation, the rules of customary
international law are part of Canadian domestic law.4
General Principles of Law
International courts and tribunals rely on general principles of law when they are unable to find
legal authority in treaties or customary international law. General principles of law are certain
legal beliefs and practices of fairness and justice that exist in all developed legal systems around
the globe. Good faith and the impartiality of judges are some of the examples of these general
principles of law. For instance, good faith means that parties explicitly or impliedly consent to
not act in a way that would defeat the objectives of the agreement they have entered into. In
other words, the parties to an agreement are under a duty to act honestly in the performance of
their contractual obligations. Good faith is a widely recognized principle that everyone intends
to comply with when entering into agreements. Courts in many countries will consider whether
the parties to a case acted in good faith when determining the outcome of a dispute. In the event
that an issue or dispute arises where there is no existing law that applies, international judges can
refer to the general principles of law to deduce an answer.
BOX 1.1
Sovereign Immunity a Principle of Customary Law
Sovereign immunity, or state immunity, is a principle of customary international law, whereby one
sovereign state and its representatives, like elected officials, ambassadors, and diplomats, cannot be
sued before the courts of another sovereign state without the state's consent. International rules affording immunity to state officials have evolved over centuries. Initially, immunity was afforded to
kings and queens by virtue of them being considered God's appointed representatives on Earth. Rules
regarding immunity proved to be very convenient in conducting international relations, and despite
the decline of monarchies in the world, the practice of granting immunity to heads of state and their
agents continued into today's time. The repetitive use of and adherence to the rules on immunity and
the belief that failure to abide by them would result in negative consequences established state immunity rules as part of the customary international law.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Judicial Decisions and Legal Scholarship
Article 38 of the International Court of Justice statute includes "judicial decisions and the
teachings of the most highly qualified publicists of the various nations"s as a subsidiary means
of determining the rules of laws. In case the international tribunals and courts are unable to
distill an answer to a legal problem from the previous three sources of law, they may consult
and quote the writings of legal scholars and judicial decisions. Although judicial decisions
and legal scholarship are not an actual source of law, they still play an important role in supplementing the previous three categories by describing rules of law that are widely followed
around the globe.
Other Sources of Law: Soft Law
"Hard law" is a term used by the international community to refer to legal obligations that are
precise and binding on states. These include the traditional sources oflaw discussed above. "Soft
law;' on the other hand, is a term used by the international community to refer to non-binding
yet highly persuasive documents such as draft multilateral treaties, United Nations General
Assembly resolutions, various codes of conduct, guidelines, best practices, official communiques, reports, multilateral conference accords, and standards. These instruments are not binding
but tend to be morally influential or aspirational, or may outline broad understandings among
state parties that are yet to become legally binding.
The term "soft law" may be confusing, since it is not truly law, yet the documents described as
soft law are significant in the regulation of the international actors' behaviour. Soft laws also have
potential relevance in that they may become hard law in the future if widely followed, becoming
customary law or being ratified by states through treaties.
Just like hard law, soft law affects more than just state actors. Often, soft law instruments
impact businesses worldwide. For example, in 2011, the United Nations Human Rights Council
endorsed the United Nations Guiding Principles on Business and Hu man Rights (UNGPs) 6 and
established a global baseline for business and human rights. The UNGPs are voluntary guidelines that set out how states and companies should protect and respect human rights in business and how to prevent and address business-related human rights abuses. The UNGPs set out
specific actions necessary for states to meet their duty to protect human rights. These actions
include passing and enforcing laws that require businesses to respect human rights, creating a
regulatory framework that facilitates business respect for human rights, ensuring adjudication
of human rights abuses, and providing direction to business on their obligations.
The UNGPs are expected to become customary in both their use and acceptance as states pass
domestic legislation based on them and businesses worldwide increasingly adopt these voluntary
but authoritative international guidelines in their daily operations. For instance, in January 2018,
Canada's international trade minister announced the creation of a Canadian ombudsperson for
responsible enterprise office to investigate human rights complaints about the overseas operations of Canadian companies.7 This legislative action stems in part from the Government of
Canada's active support in the development and subsequent endorsement of the UNGPs. Due
to such legislative initiatives, many Canadian companies are adopting the UNGPs to prescribe
their operations domestically and abroad.
How Is International Law Enforced Internationally?
Domestically, the state has the power to compel its subjects to comply with laws through the
use of its police force, administrative authorities, and threats of punishment, but internationally
there is no overarching authoritative enforcer. International law relies on voluntary compliance,
consensual dispute-resolution processes, and economic or political pressures exercised by the
offended state and the international community.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Voluntary Compliance
Most often, international law is followed by states and other entities in their day-to-day actions.
The rules and principles of international law provide all participants a practical, stable, predictable, and overall beneficial framework for conducting international transactions. International
rules are tacitly and explicitly acquiesced to by the international bureaucracies. Regular compliance, habit, passive consent, and widespread desire not to question the status quo or rock the
boat are the characteristics that give international law its resilience.
Talking
When conflicts arise, internationally and domestically, the majority of disputes are resolved
through negotiation outside of the court system. In the interest of preserving business, strategic, political, and social relationships, individuals and states alike generally prefer to keep their
grievances out of the public view and have them resolved quickly and efficiently. Among states,
private diplomatic communications and bilateral and multilateral negotiations with and without the assistance of international organizations such as the UN or the International Monetary
Fund are used frequently to come to a settlement of a dispute. In conjunction with private talks
or when private discussions fail, states will also use sequences of unilateral speeches and press
releases to pressure the opposing party to come to a mutually acceptable resolution with respect
to alleged breaches of international obligations.
Treaty Provisions
As discussed previously, treaties are written agreements between states that set out the parties'
mutual legal rights and obligations and are governed by international law. Breach-of-agreement
provisions are often included in the body of the treaty. The parties to the treaty set out in advance
what measures each can take in the event that one or both parties fail to comply with their obligations. Suspending compliance of treaty obligations of the affected state, starting legal proceedings, or seeking compensation are some of the provisions that may be included in the treaty.
Similarly, treaties will often include dispute-resolution provisions in case of a breach or disagreement regarding the interpretation of the language of the treaty. These provisions will spell out
how the treaty parties are to handle the dispute. Negotiation, arbitration of disputes, or referral
to the International Court ofJustice are some of the most common dispute-resolution mechanisms included in treaties. Some treaties include a combination of these mechanisms.
The International Court of Justice
At present, some public international law disputes are heard by the International Court of
Justice (ICJ), also known as the World Court, in The Hague in the Netherlands. Two factors
limit the court's effectiveness and power. The first is the rule that decisions are binding only on
the parties to the dispute, and the second is the fact that a state may not be brought before the
ICJ unless that state has accepted the court's jurisdiction, either generally or for the purpose of
the dispute in question. The ICJ does not hear commercial disputes involving private litigants,
because only countries may be parties before the court. For this reason, the ICJ is of little practical significance for private businesses.
Reciprocity
Often, states will not engage in a particular short-term beneficial course of action in recognition that it may create reciprocal, long-term disadvantages. States follow international law
International Court of Justice (ICJ): headquartered inThe Hague, Netherlands, acourt that hears chiefly public international
disputes
© [2020) Emond Montgomery Publications. All Rights Reserved.
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because of the general or long-term costs that could come from disregarding international law.
For example, states everywhere normally respect the rules regarding innocent sea passage. If
State A limits innocent passage through its territorial sea, other states will reciprocate and will
likely limit innocent passage to ships flying State /\s flag in the future. This induces states to
behave reasonably in the expectation that others will also abide by the rules and avoid unnecessary confrontations.
Retorsions
Imposition of unfriendly measures and removal of friendly concessions are called "acts of
retorsion:' They are implemented as a method of retaliation against injurious yet legal activities of another state. Retorsions are meant to influence another state's actions in furtherance of
national-interest goals of the imposing state. For example, states can require hefty visa requirements, suspend study programs, expel diplomats, restrict awards of government contracts, and
reduce overflight rights; there is an abundance of different measures that may be used, and the
cost to the target state is usually significant. An example of unprecedented retorsions is provided
in Box 1.2.
Countermeasures
Whereas retorsions are in response to legal yet unfavourable acts committed by another state,
countermeasures are retaliatory acts in response to illegal actions of another state. Legal countermeasures must be in response to a prior wrongful breach of an international obligation. The
countermeasures may be imposed only if the offending state refused to remedy the illegal action
following complaint by the offended state and the countermeasure is necessary to induce the
offending state to comply with its obligations. The state imposing the countermeasure must
make sure it is proportionate to the breach committed and must only direct the countermeasure
against the state committing the wrongful act. Further, there is no requirement that the countermeasures taken should be with regard to the same obligation breached by the state acting wrongfully. This means that in response to a breach of one treaty, a state may take action with regard
to another treaty, as long as the requirements of necessity and proportionality are respected.
For example, on May 31, 2018, the United States imposed aluminum and steel tariffs of 10
and 25 percent respectively on Canada, citing that its northern neighbour represented a national
BOX 1.2
Saudi Arabia Imposes Sanctions on Canada for Online Comments
Raif and Samar Badawi are two Saudi Arabian human rights
activists imprisoned in Saudi Arabia.a Raif Badawi was arrested in 2012 and later sentenced to one thousand lashes
and ten years in jail for criticizing clerics online. Samara
Badawi was arrested in the summer of 2018. 9 Raif Badawi's
wife and children are Canadian citizens living in Montreal. 10
On August 2, 2018, Chrystia Freeland, Canada's minister
of foreign affairs, tweeted "Very alarmed to learn that Samar Badawi, Raif Badawi's sister, has been imprisoned in
Saudi Arabia. Canada stands together with the Badawi family
in this difficult time, and we continue to strongly call for the
release of both Raif and Samar Badawi:•11 In retaliation for
these statements, the Saudi Arabian government imposed
substantial retorsions, namely expelling the Canadian ambassador from Saudi Arabia, stopping all Saudi Arabian flights
to Canada, halting all new trade and investment deals, and
ordering Saudi Arabian students residing in Canada to study
elsewhere or return to Saudi Arabia. The retorsions imposed
by Saudi Arabia on Canada may have significant trade and
generally economic repercussions on both countries. 12
retorsion: acts in retaliationfor legal yet unfavourable acts of another state
countermeasures or reprisals: acts in retaliation for illegal acts of another state
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Chapter 1
International Law and International Organizations
security threat to the United States.13 In response, Ottawa imposed $16.6-billion worth of countermeasures on imports of American steel, aluminum, and consumer products.14 Canada's retaliatory measure was proportional, as it was approximately the same value as the Canadian steel
and aluminum exports to the United States that were affected by the United States' tariffs, and
the measure was meant to exert pressure on the United States to withdraw its illegal tariffs on
Canadian metal. Canadian officials stated that the imposed tariffs were in breach of the United
States' obligations under the North American Free Trade Agreement and the World Trade Organization agreements and launched consultations under both dispute-resolution regimes.
This is an example of a countermeasure pursuant to breaches of treaty provisions. Similar
countermeasures can arise in response to breaches of customary international law.
Reciprocal actions, such as retorsions and countermeasures within international trade, may
lead to a spiral of out-of-control tit-for-tat consequences negatively impacting the countries
involved and the global community overall. For instance, impositions of high tariffs, increased
protectionism, and "beggar thy neighbour" policies were partly to blame for the severity of the
Great Depression and the subsequent outbreak of World War II.
Collective Action
If a state breaches international law, it may face a collective response by a group of states organized through the United Nations (UN) or from among the states themselves. Pursuant to the
UN Charter, the Security Council can act to maintain or restore international peace and security
through a broad range of enforcement measures. The UN Security Council's resolutions are the
only resolutions that are binding on all member states. These measures range from all-encompassing economic and trade sanctions to more targeted sanctions, such as arms embargoes,
travel bans, and financial or commodity restrictions. The Security Council has applied sanctions
to support peaceful transitions, deter non-constitutional changes, constrain terrorism, protect
human rights, and promote non-proliferation. For example, continued development of nuclear
weapons and ballistic missile technology by the Democratic People's Republic of Korea (DPRK,
or North Korea) is condemned by most states around the world. The 15-member UN Security
Council unanimously passed nine rounds of sanctions against North Korea since its first nuclear
test in 2006.15 The UN Security Council's measures against DPRK include a variety of economic
sanctions, such as a ban on export of electrical equipment, coal, minerals, seafood, food and
agricultural products, wood, textile, and earth and stones. 16
Naming and Shaming
The practice of calling public attention to a state's bad behaviour is called "naming and shaming:'
Negative publicity and the threat of shaming a state with public statements often help to increase
accountability and bring it into conformity with international laws. This enforcement method is
often useful in the fields of human rights and environmental law. States, non-governmental organizations, news media, and international organizations publicize states' violations in the hope
of forcing the offenders to reform and conform to international norms.
For example, the fishing industry is of utmost importance to Canada, since it brings approximately $6 billion into the Canadian economy annually.17 Canada exports fish and seafood products to some 140 countries worldwide. is
Under international law, countries are required to cooperate in the conservation and management of living marine resources. Canada, being surrounded by three oceans, plays a leadership role in enforcement of international agreements to help ensure the long-term health of the
world's shared ocean resources.
Global fishing is so aggressive that many wild-fish populations are at risk of disappearing
unless the industry is restricted. Overfishing and illegal fishing significantly deplete the number
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
of fish. Recognizing the effectiveness of the "naming and shaming" approach, in April 2018
Canada's fisheries minister called on the G7 members-Canada, France, Germany, Italy, Japan,
the United Kingdom, the United States, and the European Union-to use military and other
surveillance technology and existing satellite images to name and shame practitioners that are
conducting massive illegal overfishing operations. 19
Direct Enforcement of International Law by NGOs
States are not the only actors involved in the enforcement of international law. Domestic and
international non-governmental organizations also play an important role as watchdogs,
advocates, awareness builders, and direct enforcers.
For instance, in 2008, the Discovery Channel premiered its documentary called Whale Wars,
which followed the famous Sea Shepherd Conservation Society (SSCS) ship in its efforts to stop
illegal whaling across Antarctic waters.20 This television show illustrated the direct, and often
illegal, actions a non-governmental organization may take to enforce international marine law.
The SSCS was established by the Canadian-American environmentalist Paul Watson in 1977
and is an international non-profit marine-wildlife conservation organization. Its mission is to
end the destruction of habitat and slaughter of wildlife in the world's oceans in order to conserve
and protect ecosystems and species. SSCS uses a variety of direct-action tactics to investigate,
document, and interfere when necessary to expose and confront illegal activities on the high
seas.21 Some of the interference techniques include ramming whaling boats, pelting fishers with
rotten butter as a diversion while divers cut fishing nets holding endangered tuna, bombarding ships with stink bombs and smoke flares, blocking outflow drains, dropping lines across
poachers' ships, confiscating illegal fishing equipment, obstructing passage of fishing vessels,
and sinking fishing boats.22
Non-governmental organizations like SSCS, Greenpeace, and others compel states and private
companies to comply with already-existing international laws through direct and indirect action.
How Are Treaties Created Generally?
It is important to be familiar with the process of treaty creation, since treaties, as discussed
above, are one of the main sources of international law. The first step is negotiation of the terms
of the treaty by representatives of national governments. Normally, details of the negotiations
or the contents of the treaties will not be revealed until the parties have reached an agreement
in principle on content or wording. This negotiation will result in a draft text for the proposed
treaty, which may be signed by representatives of the national governments. The signature of a
treaty, unlike the signature of a domestic contract, does not result in a legally binding obligation.
It simply represents a preliminary and general endorsement of the treaty provisions and indicates that the signatory country intends to undertake a careful examination of the treaty before
it confirms its position. At a minimum, signing the treaty indicates that a country commits not
to undermine the principles of the treaty and, at the maximum, indicates that a government's
policy will be to commit fully to the treaty as it is currently written.
To become binding, a treaty must be ratified and usually be implemented in domestic
legislation.
Usually, a treaty will become binding on the parties once it is ratified (a process also called
"accession'') by a specified number of the governments of the participating countries. Ratification
non-governmental organization (NGO): an organization that is not established by agovernmental entity or an intergovernmental agreement; may or may not be anon-profit entity
ratification: in international law, the process of individual countries confirming under their own domestic law the international
obligationsundertaken bytheir country in atreaty or convention
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Chapter 1 International Law and International Organizations
must be done by the appropriate organ of the state, and this organ will vary from one country to
another-for example, its parliament, senate, or Crown. Once ratified, the treaty is usually binding on the signatory. Treaty parties that have ratified the instrument are also called contracting
parties. A treaty regulates relations only among countries (the contracting parties) that have
ratified the treaty. This is similar to our domestic law of privity of contract, as rights can be created between the contracting parties.
Most treaties, once ratified, will require the signing country to pass implementing legislation
to make the international treaty enforceable at a national level. Technically, a country may be
in default of its treaty obligations if it fails to pass the necessary domestic laws. Such a failure is
often a result of domestic political issues, particularly if, after the treaty's negotiation, government policy in a country changes with the election of a new government.
What Is Canada's Approach to Treaty Making and Implementation?
The following section discusses the steps the Canadian government must undertake pursuant to the Constitution Act in order to negotiate, sign, implement, and ratify an international
treaty.23
Negotiations
In Canada, only the federal government's executive branch has the authority to negotiate, sign,
and ratify international agreements. Global Affairs Canada and the minister of foreign affairs are
responsible for negotiating international treaties on Canada's behalf. Often, they will exercise a
supervisory role, depending on the subject matter of the negotiation, and other federal bodies
will take on the day-to-day negotiations in light of their expertise. For instance, Environment
and Climate Change Canada conducts international negotiations dealing with the environment,
and tax matters are dealt with by the Canada Revenue Agency. The people involved in negotiations may include the prime minister, ministers, deputy ministers, diplomatic representatives,
and sometimes provincial and territorial participants.
Parliament is responsible for passing legislation of treaties whose subject matter falls under
its jurisdiction. Provincial legislatures are responsible for treaty implementation in areas of provincial jurisdiction. Jurisdiction means the power to make legal decisions or judgments. In other
words, federal government requires provincial governments' consent to ensure international
treaty implementation and enforcement in areas of provincial jurisdiction. Federal and provincial divisions of powers are listed in the Constitution Act, 1867.
For example, section 91(2) of the Constitution grants the federal government exclusive
control over the regulation of trade and commerce, while under Section 92(13) the provincial/territorial governments have control over property and civil rights. This includes
jurisdiction over
•
•
•
•
•
business regulation (services and investment);
standards (consumer protection, health and safety);
social-welfare issues (labour and environment);
government procurement; and
other issues (monopolies, state trading enterprises, technical barriers to trade).
contracting parties: Treaty parties that have ratified an instrument
privity of contract: the concept that onlythose who are parties to the contract can enforce the rights and obligations it contains
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Signature
Once the negotiating states have reached consensus with respect to the terms of the agreement,
the Cabinet needs to approve the signing of the final text of the treaty. By signing the treaty,
Canada indicates to the other treaty parties that it agrees in principle and will not undermine
the object and purpose of the treaty; however, it is not bound by it yet.
Canada becomes formally bound by a treaty at international law only upon ratification or
accession. Since 2008, it is the Government of Canada's policy to formally table treaties in Parliament for comment prior to the Cabinet making any decisions regarding ratification.
Implementation
For Canada to comply with its international obligations, the provisions of the treaty must be
implemented in domestic law prior to ratification. Most of the time, without domestic implementation, the treaty will not be binding on persons, legal and natural, in Canada. If the subject
matter of a treaty is within federal legislative jurisdiction, it is the federal Parliament that enacts
the necessary legislation. If the subject matter of the treaty is within provincial legislative jurisdiction, then the provincial legislatures must enact the necessary legislation.
Depending on the nature of the treaty, the implementation can be done through executive or
administrative action; however, most often it is done through passing new legislation or regulations,
or by amending existing laws. For example, the International Sale of Goods Act24 makes the United
Nations Convention on Contracts for the International Sale ofGoods25 applicable in British Columbia.
Ratification
To ratify or accede to a treaty, Canada must prepare a declaratory statement or a ratification
instrument advising the other treaty signatories that it has implemented the treaty provisions
domestically. This document signals to the other treaty parties that Canada agrees to be bound
by the treaty. The treaty will come into force depending on the treaty provisions or the parties'
separate agreement regarding the date.
BOX 1.3
The United States' Approach to Treaty Making
The US approach to treaties may be described as cautious or even reluctant. This reluctance is based,
in part, on its history as a North American nation that broke away from colonial rule by way of a violent
revolution. The US Constitution grants power to the president to make treaties with the "advice and
consent" of two thirds of the Senate. This is different from other US legislation, which requires approval
by a simple majority in both the Senate and the House of Representatives. The United States also takes
a different view from many other nations concerning the relationship between international and domestic law. Many nations view international agreements as superseding domestic law, but the view in
the United States is that international agreements become a part of the body of US federal law and, as a
result, Congress can modify or repeal treaties by subsequent legislative action, even if this modification
amounts to a violation of the treaty. In addition, an international agreement that is inconsistent with the
US Const itution is void under US domestic law, just as any other federal law that is in conflict with the US
Constit ution is void. Technically, the Supreme Court of the United States could rule a treaty provision to
be unconstitutional and void under domestic law, although this has never occurred. When negotiating
a treaty, the United States usually requires the inclusion of a reservat ion stating that it will assume no
obligations that are in violation of the US Constitution.
reservation: a process used in treaties and international agreements whereby signatories tothe agreement may exempt themselves fromspecificobligations under the treaty or agreement
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizations
Significant International Organizations and Agreements
As discussed above, although states are the major players in the creation of international law,
international organizations, non-governmental organizations, and multinational corporations
(MN Cs) play an equally important part in shaping international law and the world economic
order in which businesses operate. This next section covers some of the more prominent international organizations created by treaties and agreements. Although the organizations described
here do not have an immediate effect on businesses in the sense of directly imposing specific
rules, they have a significant impact on the global business environment. It is necessary to know
about the characteristics and activities of these organizations in order to make the best possible
strategic business decisions.
The United Nations
The UN is the first international organization that comes to the minds of most people. Founded
after the Second World War by 51 countries upon the signing of the United Nations Charter in
San Francisco on June 26, 1945, its mandate is to
•
•
•
•
maintain international peace and security;
develop friendly relations among nations;
cooperate to solve problems of an economic, social, cultural, or humanitarian nature; and
promote and encourage human rights and fundamental freedoms.
Although the UN has no direct role in the legal or regulatory aspects of international business, the impact of its action or inaction on the conduct of international business should not be
underestimated.
Currently, the United Nations has 193 members and is organized as follows:
1. The General Assembly. The UN General Assembly is the main policy-making body of
the UN. Its principal functions include promoting international co-operation in the
economic, social, cultural, educational, and health fields and assisting in the realization
of human rights and fundamental freedoms for all. Each member state or country sends
a delegate to the UN General Assembly; each state has one equal vote, regardless of its
size, population, or political influence. The General Assembly is a quasi-legislative body
because its function is to discuss matters within the scope of the UN Charter. It may
recommend action, but the power to enforce the Charter rests with the Security Council. The General Assembly votes on resolutions brought forward by member states. The
resolutions then may be referred to the Security Council to be made binding. Resolutions passed by the General Assembly are highly persuasive but are not legally binding
on member states unless also passed by the Security Council. They fall under the category of "soft law" as discussed above.
2. The Security Council. The Security Council has 15 members- 5 of which are permanent members. The permanent members are China, France, the United Kingdom,
the United States, and the former USSR, whose seat is now occupied by Russia. The
ten non-permanent members are elected by the General Assembly every two years.
The permanent members have a veto over non-procedural issues in the Security
Council. Thus, just one of these countries can block any action proposed by the Security Council. The Security Council is responsible for maintaining international
peace and security, and it is the only UN organization with the authority to use
armed force. Only the Security Council's resolutions are binding on all UN member
states.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
3. The Secretary-General. The Secretary-General is the UN's chief administrative officer
and is responsible for running the Secretariat, which is the UN's "civil service:' Nominations for the Secretary-General are initiated in the Security Council, and elections are
held in the General Assembly.
The UN is the only multilateral organization with truly global membership. It serves as an
important catalyst for multilateral action on many world problems. Its Sustainable Development
Goals are discussed below to illustrate this point.
Sustainable Development Goals
The United Nations' Millennium Development Goals (MDGs) 26 were adopted by the world's
countries in 2000 as a blueprint for building a better world in the 21st century with a focus on
developing nations. These goals represented an ambitious agenda for international development,
security, and human rights, with 2015 set as the target for achieving these goals. The MDGs
overall were seen as a success. To build on the goals and attempt to complete what they did
not achieve, in 2015 the UN member states adopted the 2030 Agenda for Sustainable Development and its Sustainable Development Goals (SDGs) 27 and invited the private sector to provide
input. The SDGs, represented in Figure 1.1, are composed of 17 goals and 169 targets focusing
on ending poverty, fighting inequalities, and tackling climate change. The SDGs have a wider
scope than the MDGs, as they cover the three dimensions of sustainable development-economic growth, social inclusion, and environmental protection- and affect all countries.
Since 2015, the SDGs signatory states have started implementing the goals at a national level.
The national plans direct domestic policy, legislation, regulations, stimulus programs, financing,
awareness campaigns, and other actions intended to achieve SDGs at a domestic level. The SDGs
provide useful guidance for businesses and investors. Since the SDGs inform the direction that
signatory states will take domestically, businesses can use these goals to direct their processes. The
process of achieving the SDGs opens up as much as US$12 trillion of market opportunities and
may produce up to 380 million new jobs by 2030. 28 To benefit from these opportunities, businesses
will need to incorporate the SDGs into their long-term strategies and stakeholder engagements.
Cooperation between governments and the private sector is essential to achieving the SDGs.
.
.m II
II
•Ill •
!I Lt
FIGURE 1.1 The United Nations Sustainable Development Goals
i
II
·
I
I
'
.
•
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizations
In addition to the SDGs, a review of any list of UN-affiliated organizations and UN-sponsored conventions provides an immediate overview of the organization's impact on many areas
of concern in the world.
Organizations Affiliated with the United Nations
Among the many organizations affiliated with the United Nations are the following:
•
•
•
•
•
•
•
•
•
•
United Nations Conference on Trade and Development (UNCTAD),
United Nations Commission on International Trade Law (UNCITRAL),
United Nations Relief and Works Agency (UNRWA),
United Nations Children's Fund (UNICEF),
United Nations Development Programme (UNDP),
United Nations Environment Programme (UNEP),
International Labour Organization (ILO),
Food and Agriculture Organization of the UN (FAO),
World Health Organization (WHO), and
World Intellectual Property Organization (WIPO) .
UNCTAD and UNCITRAL are of particular importance to international business. UNCTAD
promotes the integrated treatment of trade and development and the related issues of investment,
finance, technology, enterprise development, and sustainable development. UNCTAD promotes
the integration of developing countries into the world economy. It is a knowledge-based organization that aims to inform current policy debates and thinking on development, based on the
premise that domestic policies and international action should be mutually supportive in bringing about sustainable development. It carries out the following three key functions:
• serves as a forum for intergovernmental deliberations;
• undertakes research, policy analysis, and data collection for governments and
experts; and
• provides technical assistance and cooperates with other organizations and donor countries engaged in helping developing countries and economies in transition.
UNCITRAL was established by the General Assembly in 1966 to address the disparities in
national laws governing international trade that were perceived as creating obstacles to the flow
of trade. UNCITRA[s mandate is to bring about the progressive harmonization and unification
of the law of international trade, and it has become the core legal body of the UN system in the
field of international trade law. Significant recent initiatives include a new draft Convention on
the Use of Electronic Communications in International Contracts29 and a Legislative Guide on
Insolvency Law30 to help create a unified international standard for insolvency.
The Bretton Woods System
Before the end of the Second World War, the Allies held meetings at Bretton Woods, New
Hampshire, in the United States for the purpose of creating a system to prevent future economic
United Nations Conference on Trade and Development (UNCTAD): the UN'sarm for promoting the integrated treatment of
trade anddevelopment and therelated issues of investment, finance, technology, enterprise development, andsustainabledevelopment
United Nations Commission on International Trade Law (UNCITRAL): an agency that has as its principal objective the
harmonizationof trade law
Allies: countries that emerged as victors inthe SecondWorldWar, including Great Britain, theUS, Canada, France, China, and Russia
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
and military catastrophes. This is the origin of the reference to Bretton Woods Institutions.
Discussions at these meetings concentrated on the financial problems faced by nations in the
post-war era. There was a consensus among the Allies that freer trade and the creation of a transnational bank would help in reconstruction after the war. Two major organizations and one
"agreement that became an organization" resulted from the Bretton Woods conferences: the International Monetary Fund, the World Bank, and the General Agreement on Tariffs and Trade.
The International Monetary Fund
The International Monetary Fund (IMF) was established to promote international monetary
cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth
and high levels of employment; and to provide temporary financial assistance to countries to help
ease balance-of-payments adjustment. The IMF is the central institution of the international mon etary system, which is the system of international payments and exchange rates among national
currencies that enables business to take place between countries. In 1945, when the IMF was first
established, its purpose was essentially to promote financial and monetary stability by supporting
fixed exchange rates. W hile nominally this purpose has remained unchanged, IMF operations
have developed to meet the changing needs of the evolving world economy. At present, the IMF
• monitors economic and financial developments and policies in member countries,
• provides loans to member countries with balance-of-payments problems, and
• provides technical assistance and training to countries in financial difficulty.
The IMF provides financing not for particular economic sectors or projects but for the general support of a country's balance of payments and international reserves while the country
takes policy actions to address its difficulties. The IMF's performance, mission, and relevance
have been the subject of a great deal of criticism recently.
The World Bank
The World Bank and the IMF complement each other's work. While the IMF's focus is chiefly on
macroeconomic performance and on macroeconomic and financial sector policies, the World
Bank is concerned mainly with longer-term development and poverty-reduction issues. Its mission is to fight poverty and improve the living standards of people in the developing world. Its
activities include providing loans to developing countries and countries in transition to finance
infrastructure projects, the reform of particular sectors of the economy, and broader structural
reforms. The World Bank consists of five closely associated institutions, each of which plays a
distinct role in the mission to fight poverty and improve living standards for people in the de veloping world. These institutions are the following:
• The International Bank for Reconstruction and Development (IBRD). The IBRD provides
loans and guarantees analytical and adviser services to middle-income and creditworthy
poorer countries.
Bretton Woods Institutions: the IMF, theWorld Bank, andthe GATT
International Monetary Fund (IMF): an organization establishedat Brenon Woodsin 1944torestore and promote international
monetary and economic stability
World Bank: an organization established at BrenonWoods in 1944 to help countriesreconstruct their economies after theSecond
WorldWar
General Agreement on Tariffs and Trade (GATT): an agreement that arose out of BrenonWoods meetings in 1944; a multilateral treaty that prescribes rules for international trade
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizations
• The International Development Association (IDA). The IDA provides interest-free credits
and grants to the world's poorest countries-that is, countries that have little or no capacity
to borrow on market terms. IDA resources help support country-led poverty-reduction
strategies for the purpose of raising productivity, providing accountable governance, and
improving the private investment climate and access to education and health services.
• The International Finance Corporation (IFC). The IFC promotes economic development
through the private sector. Working with business partners, it invests in sustainable private enterprises in developing countries. It provides equity, low-interest loans, structured finance and risk-management products, and advisory services for its clients. It also
finances markets that are deemed too risky by commercial investors in the absence ofIFC
participation.
• The Multilateral Investment Guarantee Agency (MIGA). The MIGA helps promote foreign direct investment in developing countries by providing guarantees to investors
against non-commercial risks, such as expropriation, currency inconvertibility and
transfer restriction, war and civil disturbances, and breach of contract. It also provides
technical assistance and advisory services to help countries attract and retain foreign
investment.
• The International Centre for Settlement of Investment Disputes (ICSID) . The ICSID supports foreign investment by providing international facilities for the settlement of investment disputes.
The World Bank is run like a cooperative, with its member countries as shareholders. The
number of shares that a country has is based roughly on the size of its economy. The United
States is the largest shareholder, holding approximately 16 percent of the total votes. The next
four largest shareholders are France, Germany, Japan, and the United Kingdom . The World
Bank's president is, by tradition, a national of the largest shareholder. Appointed for a five-year
renewable term, the president is responsible for the overall management of the World Bank.
The General Agreement on Tariffs and Trade
Although the characteristics of the General Agreement on Tariffs and Trade (GATT) are discussed in more detail in Chapter 2, it is appropriate to mention the GATT here because it has its
origins in the Bretton Woods conferences. Delegates at those meetings had hoped to establish an
International Trade Organization (ITO) in addition to the IMF and the World Bank. The mandate for the ITO was to promote and stabilize world trade. After several years of discussion, a
charter was proposed in 1947 in Havana, Cuba. Sufficient support for ratification of this charter
was not achieved because the US Congress failed to approve US participation in the ITO. The
result was that the ITO was never formally established. The remnant of these discussions was
the GATT, the surviving document that the parties had agreed upon. This agreement became,
by default over time, the international agency for trade.
The International Chamber of Commerce
The International Chamber of Commerce (ICC) was founded in 1919 with the mission of serving world business by promoting trade and investment, open markets for goods and services,
and the free flow of capital. The organization serves as an advocate for world business and
makes representations to governments and intergovernmental organizations, promoting choices
favourable to the world business community. The ICC has the highest level of consultative status
International Trade Organization (ITO): an association proposed in the Havana Charter in 1947 and intended to be the third
BrettonWoods institution; it failed to be established when the United States did not ratify the Havana Charter
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
with the UN and its specialized agencies. Since 1946, the ICC has taken part in a broad range of
activities with the UN and its specialized agencies, including the Conference on Financing for
Development, the World Summit on Sustainable Development, and the World Summit on the
Information Society.
Working with national governments all over the world through its national committees, the
ICC's activities cover a broad spectrum: for example, providing arbitration and dispute resolution, making the case for open trade and the market economy system, advocating business selfregulation, fighting corruption, and combatting commercial crime. Significant contributions of
the ICC include
• the ICC Court of Arbitration- the longest-established ICC institution and the world's
leading body for international commercial arbitration;
• the Uniform Customs and Practice for Documentary Credits (UCP) - the common rules
that enable international banks to finance billions of dollars' worth of world trade each
year;
• Incoterms- the standard international trade definitions commonly used in international
contracts; and
• business self-regulation of e-commerce-the codes developed by business to establish
international norms in this relatively new business area.
Organisation for Economic Co-operation and Development
The Organisation for Economic Co-operation and Development (OECD) is an intergovernmental organization comprising 36 countries that work together to address the economic, social, and
environmental challenges of the globalizing world economy. The OECD has played a prominent
role in fostering good governance in the public service and corporate activity, and it is well
known for its individual country surveys and reviews. Its membership is limited to countries
having a commitment to a market economy and a pluralistic democracy. It began in 1948 as the
Organisation for European Economic Co-operation (OEEC), which was established by western
European nations to implement the provisions of the Marshall Plan to aid in the recovery of
Europe after the Second World War. Membership was expanded to include the United States,
Canada, and Japan, and, in 1961, it became the OECD. As the world economy changed and
expanded, so too did the work of the OECD. At present, its work encompasses the following
areas:
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•
•
•
•
•
•
•
•
•
•
•
•
economics;
statistics;
the environment;
international law;
development;
public governance;
trade;
financial affairs;
taxation;
science, technology, and industry;
employment and social cohesion;
education; and
agriculture.
The OECD's original focus has also broadened to include extensive contacts with nonmember countries, and it now maintains co-operative relations with at least 100 such countries.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizations
Present members of the OECD are the following:
Australia
Austria
Belgium
Canada
Chile
Czech Republic
Denmark
Estonia
Finland
France
Germany
Greece
Hungary
Iceland
Ireland
Israel
Italy
Japan
Korea
Latvia
Lithuania
Luxembourg
Mexico
Netherlands
New Zealand
Norway
Poland
Portugal
Slovak Republic
Slovenia
Spain
Sweden
Switzerland
Turkey
United Kingdom
United States
The OECD's Guidelines for Multinational Enterprises, first issued in 1976 and with the most
recent version published in 2011, are a highly persuasive and widely adopted set of recommendations for multinational enterprises operating in or from 44 adhering countries. The guidelines
provide non-binding principles and standards for responsible business conduct in a global context
consistent with applicable laws and internationally recognized standards. The guidelines provide
a comprehensive list of recommendations on how foreign direct investment should be conducted
with respect to human rights; employment and industrial relations; the environment; combating
bribery, bribe solicitation, and extortion; consumer interests; science and technology; competition;
taxation; and other topics. Although they are not legally binding on multinational corporations,
the guidelines promote self-enforcement through transparency, reporting, and internal controls.
GlandG20
Although the G7 and G2031organizations are not supported by a transnational administration,
as are all the other organizations we have examined, they are nevertheless important and influential in the current global business environment.
The G7 began as the G6 and has its roots in the 1973 oil crisis and the subsequent global
recession. France, West Germany (as the Federal Republic of Germany was known at the time),
Italy, Japan, and the United Kingdom, under the leadership of the United States, agreed to an
annual meeting to be organized under a rotating presidency. Canada joined in 1976, and in 1991,
following the end of the Cold War, Russia began meeting with the G7. The G7 became the GS at
the instigation of then US President Clinton as a gesture of appreciation for Russia's pursuit of
economic reform, although its membership was suspended indefinitely in 2014 following Russia's annexation of Crimea.
The country holding the presidency of the G7 hosts a series of ministerial-level meetings
and a three-day summit each year at which topics of current concern, such as global warming,
poverty in developing countries, and world health problems, are discussed. Because these topics
are controversial, there is much criticism of the G7, described by some as an unofficial "world
government:' The annual summits are often the focus of anti-globalization protests.
The G20 is an informal forum that seeks to promote an open and constructive dialogue
between industrial nations and emerging-market countries on issues that relate to the international monetary and financial system. It also provides a platform for discussion of current
international economic issues. G20 members develop a common position on issues that relate to
international currency and financial systems, and they foster the establishment of internationally
recognized standards and practices to promote transparency of fiscal policy, as well as policies to
combat money laundering and the financing of terrorism.
Cold War: following the Second World War, the state of politica l tension and military rivalry between the United States and the
Soviet Union and their respective al lies
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
The genesis of the G20 occurred in Berlin in 1999. The G20 n ow brings together industrial
and emerging-market countries from all regions of the world. Together, the member countries
represent nearly 90 percent of global gross national product, 75 percent of world trade, and two
th irds of the world's population. The G20, like the G7, has no permanent staff of its own. Like
the G7, the current chairing country coordinates the group's work and organizes its meetings.
Current members of the G20 are th e following:
Argentina
Australia
Brazil
Canada
China
European Union
France
Germany
India
Indonesia
Italy
Japan
Korea
Mexico
Russia
Saudi Arabia
South Africa
Turkey
United Kingdom
United States
To ensure that the G20's activities are closely aligned with those of the Bretton Woods Institutions, the managing director of the IMF and the president of the World Bank, as well as the
chairpersons of the International Monetary and Financial Committee and of the Development
Committee of the IMF and World Bank, participate in its deliberations, as do experts from
private-sector in stitutions.
World Economic Forum
Established in 1971, the World Economic Forum is an international organization for publicprivate cooperation. Any entrepreneur would be wise to pay attention to th e World Economic
Forum and the policies and agenda items deliberated at the forum's meetings h eld throughout
the year. The meetings are attended by corporate executives, heads of state, civil society leaders,
social entrepren eurs, experts an d academics, representatives of international organizations, and
youth and technology innovators with th e goal of collaborating and finding solutions to global
security issues, problem s of th e global commons, and the challen ges of the fourth industrial
revolution. The forum also h as world-class research capabilities that produce invaluable data on
some of the world's most significant issues; the data is made available to the public. For example,
the forum publishes the influential Global Competitiveness Report32 (published since 1979 and
now covering 138 countries) and th e Global Gender Gap Report.33
CRITICAL ANALYSIS: Business Law and Ethics
Alleged Breaches of Human Rights Law by a Canadian Mining Company: Araya v Nevsun
Resources Ltd, British Columbia Court of Appeal Case34
Background to the Lawsuit
A Va ncouver-based mining compa ny, Nevsun Resources Ltd
(Nevsun), bui lt an open mine to extract the significant gold,
silver, zinc, and copper deposits from a remote area in t he small
East African country of Eritrea. With in the fi rst four years of
operation, Nevsun was generating $700 million in profits from
its mine. The Erit rean government holds a 40-percent stake in
the operation and Nevsun, through its foreign subsidiaries, the
remai ning 60 percent. Since 1993, t he Eritrean government
has been run by a dictator, President Isaias Afewerki. The UN
and the Human Rights Watch allege that President Afewerki's
regime has committed crimes aga inst human ity by using
conscripted military labour, akin to slavery, to build and operate the mine run by Nevsun's subsidiaries.
The Lawsuit
In 2014, the plaintiffs, a group of Eritrean refugees, commenced
an action in British Columbia. Among the plaintiffs' claims are
that Nevsun violated customary internat iona l law (CIL) by
knowingly aiding or permitting forced labour, slavery, torture,
and other crimes against humanity in the process of building
the mine in Eritrea. The plaintiffs seek damages in Canada for
the breach of CIL. This is a novel claim. Nevsun fai led before
both the BC Supreme Court and Court of Appeal to have the
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1
courts strike out this portion of the claim on the basis that
this was not a recognized private cause of action in Canada.
The Court of Appeal permitted the action to proceed to trial.
However, Nevsun sought and was granted leave to appeal to
the Supreme Court of Canada (SCC) . The SCC heard the case
in January 2019 and will decide, among other issues, whether
for the first time the Canadian common law should recognize
a cause of action for damages based on alleged breaches of
CIL norms.
Extracts from the Judgment from British Columbia Court
of Appeal
[186] In 2014, the question reached the Supreme
Court of Canada in Kazemi. 35 The Court held that
there was no obligation on signatories to the Convention Against Torture to create civil remedies for
torture committed outside their respective territorial jurisdictions ...
[187] Abella J. dissented, writing that an individual's
right to a remedy for violations of his or her human
rights is "now a recognized principle of international
law" (at para. 199) ...
Abella J. also found that on its face, Article 14 of
the Convention imposed an obligation on state parties
to ensure that all victims of torture from their countries
can obtain "redress and ha[ve] an enforceable right to
fair and adequate compensation" (at para 21 S) ...
[189] Nevsun contends, however, that corporations
such as itself are subjects of national law and "creatures of statute" that are not directly recognized as
actors in international law. In Nevsun's submission:
... As it stands, international law does not purport to regulate corporations directly, but may
oblige states to do so under their own nationa l
laws. Corporate liability for human rights violations is not yet recognized under any customary internationa l law ...
[190] The plaintiffs respond that Nevsun's objections to the concept of the adoption of Cl L into Canadian law rest on a fundamental misunderstanding
International Law and International Organizations
of Canada's constitutional arrangements and the relationship between criminal and tort law. They take
the position that peremptory norms of international
law are "automatically" incorporated into the domestic law of Canada in the absence of legislation to the
contrary ...
[191] Obviously, the plaintiffs continue, Canada has
not passed any laws that legalize slavery, torture,
or crimes against humanity. The fact that a b reach
of these norms is a crime under international law
does not mean it may not also be a civil wrong and
indeed, the plaintiffs note that s. 11 of the Criminal
Code, R.S.C. 1985, c. C-46,36 provides that no civil
remedy for an act or omission is suspended or affected by reason of the fact that it is also a criminal
offence.
Critical Analysis Questions
1. Why do you think the plaintiffs are suing Nevsun in
Canada and not Eritrea?
2. What are the possible ramifications for companies
should a new, private cause of action for breaches of
norms of customary international law become part of
the Canadian common law?
3. What is one way discussed in the chapter that Canadian
companies can be held accountable for their operations
abroad? Can you think of any other ways?
4. What ethical obligations does Nevsun have when
operating abroad? Are the ethical obligations the same
domestically? Why or why not?
5. How can companies ensure they are not subject to
lawsuits for breaches of customary international law?
6. Do you consider this case to be one of international
public law or private law or both? Why?
7. Should foreign subsidiaries of Canadian corporations be
subject to Canadian law? Why or why not?
8. What role, if any, should Canadian (1) government, (2)
corporations, and (3) NGOs play with respect to human
rights internationally?
9. Access the Supreme Court of Canada website and
revi ew its Nevsun decision. What is the main take-away
from the decision?
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
CHAPTER SUMMARY
•
In th is chapter, we discussed:
Why it is necessary for all businesses to possess a current
knowledge of the global business environment.
By understanding the legal underpinnings of international trade, it is possible to better assess risks,
understand the "levers of power," and make strategic
How international agreements and treaties are created.
•
decisions.
The characteristics of law and what international law
is-and is not.
•
•
A law is a rule that can be enforced by the courts.
Domestic and international laws are subdivided into
public law and private law.
Public international law regulates relations among
nations.
Private international law regulates relations among individuals in different states.
Main sources of international public law, in order of importance, are treaties and conventions, international
customary law, general principles of law recognized by
civilized nations, and judicial decisions and teachings
of various nations.
International law is enforced through negotiation, reciprocity of retorsions and countermeasures, arbitration
and other treaty dispute resolution provisions, collective action, naming and shaming, and direct action.
•
A treaty is a binding agreement between two or more
states.
This is the process of treaty creation: national governments negotiate treaty terms; text is drafted for the
proposed treaty; signing a t reaty shows that a country
will consider the treaty; once ratified by a specified
•
•
number of the governments, a treaty comes into force.
A treaty regulates relations only among countries that
have ratified it and passed domestic legislation.
In Canada, treaty-making authority lies exclusively with
the federal executive branch of government .
The history, characteristics, and purpose of some wellknown international organizations and agreements, and
their limitations.
•
The United Nations and other international organizations
contribute to the formulation of international law.
How international law is enforced and implemented.
International law is usually followed by most states
most of the ti me.
REVIEW QUESTIONS
1. Why is there some debate as to whether international
law is really law?
8. What is the sign ificance of a country ratifying a treaty
or convention?
2. What is the difference between public international
9. What is meant by "sovereignty;' and what is the
law and private international law?
3. Why is the International Court of Justice of little
practical significance for private businesses?
4. What are the acknowledged sources of public
international law?
5. Why is private international law sometimes described
as the "conflict of laws"?
6. What is the difference between a treaty and a
convention?
7. Wh at is the significance of a country signing a treaty
or convention?
significance of this concept in the context of treaties
and other international ag reements?
10. Describe the different requ irements in Canada and
the United States with respect to ratification of a
treaty. How does this reflect the d iffering attitudes
of the two countries toward international
obl igations?
11. You operate a business in the dairy industry. What
branch or branches of government would you likely
try to influence with respect to a potential
international trad e deal?
12. What is th e sign ificance of soft law?
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizat ions
13. Which international law enforcement measure is the
most effective?
14. What are peremptory norms in international law?
15. Describe the mandate and the present organizational
set-up of the UN.
16. Describe the work of UNCTAD and UNCITRAL.
17. What are the Bretton Woods Institutions, and what is
the role of each of these?
25
18. Is the International Chamber of Commerce an
intergovernmental organization? Why was it founded
and what are some of its achievements?
19. Describe the history and purpose of the OECD. What
is it best known for?
20. What is the G7? How is it structured and how does it
achieve its mandate?
21. Describe the origin and purpose of the G20. Go
on line to <https://www.g20.org> and explain the
impact the G20 has.
NOTES
1. Sir William Blackstone, Commentaries on the Laws of
England. 4 vols. (Oxford: Oxford at the Clarendon
Press, 1778).
2. Mitchell Mcinnes et al, Managing the Law: The Legal
Aspects of Doing Business (Toronto: Prentice Hall, 2003).
3. The Central Intelligence Agency, The World Factbook
under"Government :: World" (3 June 2019), online:
<https://www.cia.gov/ library/ publications/the-worldfactbook/geos/ xx.html>.
4. R v Hape, 2007 sec 26.
5. Statute of the International Court ofJustice, Can TS 7
1945 (entered into force 18 April 1946).
6. United Nations Human Rights, Office of the High
Commissioner (New York and Geneva, 2011 ). on line
(pdf}: <https://www.ohchr.org/ Documents/
Publications/ GuidingPrinciplesBusinessHR_EN.pdf>.
7. "The Government of Canada Brings Leadership to
Responsible Busin ess Conduct Abroad" (17 January
2018), online: Global Affairs Canada <https://www
.canada.ca/ en/g lobal-affairs/ news/ 2018/ 01 / the_
government_ofcanadabringsl eadershiptoresponsible
businesscond.html>.
8. Elliot Abrams, "Saudi Arabia and Canada" (7 August
2018), online: Council on Foreign Relations <https://
www.cfr.org/ blog/ saudi-arabia-and-canada >.
9. Ibid.
10. Ibid.
11. Chrystia Freeland, "Very alarmed to learn that Samar
Badawi, Raif Badawi's sister, has been imprisoned in
Saudi Arabia .. ." (2 August 2018 at 7:46), on line:
Twitter @cafreeland <https://twitter.com/cafreeland/
status/ 1025030172624515072 >.
12. Sylvan us Kwaku Afesorgbor, "The Major Trade
Implications of the Canada-Saudi Arabia Spat;'
National Post (14 August 2018), online: <https://
nationalpost.com/ pmn/ news-pmn/
the-major-trade-implications-of-the-canada-saudiarabia-spat>.
13. Andy Blatchford, "U.S. Hits Back w ith WTO Challenge
Against Canada's Retaliatory Tariffs;' CTV News (16 July
2018), online: <https://www.ctvnews.ca/ canada/
u-s-h its-ba ck-with-w to-ch a11 eng e-ag ai nst-ca nada-sreta 1iatory-ta riffs- 1.4015066>
14. Ibid.
15. United Nations Security Co uncil, Subsidiary Organs,
2019 Facts Sheets (8 February 2019), online (pdf):
<https://www.un.org/ securitycouncil/ sites/www.un
.org.securitycouncil/files/ subsidiary_organs_
factsheets.pdf> .
16. Ibid.
17. Fisheries and Oceans Canada,"Canada's Fisheries Fast
Facts 2018" (8 March 2019), on line: Government of
Canada Government of Canada < https://www.dfompo.gc.ca/ stats/facts-l nfo-18-eng.htm>.
18. Fisheries and Oceans Canada, New s Release,
"Fisheries and Oceans Canada Releases 201 7 Trade
Figures: Canadian Fish and Seafood Expo rts Continue
to Grow" (9 March 2018), on line: Government of
Canada <https://www.canada .ca/ en/fisheries-
© [2020) Emond Montgomery Publications. All Rights Reserved.
26
Part I
Public International Law
oceans/ news/ 2018/ 03/ fisheries-and-oceanscanada-rel eases-201 7-trade-fig u res-ca nad ia n-fisha n d-seafood-exports-conti nu e-to-g row.htm I>.
19. Mike Blanchfield, "Canadian Minister Calls for G7
27. United Nations, on line: < https:// www.un .org/
sustainabledevelopment/ development-agenda/>.
28. Business & Sustainable Development Commission,
Better Business, Better World: Executive Summary
'Naming and Shaming' on Ocean Overfishing;' National
(January 2017), online (pdf): < http://report
Post (17 April 2018), online: < https://nationalpost
.businesscommission.org/ uploads/ ExecutiveSummary.pdf> .
.com/ pmn/news-pmn/canada-news-pmn/
canadian-minister-calls-for-g7-naming-and-shamingon-ocea n-overfish ing >.
29. United Nations Commission on International Trade
Law (New York, 2007), online (pdf): < https://www
20. "Discovery Channel Follows Crusaders of the Sea
Shepherd Conservation Society in Whale Wars:'
on line: Discovery Channel <https://press.discovery
.com/ asia-pacific/ dsc/ programs/ whale-wars> .
21. Mette Eilstrup-Sangiovanni & Teale N Phelps
Bondaroff, "From Advocacy to Confrontation: Direct
Enforcement by Environmental NGOs" (2014) 58
International Studies Quarterly 348, DOI: < 10.1111 /
.uncitral.org/ pdf/ english/ texts/ electcom/06-57452_
Ebook.pdf>
30. United Nations Commission on International Trade
Law (New York, 2005), online (pdf): < https://www
.uncitral.org/pdf/english/texts/insolven/05-80722_
Ebook.pdf>
31. Online: <http://www.g20.org>
32. World Economic Forum, online: < https://www
isqu.12132>.
.weforum.org/ reports/ the-global-competitveness-
22. Ibid.
report-2018 >.
23. Laura Barnett, "Canada's Approach to the TreatyMaking Process" (5 August 2018), on line: Library of
Parliament < https://lop.parl.ca/sites/ PublicWebsite/
default/en_CA/ ResearchPublications/ 200845E>.
33. World Economic Forum, online: < https://www
.weforum.org/ reports/ the-global-gender
-gap-report-2018>.
34. 2017 BCCA 401.
24. RSBC 1996, c 236.
25. United Nations (New York, 2010), online (pdf):
< https://www.uncitral.org/ pdf/ english/ texts/ sales/
cisgN1056997-CISG-e-book.pdf> .
35. Kazemi Estate v Islamic Republic of/ran, 2014 SCC 62,
[2014] 3 SCR 176.
36. RSC 1985, c C-46.
26. United Nations, on line: <https://www.un.org/
millenniumgoals>.
FURTHER READING
Anthony Aust, Modern Treaty Law and Practice, 3rd ed
(Cambridge: Cambridge University Press, 2017).
Elhanan Helpman, Understanding Global Trade
(Cambridge: Harvard University Press, 2011 ).
Alexander Orakhelashvili, Akehurst's Modern Introduction to
International Law, 8th ed (Abingdon: Routledge, 2018).
Paul B Stephan & Julie A Ro in, International Business and
Economics: Law and Policy, 4th ed (Durham, NC:
Carolina Academic Press, 2010).
Michael Trebilcock, Robert Howse, & Antonia Eliason, The
Regulation of International Trade, 4th ed (London:
Routledge, 2013).
WEBSITES
Canada's G7 Website: < https://www.international.gc.ca/
world-monde/ international_relations-relations_
i nternationales/ g 7/i ndex.aspx?lang=eng >
Group of 20 (G20): < http://www.g20.org >
International Chamber of Commerce: < http:/ / www.
iccwbo.org >
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 1 International Law and International Organizations
27
International Court of Justice: <http://www.icj-cij.org >
International Law Association: <http://www.ila-hq.org >
United Nations: <http://www.un.org>
International Monetary Fund: <http://www.imf.org >
United Nations Commission on International Trade Law:
<http://www.uncitral.org>
United Nations Conference on Trade and Development:
<http://www.unctad.org>
Organisation for Economic Co-operation and
Development: <http://www.oecd.org >
United Nations Audiovisual Library of International Law:
United Nations Development Programme: <http://www
.undp.org>
United Nations Environment Programme: <http://www
<http://legal.un.org/ avl/ i ntro/welcome_avl .htm I>
.unep.org>
World Bank: <http://www.worldbank.org>
LIST OF CASES
Araya v Nevsun Resources Ltd, 2017 BCCA 401
Hape, R v, 2007 sec 26
Kazemi Estate v Islamic Republic of Iran, 2014 SCC 62, [2014]
3SCR176
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand
• the rules governing international trade and where they come from
• how the WTO was established and its purpose
• the fundamental rules of the WTO
• how fair competition is protected in the WTO
• the exceptions to the fundamental WTO rules
• tariffs and non-tariff barriers
• how trade in services differs from trade in goods
• intellectual property protection provided by the WTO
• the WTO dispute-settlement system
• the achievements and challenges of the WTO
Introduction 29
Rules Governing InternationalTrade and Where They Come From 29
The Establishment of theWorldTrade Organization 30
The Fundamental Rulesof GATT 1994 32
Fair Competition 36
WTO Exceptions 40
WTO Rules Relatingto Trade inServices 49
Protectionof Intellectual Property 50
EnsuringTransparency:Trade Policy Reviews 50
Dispute Settlement in the WTO 51
WTO Achievementsand Challenges 53
Chapter Summary 56
ReviewQuestions 56
Notes 57
Further Reading 58
Websites 58
List of Cases 59
Introduction
The exchange, purchase, and sale of goods and services among countries is called international
trade. International trade is not new; it dates back at least 10,000 years to the domestication of
animals and the invention of ships.
Countries are not self-sufficient and cannot produce everything to satisfy their own needs.
Trading allows countries access to a greater variety of goods and services, often at lower prices
or of better quality. International trade is central to the global economy and global development.
Although international trade is not new, the rules governing it are modern.
While Chapter 1 dealt with international law generally, this chapter discusses the foundational legal rules that govern international trade and the organization that oversees them.
Rules Governing International Trade and Where They Come From
The foundation for today's multilateral trading system can be traced back to the end of World
War II, when it became evident to world leaders and economists that the Great Depression and,
to som e degree, the Second World War were caused by protectionist trade policies that proliferated around the globe during the 1930s. At that time, a number of dominant trading blocs had
developed: the British Empire, the French Union, the Japanese Co-Prosperity Sphere, Germany
29
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
and Eastern Europe, and the United States and Latin America. Each bloc sought to restrict and
even eliminate trade with the rest of the world by imposing exorbitant tariffs on goods.
The early supporters of a multilateral rule-based trading system believed that open markets
and full competition were the best assurance against future hostilities on the scale of the two
world wars. To address the state of the post-war economy, boost international trade, and ensure
long-lasting peace, the United States, Canada, the UK, France, and other states came together to
create an international organization and to negotiate global rules that would multilateralize trade
and reduce trade obstacles. The United States spearheaded the effort to create the International
Trade Organization (ITO) and formalize a multilateral treaty codifying trade rules.
Although the ITO as proposed by the United States never came into existence, the General
Agreement on Tariffs and Trade (GATT), a multilateral treaty signed by 23 countries in 1947,
became the basis for the international trading system until the formation of the World Trade
Organization (WTO) in 1995.
There were two major roles anticipated for the GATT at its creation. The first was simply to
develop a code of rules governing trade relations among participating countries, and the second
was to provide a forum where countries could discuss trade disputes and address trade-related
issues. There was no overriding supranational enforcement mechanism in the GATT 1947 and
no international superstructure to punish countries that did not adhere to the rules. The only
mechanism to ensure compliance with the GATT 1947 was the desire of member countries to
make the agreement work and the economic leverage they could employ to retaliate against any
member that violated the rules.
Between 1947 and 1995, the GATT 1947 contracting states would meet periodically to negotiate new trade rules and tariff reductions on goods, allow accession to the GATT 1947 by other
states, and resolve disputes among the contracting states. The major negotiating sessions of the
GATT 1947, and later the WTO, are referred to as "rounds:' For 47 years the GATT 1947 evolved
through additional agreements negotiated during the rounds, as well as schedules, decisions,
waivers, and a growing number of signatories. It remained a contractual arrangement, however,
whereby contracting parties could pick and choose the agreements they acceded to, and not a
formal organization with clear and consistent rules applicable to all its members.
The Importance of Rounds in the Multilateral Trading Environment
Due to the complexity, detail, and importance of the issues discussed, rounds extended over
several years. The Uruguay Round, the most important round, lasted from 1987 to 1993.
The goals for the Uruguay Round were ambitious and were developed at a time when the
multilateral trading system established by the GATT 1947 was in serious jeopardy. Although
enormous progress had been made on reducing tariff barriers, the world trading system was
threatened by the growing use of protectionist measures, the proliferation of bilateral and multilateral trade agreements, and the increasing use of unilateral measures by members. As world
trade expanded, business in all countries was exposed to greater competition, and trade policy
had an increasingly direct effect on voters as well as on companies and their employees. Hopes
for a successful outcome of the Uruguay Round were not high.
The Establishment of the World Trade Organization
In December 1993, when world had all but abandoned hope for a successful outcome of the Uru guay Round, the parties reached an agreement to create the World Trade Organization, which
would have its headquarters in Geneva, Switzerland. The Agreem ent Establishing the WTO
(WTO Agreement) was formally signed by more than 100 countries in Marrakesh, Morocco, on
tariff: aduty or taxlevied by government on goodsenteringacountry
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
April 15, 1994, and came into effect on January 1, 1995. At the time of writing, the WTO has 164
state members, accounting for 98 percent of global trade.1
The WTO members commit to trade liberalization as a means to achieving numerous objectives listed in the preamble of the WTO Agreement-namely, "raising standards ofliving, ensuring
full employment and a large and steadily growing volume of real income and effective demand,
and expanding the production of and trade in goods and services, while allowing for the optimal
use of the world's resources in accordance with the objective of sustainable development:' 2 In part,
to achieve these objectives, the WTO members agree to "[enter] into reciprocal and mutually
advantageous arrangements directed to the substantial reduction of tariffs and other barriers to
trade and to the elimination of discriminatory treatment in international trade relations:'3
The WTO aims to help its members achieve the objectives listed in the WTO Agreement
through international trade cooperation, in particular as a forum for
• negotiating the reduction or elimination of obstacles to trade;
• administering and monitoring the application of the WTO's agreed rules;
• monitoring and reviewing the trade policies of member states, as well as ensuring transparency of regional and bilateral trade agreements;
• settling disputes among members regarding the interpretation and application of the
agreements;
• building capacity of developing country government officials in international trade matters;
• assisting the process of accession of some 30 countries that are not yet members of the
organization;
• conducting economic research and collecting and disseminating trade data; and
• explaining to and educating the public about the WTO, its mission, and its activities.
The WTO is a member-driven organization, and all members' voices carry equal weight. The
WTO requires that nearly all agreements negotiated during the rounds are adopted by consensus
among all member states.
The WTO as a Bundle of Agreements
Countries acceding to the WTO must adopt all the agreements reached in the Uruguay Round
as a bundle.4 This is a list of approximately 60 agreements, annexes, decisions, and understandings. Dealing with the agreements is easier if they are viewed as one umbrella agreement: the
WTO, with five major aspects of agreement relating to
1. trade in goods, found in Annex lA;
2. trade in services, found in Annex lB;
3. intellectual property protection, found in Annex l C;
4. dispute settlement, found in Annex 2; and
5. the review of members' trade policies, found in Annex 3.
The WTO Agreement, as an umbrella agreement, incorporates by reference numerous other
integral agreements, which are attached as annexes (see Figure 2.1). Annex lA is composed of
the General Agreement on Tariffs and Trade (GATT) 1994, which is in itself composed of GATT
1947 together with a series of decisions and waivers adopted during the 47 years of its existence.
Each state must adopt the entire bundle of agreements to become a WTO member and
does not have the option of acceding to some and rejecting others it finds less acceptable. This
is the principle of a "single undertaking:' It is also important to note that these agreements
are not static- they are renegotiated from time to time, and new agreements may be added.
It is expected that the Doha Round of negotiations, which began in 2001 and has yet to be
concluded as of time of writing 2019, will result in a number of changes and additions to the
current agreements.
© [2020) Emond Montgomery Publications. All Rights Reserved.
31
32
Part I
Public International Law
FIGURE 2.1
The WTO Agreement, as an Umbrella Agreement
GATS
+
+
Other goods-related
agreements (SPS, TBT,
TRIMs, Rules of Origin,
Subsidies and
Countervailing
Measures, etc.)
Services
Annexes
+
+
Members' schedules
of commitments
and MFN exemption
Dispute
Settlement
Understand ing
Trade Policy
Review Mechanism
re
>
QJ
c
QJ
1.9
.!:
i:'
·.;::;
c
Members' schedules of
concessions
and annexes
QJ
0
~
w
I
I-
The WTO agreements represent a significant advance over the GATT 1947. For example,
the WTO is a permanent institution with a wider agenda covering trade in services, intellectual
property, and investment as well as greater enforcement powers through strengthened disputesettlement mechanisms.
Since GATT 1947 is part of GATT 1994, and GATT 1994 is an integral part of the WTO,
a familiarity with the philosophy and provisions of the GATT 1994 is fundamental to understanding the regulation of modern international trade.
The Fundamental Rules of GATT 1994
At the time the GATT 1947 was negotiated, the parties agreed on three basic rules that became
the foundation of the trading rules and remain in the WTO today. These are the binding
concessions rule, the most-favoured-nation (MFN) rule, and the national treatment rule. The
goal of this section is to provide an understanding of why these rules are critical to international
trade and how they apply in practice.
Article II of GATT 1994- Tariffs and the Binding Concessions Rule
Tariffs, also called "custom duties;' are a type of tax or charge imposed by a government on goods
imported into a country. States use tariffs to protect domestic industries and raise revenue for the
binding concessions rule: under GATT/WTO rules, the rule that onceacountry lowers atariff, it becomes "bound" and thecountry
is obligated not to increase the tariff above the negotiated bound level
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
government. States are sovereign and are empowered to impose tariffs on imported goods as they
desire. This leads to fluctuating, inconsistent, and often very high tariffs on goods worldwide-a
major obstacle for businesses that want to access international markets. International treaties
are created to prevent this impediment and limit states' ability to arbitrarily increase tariffs. The
initial goal of the GATT 1947 was to oversee the progressive lowering of tariffs in successive
rounds of reciprocal bargaining among GATT members.
The "reciprocity" principle underlies all WTO agreements, including the tariff concessions,
and makes tariff reductions acceptable to states. Each member state will grant tariff reductions or
removal of trade barriers in exchange for equal concessions by other states. Pursuant to Article
II of GATT 1994, once a WTO member lowers a tariff, it becomes "bound" and the country is
obligated not to increase the tariff on a given product. Article II states that the WTO members
shall not collect tariffs at the border at levels higher than the maximum level agreed to, which is
known as the maximum binding.
For example, a Canadian maple syrup producer who sells top-grade syrup wants to export
her product to Costa Rica, and a Costa Rican coffee producer wants to export his coffee to
Canada. Canada and Costa Rica are sovereign nations and could impose any tariff on any product, including maple syrup and coffee. Before the GATT 1947, Costa Rica and Canada could
collect 20-percent tariffs on the value of each maple syrup bottle and coffee bag one day and the
following week 100 percent and possibly even more. This would create a significant trade barrier
for the Canadian maple syrup exporter because she would not be able to sell her products to
Costa Rica due to the prohibitively high tariff she would have to pay on the value of each maple
syrup bottle. She would be limited to selling her product domestically and to countries that have
low or no tariffs on maple syrup, greatly reducing her market options. The Costa Rican coffee
vendor would face similar challenges in Canada and other countries with high tariffs on coffee.
As signatories to the GATT 1947 and later as members of the WTO, Canada and Costa Rica
have agreed to a progressive, reciprocal reduction and binding of tariffs, thus creating a more
stable trading environment for businesses.
The tariff concessions made by each member state are found in the schedules annexed to the
GATT 1994. They indicate tariff rates and also represent commitments not to increase tariffs
above the listed rates. Each member state must publish and provide its schedule of concessions
to WTO. These annexed schedules comprise more than 30,000 pages and list individual countries' commitments to cut and bind customs duty on specific categories of imported goods.
Countries can break these commitments, but only with great difficulty. They must negotiate with
countries that will be most affected by the change to the bound tariff and may have to provide
compensation for any trading partners' consequent loss of trade.
Article XI of GATT-General Elimination of Quantitative Restrictions
Article XI of GATT complements the binding concession rule of Article II of GATT. Article XI
reads in part
No prohibitions or restrictions other than duties, taxes or other charges, whether made effective
through quotas, import or export licenses, or other measures, shall be instituted or maintained ...
on the importation of any product ... or on the exportation or sale for export of any product.
A quota is a limit on the quantity of a product that may be imported and exported. Quantitative restrictions limit the quantity of imports or exports. Subject to certain exceptions, pursuant
to Article XI of GATT, WTO members, at their borders, cannot maintain quantitative restrictions
on imported goods; they can only maintain tariffs at levels below or at their binding levels. Quotas
and bans distort market access and defeat the purpose of negotiating tariff concessions.
bound tariff: atariff that acountry hasagreed not to increase or change
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
Public International Law
For example, the maple syrup producer would be dismayed to find out she could export only
ten cases of her product to Costa Rica at 0 percent. Although tariff concessions were made, Costa
Rica imposed a quota on the number of bottles of maple syrup that could enter the country.
Article XI of GATT helps the maple syrup producer when faced with such quotas.
Article I of GATT 1994-The Most-Favoured-Nation Rule
The most-favoured-nation (MFN) rule requires that tariffs be applied equally to all member
countries-that is, tariffs negotiated between any two GATT countries should be available to all
other member countries. Article I ofGATT 1994 reads in part
With respect to customs duties and charges of any kind imposed on or in connection with importation or exportation ... and with respect to the method of levying such duties and charges, and with
respect to all rules and formalities in connection with importation and exportation ... any advantage,
favour, privilege or immunity granted by any contracting party to any product originating in or destined for any other country shall be accorded immediately and unconditionally to the like product
originating in or destined for the territories of all other contracting parties.
BOX 2.1
Case Highlight
The EC Bananas Case
Case Name and Tri bunal
Decision
European Communities-Regime for the Importation, Sale and
Distribution ofBananas (WTO Appellate Body, May 1997)5
The requirements to import bananas from non-ACP countries
differed from and went substantially beyond those requi red
for importing ACP bananas, and bananas from non-ACP countries were not given the same treatment as those coming from
ACP countries. The EC was therefore in violation of the MFN
principle.
Facts
The European Communities (EC) had two importing regimes
for bananas: a preferent ial regime for bananas originating in
former European colonies in Africa, the Caribbean, and Pacific
states (ACP states) and another regime for bananas coming
from all other countries. ACP states were al lowed to import
t heir bananas duty-free up to a specified amount, after which
they could continue to import by paying d uty. Non-ACP countries were not permitted duty-free access, and higher d uty was
applied to bananas from t hese countries than to bananas from
ACP cou ntries when the number of bananas imported from
these count ries reached a specified amount.
A US-based corporation, Chiquita, whose Latin American
operations were adversely affected, lobbied the Clinton administration and Congress to pursue the case, with the result that
the United States, Ecuador, Guatemala, Honduras, and Mexico
requested a WTO panel in 1996. They alleged that the EC had
engaged in multiple violations ofWTO obligations, but principally of t he MFN rule.
Analysis/Application
The MFN principle is violated when an advantage is conferred
on some trading partners and not on others.
Aftermath
The aftermath of these decisions was acrimonious, with the
United States and Ecuador moving aggressively to impose
sanctions on t he European Communities and rejecting repeated alterations of the EC banana regime as inadequate.
Finally, in April 2001, the United States reached a settlement
with the European Communities whereby a tariff-only regime would be gradually adopted by the EC by 2006, more
than nine years after the original rulings of WTO violations
were made.
Issue
Do the EC's rules on importing bananas violate the MFN principle of the GATT 1994?
most-favoured-nation (MFN) rule: the rulethat atariff negotiated between any two GATT countriesshould beavailable to all
other member countries
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
In other words, each WTO member must treat the imports of another member the way they
treat the imports of their most favoured trading partner or partners. In the maple syrup example
above, if Canada lowered its tariff on Costa Rican coffee to 0 percent, it must extend the same
treatment to coffee from any other coffee-exporting country that is a member of the WTO.
Imposing a higher tariff on Colombian coffee than on Costa Rican coffee would be discriminatory and in breach of the MFN rule. The European Communities Bananas Case below illustrates
the way the MFN clause operates.
The MFN rule embodies the principles of non-discrimination and reciprocity, which are at
the very foundation of the modern trading system. In the context of trade rounds, the MFN rule
applies as a means to multilateralize the results of bilateral trade concessions among states. This
rule has had a significant effect on world trade and is legitimately credited with the substantial
progress made in lowering tariffs worldwide. It is, however, subject to a number of exceptions
incorporated in the GATT. Two of the most important exceptions are the special tariff rate
accorded to developing countries, referred to as the generalized system of preference (GSP),
and the acceptance of free trade areas and customs unions. These will be discussed later in this
chapter.
Article Ill of GATT 1994-The National Treatment Rule
The national treatment rule of Article III of GATT requires that once a good or service is legally
present in a country, it must receive the same treatment as a domestic good or service. There
must be exactly the same tax and regulatory treatment as is extended to local goods. Article III: 1
of GATT serves as a guiding principle of the whole Article III. Article III: 1 reads in part
The contracting parties recognize that internal taxes ... and laws, regulations and requirements should
not be applied to imported or domestic products so as to afford protection to domestic production.
Article III:4
The products of the territory of any contracting party imported into the territory of any other contracting party shall be accorded treatment no less favourable than that accorded to like products of
national origin in respect of all laws, regulations and requirements affecting their internal sale, offering for sale, purchase, transportation, distribution or use. [Emphasis added.]
The goal of Article III is to avoid protectionism once the product enters the country's borders.
States are not allowed to protect domestic goods by treating similar, imported goods differently
and less favourably than domestic goods.
Article III regulates like products only. This means that there is a breach of national treatment
only if an imported product is treated less favourably than a like domestic product. To determine
"likeness" between an imported product and a domestically produced good, a WTO tribunal
will look at the product's
•
•
•
•
physical characteristics;
end uses;
perception by consumers, including its cross-substitutability; and
tariff classification.
generalized system of preference (GSP): the system that provides that GATT members may give preferential treatment to
exports from developing countries
national treatment rule: the rule that once goods, services, or investment areimported into a member country, they must be
treated in the same way as domestic goods, services, and investment; thus internal taxes and health and safety standards must
be uniform for foreign and domestic concerns
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
If an imported product and a domestic product have similar physical characteristics, are used
the same way, are in the same market, and compete with each other, then they are like. Also, if it
is evidenced that consumers view the imported and domestic products as directly substitutable,
they are like for the purpose of Article III. If the imported and domestic products are like, then
the imported products cannot be treated less favourably than the domestic products with regard
to all domestic regulations, including taxation.
Japan-Taxes on Alcoholic Beverages II, 6 is one of the seminal decisions by the WTO Appellate Body on national treatment and the likeness criteria. In this case, Japan's domestic liquor
tax law was at issue, which imposed different tax rates on distilled alcoholic beverages. Whisky,
brandy, rum, gin, vodka and other spirits and liqueurs were in some cases taxed at rates seven or
eight times those imposed on the popular Japanese-distilled beverage called "shochu:' Shochu
is an alcoholic beverage distilled from potatoes, sweet potatoes, buckwheat, or other grains. It
averages a 25-to-30-percent alcohol content and is similar in other characteristics to vodka and
whisky. The United States, the European Communities, and Canada launched a complaint with
the WTO, alleging that the Japanese law taxed the locally produced shochu more favourably
than several other imported alcoholic beverages in contravention of the national treatment rule.
The WTO Appellate Body stated that "Article III obliges Members of the WTO to provide
equality of competitive conditions for imported products in relation to domestic products:'7 It
reviewed arguments presented by the parties to the dispute and concluded that imported vodka
and sochu are like products, are directly competitive and substitutable (based on clear evidence
like cross-price elasticity and consumer surveys), and that Japan afforded protection to domestic
shochu production in violation of Article III. Following the Appellate Body's decision, Japan
changed its domestic legislation and started applying the same tax rate on all alcoholic beverages. Subsequently, demand for imported products rose, and the United States, Canada, and the
European Communities increased their exports of alcoholic beverages to Japan.
Additional GATT Rules
Articles I, II, and III ofGATT are intended to provide greater market access to goods on a multilateral, reciprocal, and non-discriminatory basis and are the foundation of the modern international trading system. However, they are not the only provisions that make trading possible.
The following section will discuss additional GATT rules and exceptions to the rules:
•
•
•
•
•
•
Article VI-anti-dumping and countervailing duties;
Article XIX-safeguards;
Article XX-general exceptions;
Article XXI -security exceptions;
Article XXIV-regional trade agreements; and
Generalized System of Preferences (GSP), Enabling Clause, and Article XXXVI-special
treatment for developing countries
Fair Competition
The MFN and national treatment rules are meant to ensure fair and undistorted competition in
the markets. The rules on dumping and subsidies also aim to ensure fair conditions of trade. The
discussion below illustrates how governments can respond by charging additional import duties
or imposing quotas or bans to counter the effects of unfair trading practices.
Rules on Dumping, Subsidies, and Contingencies
Although binding tariffs must be applied equally to all trading partners by virtue of the MFN
rule, and quantitative restrictions are generally prohibited, there are also GATT provisions and
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
separate agreements that allow members to deviate from these rules in some circumstances.
These rules allow countries to act in a way that would normally break the WTO principles of
bound tariffs and non-discrimination by imposing tariff rates on a particular member that are
higher than the bound rate and/or higher than rates offered to other members or by imposing a
quota on a particular good. The three principal areas of exception are
• actions to protect domestic industry from dumping (a company selling at a price lower
than that in the home market);
• actions to counteract subsidies (government help given to producers, manufacturers, or
exporters); and
• actions, called safeguards, to temporarily limit imports to protect domestic industry
from a surge in imports.
Dumping and Anti-Dumping Actions
Dumping occurs when a company exports a product and sells it at a price lower than the price
it usually charges in its home market. Companies dump to gain a competitive advantage on like
products in the target market or to dispose of occasional surplus. Dumping is seen as an unfair
trading practice, as it can hurt domestic industry. The WTO Anti-Dumping Agreement allows
governments to act against dumping where there is genuine or material injury to the competing
domestic industry. There are three necessary elements that must be present to justify an antidumping action:
1. A demonstration that dumping is taking place: the fact that the product is being sold at
less than the normal price in the home market must be proven.
2. A calculation of the extent of the dumping. There are several methods to calculate a
product's usual value. The most common and simplest method is based on the price
in the exporter's domestic market. A second method looks at the price charged by the
exporter in another country. A third method involves a calculation based on the combination of the exporter's production costs, other expenses, and normal profit margins.
The margin on the product being dumped must be more than 2 percent of the export
price of the product in order for a government to take anti-dumping action. The comparison used to determine the dumping margin is between the price used in normal
market transactions in the importing country market and the export price.
3. A demonstration that the dumping is causing or is threatening to cause injury to the
domestic industry.
A detailed investigation must be conducted to evaluate all relevant economic factors affecting the state of the industry in question. If there is a connection between the dumping and
adverse effects or the threat of adverse effects on the industry, anti-dumping duties may be
imposed. Once these three requirements are met, the importing country may impose an extra
import duty on the particular product from the specified exporting country in order to bring
the price closer to the "normal value;' which is designed to remove the injury to the domestic
industry in the importing country. Member countries must promptly inform the WTO Com mittee on Anti-dumping Practices when they take preliminary or final anti-dumping measures.
dumping: selling at aprice lower than that in the homemarket
subsidy: government helpgiven to producers, manufacturers, or exporters
safeguard: atemporary limit of imports intended to protect domestic industryfrom asurge in imports
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Part I
BOX 2.2
Public International Law
What Is Dumping in the Eyes of the Law?
A Brazilian shoe manufacturer is able to manufacture ladies'
sandals in Brazil and sell them to a wholesaler in Brazil for a
price equivalent to Cdn$18. This price is sufficient for the manufacturer to cover all costs and recover his usual percentage of
profit. The same manufacturer sells the sandals to a wholesa ler in Canada. The extra cost of export to Canada (covering
packing, shipping, insurance, customs duties, and handling) is
Cdn$2 per pair. An equivalent pair of sandals manufactured in
Canada and sold to the wholesaler with the usual allowance
for profit to the manufacturer is $25, and appears in retail shoe
outlets priced from $30 to $35. Consider whether dumping has
occurred in the following examples.
Example 1. The Brazilian manufacturer sells the sandals to
the Canadian wholesaler for Cdn$ 17 per pair. These sandals
eventually appear in Canadian retai l shoe outlets priced
at $23.
Example 2. The Brazilian manufacturer sells the sandals
to the Canadian wholesaler for Cdn$20 per pair. These sandals eventually appear in Canadian retail shoe outlets priced
at $25.
Has dumping occurred in both example 1 and example
2? No, dumping has occurred in example 1 only. The test is
whether the imported product is being sold at a price lower
than that in its country of origin, not whether the good is later
sold at a price below that of goods manufactured in Canada.
Since in Brazil the sandals are sold for $18 and in Canada they
are sold for$ 17, dumping is occurring and the price difference
is greater than 2 percent.
Where countries disagree over the imposition of anti-dumping (AD) duties in a particular case,
they are encouraged to consult with each other and attempt to resolve their differences, but if
these consultations fail, they can resort to the WTO dispute-settlement procedure.
Subsidies and Countervailing Measures
A subsidy is any financial or commercial benefit given to a producer, manufacturer, or grower
by any government or public body of this kind. A benefit can involve a direct transfer of funds,
a government decision to forgo revenue otherwise due, the provision of goods or services other
than general infrastructure provided by the government, government payments to a funding mechanism, or government direction to a private body to take any of these actions. The
actions taken to counteract subsidies are similar in practice and principle to the actions taken
to counteract dumping. The difference is that countervailing duties are assessed to remedy the
actions of a foreign government, whereas anti-dumping duties are assessed to remedy the actions
of foreign companies.a
The WTO Agreement on Subsidies and Countervailing Measures discourages the use of subsidies and regulates the actions that countries may take to offset the effects of subsidies on goods
that are produced in other countries and then exported into their market. Many of the criteria
allowing countries to impose countervailing duties to offset the negative effects of subsidies
are parallel to those in the Anti-Dumping Agreement. Countervailing duties (CVD), which are
designed to offset the effects of a subsidy, may be charged only after the importing country has
conducted a detailed investigation. The Agreement on Subsidies and Countervailing Measures
sets out rules for determining whether a product is indeed being subsidized and criteria that
importing countries must consider when determining whether subsidized imports are causing injury to their own domestic industry. The Agreement also sets out the required procedures for initiating and conducting investigations to make these determinations, as well as rules
anti-dumping (AD) duties: duties imposed by an importing country over and above the usual import duties when goods are
being dumped into the importing country
countervailing duties (CVD): duties imposed by an importing country over and above the usual duties when the goods have
been subsidized by the country in which they are produced
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Chapter 2 The World Trade Organization
on implementing such countervailing measures. Under normal circumstances, countervailing
measures may be imposed for only five years.
For example, Canadian Pasta Manufacturers Association (CPMA) noted that pasta imports
from Turkey more than doubled in 2015 compared to 2014 and that Loblaws started selling
quality pasta from a Turkish supplier at a lower price than from domestic pasta manufacturers. This caused a spiralling price war where retailers sought to maintain or increase their sales
of pasta products and domestic pasta manufacturers were forced to lower prices or risk losing
sales and market share, intensifying the already aggressively competitive market. In December
2017, CPMA launched a complaint with the Canada Border Services Agency (CBSA) alleging
that Turkish pasta was being sold at unfair prices in Canada and the Canadian wheat manufacturing industry faced injury in the form oflost production, lost sales, price depression, loss
of employment, and reduced profitability. The CBSA imposed provisional anti-dumping and
countervailing duties on Turkish pasta products while investigating the allegations in CPMA's
complaint.
The CBSA and the Canadian International Trade Tribunal (CITT) are responsible for investigating allegations of dumping and subsidies pursuant to the Special Import Measures Act
(SIMA), domestic legislation that reflects the WTO's Agreement on Subsidies and Countervailing Measures. In June 2018, following a thorough investigation, the CBSA and CITT found
that Turkish dumping and subsidizing had injured the domestic pasta-retail sector, and antidumping and countervailing duties were maintained on Turkish pasta.
At the time of writing, there were 111 anti-dumping and countervailing measures in force,
covering a wide variety of industrial and consumer products, from steel products to pasta. These
measures help protect Canadian business and economy while addressing unfair trading practices in accordance with multilateral trading rules and in a transparent way.
Safeguards
Under WTO rules, a member country may restrict imports of a product temporarily if its domestic industry is injured or threatened with injury caused by a surge in imports. An import surge
may be an absolute increase in imports, or it may be a relative increase. An absolute increase
occurs when the amount of imported goods increases, while a relative increase occurs when
the amount of imported goods remains unchanged at the same time that the domestic market
shrinks. In the latter case, the importer is able to obtain a larger share of the market. As is the
case with anti-dumping and subsidy actions, industries or companies may request that their
government take safeguard action.9 In so doing, governments must first investigate whether
safeguard measures may be imposed. Investigations conducted for this purpose must be open
to the public, and authorities must consider whether imposing a safeguard measure would be
in the public interest.
The WTO Agreement establishes the criteria for determining whether serious injury has
occurred. These criteria include the absolute and relative rates and amounts of the increase in
imports; the market share taken by the increased imports; and any changes in the level of sales,
production, productivity, capacity, utilization, profits and losses, and employment of the domestic industry.
The Agreement also requires that safeguard measures be applied only to the extent necessary to prevent or remedy serious injury. Safeguard measures are not supposed to be targeted
at imports from a specific country; when quotas are imposed as a safeguard measure, they
Special Import Measures Act (SIMA): the Canadian federal legislation that setsout the Canadian rules and procedures for dumping, subsidies, and safeguards
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
Public International Law
may be allocated among those countries that supply that particular good. Safeguard measures
may be imposed for up to four years under normal circumstances but may be imposed for an
additional four-year period in the event the national authorities determine that an extension
of the measure is necessary and that the industry is adjusting as a result of the imposition of
safeguard measures.
The exporting country can seek compensation through consultations with the importing
country and, if this fails, may be entitled to take equivalent retaliatory action. Governments are
required to report each phase of their safeguard investigation and decision-making to the WTO's
Committee on Safeguards.
WTO Exceptions
There are situations in which members may suspend preferential treatment afforded to trade
partners. The allowable exceptions in Article XX are in connection to conservation and to the
protection of public morals, national treasures, and human and plant life. They are often invoked
to address public-policy concerns of the member governments.
General Exceptions
Articles I, III, and XI create the expectation on the part of WTO member countries that their
exports will be accepted by other WTO member countries; however, under WTO rules, it is
possible for a member country to act in a manner inconsistent with these rules and be excused
under the provisions of Article XX. Thus, these provisions come into play only once a measure
has been found to be inconsistent with other WTO rules. The text of the GATT Article XX provision states, in part,
Subject to the requirement that such measures are not applied in a manner which would constitute
a means of arbitrary or unjustifiable discrimination between countries where the same conditions
prevail, or a disguised restriction on international trade, nothing in this Agreement shall be construed to prevent the adoption or enforcement by any contracting party of measures
(a)
(b)
(f)
(g)
necessary to protect public morals;
necessary to protect human, animal or plant life or health; ...
imposed for the protection of national treasures of artistic, historic or archaeological value;
relating to the conservation of exhaustible natural resources if such measures are made
effective in conjunction with restrictions on domestic production or consumption.
In other words, WTO member states are allowed to deviate from their obligations in Article
I, II, II, and XI of GATT and other WTO agreements as long as the regulations, laws, or other
measures implemented with respect to the 10 policy concerns listed in Article XX are not disguised restrictions to trade, are justifiable, and do not evidence arbitrary discrimination between
countries in similar conditions. To prove arbitrary or unjustifiable discrimination, the member
must show three elements: (1) a measure must result in discrimination; (2) discrimination must
be arbitrary or unjustifiable in character; and (3) discrimination must occur between countries
where the same conditions prevail.
An example of this is the EC-Asbestos Case, 10 discussed in Box 2.3, where France was found
to be justified in prohibiting imports of Canadian asbestos and asbestos products, the WTO
Appellate Body having determined that the French measure was "necessary to protect human,
animal or plant life or health:'
While in the asbestos case the issue was human health, in the Shrimp-Sea Turtle Case I
(WTO Appellate Body, 1998) 11 the WTO discussed the exhaustible resource provision of Article
XX(g) (see Box 2.4).
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Chapter 2 The World Trade Organization
BOX 2.3
41
Case Highlight
Health Concerns About Asbestos
Case Name and Tribunal
European Communities- Measures Affecting Asbestos and
Asbestos-Containing Products (WTO Appellate Body, 2001) 12
Facts
France imposed a ban on asbestos and products containing
asbestos and prevented such products from being imported
into the country. France claimed that the ban was necessary
to protect human life or health and that it therefore qualified
under the Article XX(b) exceptions of the GATT. Canada was a
significant producer and exporter of asbestos and alleged that
the prohibition violated several articles of the GATT, such as
Article Xl-Prohibition of Quantitative restrictions, the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS Agreement), and the Agreement on Technical Barriers
to Trade (TBT Agreement).
Issue
Do asbestos and asbestos-containing products pose a risk to
human life or health, and is a ban on such products necessary
to protect human life or health?
Decision
The Appellate Body agreed with the WTO's Dispute Settlement Body (DSB) panel's assessment that the prohibition on
BOX 2.4
asbestos and asbestos-related products protects human life
or health and that no reasonable available alternative measure existed. The panel based its decision on the fact that all of
the scientific experts it consulted attested that asbestos and
asbestos-containing products posed a risk to human health
and that respected international organizations such as the
World Health Organization had recognized the carcinogenic
nature of these products in 1977. The Appellate Body also
agreed that the ban was necessary to protect human life or
health because France was seeking to halt the spread of asbestos-related health risks. Risk may be evaluated in either qual itative or quantitative terms, and members have the exclusive
right to set the level of health protection. The panel did not accept the suggestion by Canada that a controlled use of asbestos was a "reasonably available alternative measure" and could
be substituted for an outright proh ibition. It rejected Canada's
suggestion because the efficacy of such practices in preventing asbestos-related diseases could not be demonstrated.
Analysis/Application
WTO state parties may rely on the Article XX(b) exceptions for
protecting human life or health where there is evidence as to
the risk posed by the product; such a prohibition is necessary
in that there is no reasonably available alternative measure for
protecting human life or health.
Case Highlight
Shrimp-Sea Turtle Case I
Case Name and Tribunal
Issue
Shrimp - Sea Turtle Case I (WTO Appellate Body, 1998) 13
Was the US compliant with WTO rules in imposing import restrictions on shrimp caught in non-US waters using methods
that did not meet US standards?
Facts
The United States passed domestic legislation that banned the
importation of shrimp that had been caught by methods that
harmed sea turtles, and the US mandated that US-designed
Turtle Excluder Devices (TEDs) be used to catch any shrimp
destined for the US market. It had applied these restrictions to
its own industry and was seeking to restrict access to its market
as a way of ensuring that other countries would implement the
same or similar measures. In fact, the way in which the Un ited
States had applied the import restrictions was arbitrary: some
countries whose shrimping methods harmed sea turtles were
excluded, whereas others were not. As well, some countries received information about and assistance in conforming with
the techniques, w hile others did not. The case against the
United States was brought by India, Malaysia, Thailand, and
Pakistan, all significant shrimp-producing nations.
Ajuvenile hawksbill turtle caught in a fishing net.
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Part I Public International Law
Decision
The Appellate Body found that "a balance must be struck between the right of a Member to invoke an exception under Article XX and the duty of that same Member to respect the treaty
rights of the other Members'.' 14 The Appellate Body held that
the US import ban was related to the conservation of exhaustible natural resources and, thus, covered by Article XX(g) exception, but it could not be justified under Article XX, because
the ban constituted "arbitrary and unjustifiable"discrimination.
WTO's Appellate Body ruled against the US. It explained that
the US's legislation was unjustifiably discriminatory because of
its coercive effect on policy decisions made by India, Malaysia,
Thailand, and Pakistan. The measure also constituted "arbitrary"
discrimination because of the rigidity and inflexibility in its application and the lack of transparency and procedural fairness
in the administration of trade regulations.
In response to the first Shrimp- Sea Turtle decision, the United States changed its guidelines
to allow countries to apply for certification, even if they did not require the use of the USdesigned TEDs. If the harvesting country could demonstrate that it had implemented and was
enforcing a comparably effective regulatory program to protect sea turtles, its shrimp would not
be embargoed. The new rules also provided that the United States would negotiate as to what
measures would be accepted as comparably effective.
Malaysia brought a complaint to the WTO alleging that this measure was not sufficient and
that the United States had still failed to comply with the previo us ruling. In this Shrimp-Sea
Turtle Case II (WTO Appellate Body, 2001), 15 the WTO Appellate Body found in favour of the
United States, stating that the new US measure was sufficiently flexible to consider the specific
conditions prevailing in any exporting country and that such a measure was legal under GATT
Article XX.
This was a significant decision because it marked the first time that the imposition on an
importer of an environmental process or production method was declared WTO-compliant,
and because it pointed to the possibility that the WTO dispute-settlement process was adapting
to the realities of a world in which the general public does not support expanded trade at the
expense of the natural environment.
The WTO and Process and Production Methods
A process and production method (PPM) refers to the way a product is made. The acceptance of a process or production method in the Shrimp- Sea Turtle case leads us quite naturally
to a consideration of WTO rules that relate to product standards. It is necessary to distinguish
between product-related PPMs and non-product-related PPMs. This distinction is based on
how the PPM affects the final product. A non-product-related PPM leaves no trace in the final
product. For example, in the case of a wooden table, you cannot tell by examining the table or
testing the wood whether it was produced from sustainably managed timber. An example of a
product-related PPM is cotton grown using pesticides that have left some residue in the product
itself. WTO m embers agree that countries are within their rights under the rules to set criteria
for the way products are produced if the production m ethod leaves a trace in the final productin other word s, if they are product-related PPMs.
As we see from the cases discussed above, the assumption under traditional GATT/ WTO
rules was that trade barriers based on product-related PPMs were acceptable under national
process and production method (PPM): the way aproduct ismade or harvested
product-related PP Ms: standards set by an importing country based on the particular properties of the goods themselves; the
standards may thusapply equally toimported and domesticgoods
non-product-related PPMs: processing or production methods that are not discernible in the properties or characteristicsof
the finished product
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Chapter 2 The World Trade Organization
treatment provisions because they allow imports and domestic products to be treated in a similar way based on their particular properties. Non-product-related PPMs, on the other hand,
allow one country to dictate to another country how manufacturing or harvesting will be undertaken in another country's territory, which is a violation of national sovereignty and not in accordance with the basic philosophy of the GATT.
With respect to the WTO, the safest conclusion to reach is that non-product-related PPMs
are not prohibited outright. There is a limited acceptance of these controls, provided they can be
justified under GATT Article XX, depending on how overwhelming the evidence is of environmental damage and how fairly such rules are applied to all countries. If they are contrived to
protect domestic producers and workers from import competition, they will not be acceptable.
International Product Standards
Under Article XX of the GATT, governments may make trade-related rules in order to protect
human, animal, or plant life (or health), provided that such rules are neither discriminatory
to imported goods nor disguised protectionist measures. This provision has been preserved in
the WTO. There are, in addition, two specific WTO agreements that deal with food safety and
animal and plant health and safety and product standards.
The Sanitary and Phytosanitary Measures Agreement
The Sanitary and Phytosanitary Measures Agreement (SPS Agreement) 16 allows members to
take scientifically based measures to protect public health, provided that such measures are
based on internationally established guidelines and risk-establishment procedures. Such rules
may be applied only to the extent necessary to protect human, animal, or plant life (or health)
and must not arbitrarily or unjustifiably discriminate against imports.
Theoretically, countries may use measures that result in higher standards domestically than internationally if there is scientific justification, and they can to some extent apply the precautionary
principle. The precautionary principle is the concept of taking protective action before there is
complete scientific proof of risk. This is founded on the idea that protective action should not be
delayed simply because full scientific information is not available. There may be instances when
a sudden outbreak of an animal disease, for example, is suspected of being linked to imports, and
trade restrictions must be immediately imposed while further information about the source of the
outbreak and its extent is gathered. Article 3.3 of the SPS Agreement mandates a precautionary
approach that explicitly permits members to adopt SPS measures, which are more stringent than
measures based on the relevant international standards. Article 5.7 of the agreement allows members to take provisional measures when sufficient scientific evidence does not exist to permit
a final decision on the safety of a product or process. The provisional measure must take into
consideration available pertinent information. The member adopting the measure must seek
to obtain a more objective assessment of risk and must review the SPS measure within a reasonable
period of time.
The agreement also includes provisions on control, inspection, and approval procedures.
Technical Regulations and Standards
Technical regulations and standards are rules that exist to ensure that a product is produced
according to an established process or to conform to specific requirements. They are important
for maintaining consumer protection; however, these standards vary from country to country,
and, if developed in an arbitrary manner, they can serve as the basis for limiting trade and result
in a form of protectionism.
precautionary principle: authorization for taking protective action before thereis completescientific proof of risk
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Part I
BOX 2.5
Public International Law
Case Highlight
Limiting Imports of Hormone-Treated Beef
Case Name and Tri bunal
European Communities-Measures Concerning Meat and Meat
Products (Hormones) (WTO Appellate Body, 1998) 17
principles and procedures and, therefore, was in violation of
the SPS Agreement.
Analysis/Application
Facts
In response to concerns of EU citizens about the risks presented
by beef injected with natura l and synthetic growth hormones,
t he European Union imposed a ban on the import of such beef.
The United States challenged t he restrict ion under the SPS
Agreement, claiming t hat the panel reviewing t he issue evaluated the risk associated with the use of hormones for growth
promotion twice and the only evidence on record showed that
the studies looked at a "theoret ical framework for the systemic
analysis of such problems" but did not actually investigate and
eva luate t he problems t hat arise from the use of such hormones.
Issue
Did the EU's ban on hormone-treated beef comply with t he requirement s of the SPS Agreement ?
Decision
A risk assessment , as required by Article 5. 1, is "a scientific
process aimed at establishing the scientific basis for the sanitary measure a Member intends to take:' The ban was found
not to be based on a risk assessment that followed scientific
In order to rely on exceptions to the GATT under the Ag reement on Technical Barriers to Trade (TBT Agreement), member
states must rely on sound scientific principles and provide evidence of such.
Aftermath
The case raised difficult issues and required a consideration
of t he uncertainty presented by divisions of scientific opinion.
The European Union was unwilling to remove its restrictions on
t he import of the hormone-treated beef, with the result that the
WTO in 1999 authorized t he United States and Canada to collect penalties of more t han $100 million per year in extra duties
on European exports. The European Union brought the issue
back to t he WTO, where unprecedented open hearings were
held in 2005. The European Union argued that new scientific
evidence showed that the European Union complied with the
1998 WTO judgment. The impasse between the United States
and the European Union was settled by way of a negotiated
agreement in 2012 in which the European Union kept its ban
on importing hormone-treated beef but increased its quota for
importing beef from Canada and the United States.
The SPS Agreement was negotiated in the Uruguay Round to ensure that domestic technical regulations and product standards did not interfere substantially with international trade.
Interference with international trade can happen when a regulation is more trade-restrictive
than necessary to achieve a particular policy objective or if the policy objective the regulation
is designed to address is not legitimate. When the policy objective can be achieved through
less trade-restrictive means, the regulation will be considered more restrictive than necessary.
Legitimate policy objectives include national security requirements; the prevention of deceptive
practices; and the protection of human health or safety, animal or plant life (or health), or the
environment.
The agreement sets out a code of good practice for the preparation, adoption, and application of standards by governments and government bodies. Procedures used to decide whether
a product conforms with national standards must be fair and equitable, and methods that give
domestically produced goods an unfair advantage are not acceptable.
Countries must establish inquiry points and national notification authorities to answer questions about product regulation rules.
Security Exceptions
Under Article XXI, WTO members are entitled to deviate from the obligations of the GATT
when they consider that measures are necessary for the protection of their security interests.
Article XXI says "Nothing in this Agreement shall be construed ... to prevent any contracting
party from taking any action which it considers necessary for the protection of its essential
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
BOX 2.6
Case Highlight
A Dispute Over Product Description
Case Name and Tribunal
European Communities-Trade Description of Sardines (WTO
Dispute Settlement Body, 29 May 2002) 18
Facts
A European Commun ities regulation prevented Peruvian exporters from using the term "sardines" to describe their product. An international standard, Codex Stan 94, would have
allowed Peru to label their products with the term "sardines"
combined with the name of the country of origin, the geographical origin of the species, or the name of the species itself.
Issue
Was the European Communities' technical regulation more
trade-restrictive than necessary?
have been ineffective or inappropriate for the EC to use the
Codex Stan 94 requirements in meeting its legitimate objective
in ensuring market transparency, consumer protection, and fair
competition in labelling consumer products. Therefore, the EC
regulation was more trade-restrictive than necessary.
Analysis/Application
Where an existing international standard allows for a regulatory objective to be met, domestic standards that p lace
greater restrictions on importers will be found to be more
trade-restrictive than necessary. WTO state parties are expected to use existing international standards unless "their use
would be ineffective or inappropriate" 19 in allowing them to
fulfill a particular policy objective.
Decision
The Codex Stan 94 was a relevant international standard that
was not used as the basis for the EC regulation. It would not
security interests ... taken in time of war or other emergency in international relations:' 20 This
provision has limited WTO jurisprudence. However, it is clear that states may rely on this exception to protect essential security interests, foreseeably dealing with nuclear matter, traffic in
weaponry and dual-use products, time of war or national emergencies, and sanctions mandated
by the UN Security Council.
The protection of "essential security interests" enables WTO members to avoid substantive
WTO rules at their own discretion unless challenged by other members through the WTO dispute-settlement process. WTO members have been reluctant to use Article XXI, recognizing the
potentially negative, tit-for-tat repercussions from fellow members in case the exception is abused,
as illustrated by the reciprocal measures taken by Canada, the European Union, and Mexico in
response to the United States' unprecedented imposition of tariffs on steel and aluminum imports.
On June 1, 2018, the United States imposed tariffs of 25 percent on steel and 10 percent
on aluminum imports from Canada, the European Union, and Mexico, justifying the measure
on the grounds of Article XXI of GATT: national security. Canada, Mexico, and the European
Union consider these tariffs to be protectionist measures in disguise, to which GATT's security
exception does not apply. In response to the United States' measure, Canada, Mexico, and the
European Union retaliated with their own sets of tariffs on American goods and commenced
proceedings in the WTO dispute-settlement system.
Regional Trade Agreements
A free trade area is an arrangement whereby two or more countries agree to remove, substantially, all duties and restrictions of commerce among them but retain independent schedules
for tariffs and other barriers applicable to other countries. A customs union is similar in that,
free trade area: arrangement whereby two or more countries agree to remove substantially all tariff and non-tariff barriers between them whilemaintaining the existing individual tariffs against other countries
customs union: an agreement in which tariffs andtrade barriers areeliminated among member countries andacommonexternal
tariff is adopted
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substantially, all duties and restrictions on commerce among the participating countries are
removed, but members agree to adopt a common tariff that applies to all goods imported from
other countries (a common external tariff). Thus, each of these arrangements derogates from
the MFN principle insofar as their very essence is preferential treatment among members. The
GATT (and subsequently the WTO) adopts the approach that such agreements are acceptable
provided they are entirely trade creating-that is, they facilitate trade among members and do
not raise any new barriers for trade with non-members.
Regional trade agreements (RTAs) are separate agreements between states that are meant to
promote freer trade or grant trade preferences with respect to goods and services. Canada has
15 in-force RTAs at the time of writing, with NAFTA, CETA and CTPP being the most widely
known; they will be discussed in Chapters 3 and 4, respectively.
When members decide to form an RTA, they must advise the WTO membership and provide
a draft of their agreement to the Committee on Regional Trade Agreements (CRTA), which will
assess the compatibility of such RTA with the requirements of Article XXIV of the GATT. There
are currently 467 regional and multilateral trade agreements in force outside of the WTO and
numerous others still in negotiations.21
Enabling Clause, Generalized System of Preferences, and Article
XXXVl-Special Treatment for Developing Countries
It was unfair for the developing countries to be fully subject to all GATT rules, as they were not
on the same level of economic prosperity as the developed countries. As a result, the rules were
changed over the years to alleviate some of the hardships for these countries. Greater latitude
was permitted to allow these countries to use subsidies to promote economic development and
to allow currency-exchange restrictions to address balance-of-payment difficulties. Also, the
Enabling Clause, adopted in 1979, allowed developed WTO members to deviate from the Article
I-MFN obligation. The Enabling Clause entitles developed WTO members to give tariff preferences to imports from developing countries without extending the same preferences to other
WTO members. The Enabling Clause is now a part of GATT 1994. This philosophy was reinforced by the adoption of the GSP. Under this system, developed countries agreed to grant preferential treatment to a wide range of exports from developing countries. Additionally, Article
XXXVI of the GATT clarifies that developed countries do not expect developing countries, in
the course of trade negotiations, to make concessions, like lowering tariffs, that are inconsistent
with their individual development, financial, and trade needs.
The special treatment extended to developing nations is necessary to ensure all countries,
including the least developed countries, can integrate into a rules-based trading system while
recognizing and minimizing the challenges of doing so.
Non-Tariff Barriers
Philosophically, the WTO's only acceptable form of import control is a tariff; however, countries
often resort to imposing other measures that adversely affect trade. These include import licensing, rules for the valuation of goods at customs, pre-shipment inspection requirements, rules of
origin requirements, and certain investment measures. Non-tariff barriers create obstacles for
businesses to export and import goods in an efficient, unobstructed manner.
Import Licensing
The Agreement on Import Licensing Procedures 22 requires that import licensing processes be
simple, transparent, and predictable, and that the rules for import licensing be neutral in their
application and administered in a fair and equitable manner. Governments must publish sufficient information for businesses to know how and why licences are granted at least 21 days
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Chapter 2 The World Trade Organization
prior to any new licensing requirements taking effect. There are two types of import licences:
those granted automatically and those not granted automatically. Automatic import licences
are granted to importers in all circumstances. When countries use automatic import licensing,
they generally do so in order to collect statistical and factual data on the imports. Automatic
import licences must be issued within ten days of an application being submitted. Non-automatic import licences are used to administer trade restrictions that are permitted within the
WTO framework. When issuing non-automatic import licences, governments are not permitted to discriminate among applicants. Applications for non-automatic import licences are to be
processed within 30 days, and importers who are refused licences have the right to review or
appeal that decision. The agreement also requires that countries notify the WTO within 60 days
of imposing new requirements or making changes to existing requirements.
Valuation of Goods at Customs
"Customs valuation" refers to the method by which countries value imported goods in order
to assess duty on them. The Agreement on Implementation of Article VII of the GATT 1994,
referred to as the WTO Customs Valuation Agreement, sets out rules for valuing goods for customs purposes, aiming to create a fair, uniform, and neutral system. 23 It prohibits the use of arbitrary or fictitious customs values and sets out several methods by which the value of goods may
be determined. Detailed valuation rules are prescribed, and all member countries are expected
to follow them.
These are the basic tenets of free trade: that goods must not be restricted from crossing borders, and that there must be no discrimination toward goods in domestic markets based on their
country of origin.
Pre-Shipment Inspections
Pre-shipment inspection24 is the process of verifying the content of a shipment before it leaves
the exporting country. Typically, the price, quantity, and quality of goods is checked; this is
often done in developing countries that are concerned with capital flight, commercial fraud,
and customs-duty evasion. Pre-shipment inspections are also often necessary to compensate for
inadequacies in local customs administration. The Pre-Shipment Inspection Agreement places
obligations on governments to make use of pre-shipment inspections in a manner that is nondiscriminatory, transparent, and confidential. It further obliges governments to develop specific
guidelines for price verification and for avoiding unreasonable delays and conflicts of interest by
inspection agencies. There is an independent review procedure for resolving disputes between
an exporter and an inspection agency where they arise.
Rules of Origin
The rules of origin 25 are the criteria used to define where a product was made. This is significant
in the context of international trade because the origin of a product will determine the duties
that are imposed on it. For example, the origin of a good will determine whether it qualifies for
MFN treatment or other preferential treatment. Determining the origin of a good can also affect
whether anti-dumping duties or subsidy safeguards are used and may also influence the labelling
and marketing of a good. Given the global supply chain, determining the origin of a good may
be difficult since it could be processed, assembled, packaged, finished, or sent to the importing
country by way of any number of different countries.
Each member country may have their own rules of origin; however, the Rules of Origin
Agreement requires that, whatever criteria is used, the rules of origin be transparent; that they
are administered in a consistent, uniform, impartial, and reasonable manner; and that they
do not restrict, distort, or disrupt international trade. The agreement aims for common or
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harmonized rules of origin among all WTO members. The principal method of determining
origin is establishing the last country in which a substantial transformation of the good took
place. However, origin can be assessed in one of several ways:
• change of tariff classification-this criterion is satisfied when the final product is classified
under a different tariff classification than the materials within it;
• ad valorem percentage criterion-this criterion is satisfied when a certain percentage
of the goad's overall value has met local content requirements and has not exceeded the
maximum allowed third-country content requirement; and
• manufacturing or processing operation-here, the good will be considered to have
originated in the place in which a designated manufacturing or process operation has
occurred.
See Box 2.7 for an illustration of these provisions.
Investment Measures
The Agreement on Trade-Related Investment Measures (TRIMS Agreement) applies to
domestic rules for investment measures that discriminate against foreign investors and foreign
goods. The TRIMS Agreement nullifies the requirement that foreign firms meet local content
requirements as well as any restrictions on a foreign company's ability to import or export
(known as "trade-balancing rules").
BOX 2.7
Case Highlight
Rules of Origin
Case Name and Tribunal
United States- Rules of Origin for Textiles and Apparel Products
(WTO Dispute Settlement Body, 2003)26
Facts
India claimed that the United States designed its Rules of Origin
to protect domestic industry and favour EU products over developing-country products. The United States had changed its
Rules of Origin from the "substantial transformation" test, under
which a good would be defined as having originated in the
country where it last undertook a substantial transformation.
The rules were changed so that a product would be defined
as originating in the country in which the fabric was manufactured. India claimed that this change was implemented in order
to stem the flow of imports of fabric and textiles from India.
Issue
Was the change to the US Rules of Origin in violation of the
Rules of Origin Agreement, which stipulated that Rules of
Origin shall not be used to pursue trade objectives (Article 2(b))
and shall not create restrictive, distorting, or disruptive effects
on international trade (Article 2(c))?
Decision
The change to the US Rules of Origin was found not to be in
violation of the Rules of Origin Agreement.
Analysis/Application
Demonstrating a change to the Rules of Origin is not sufficient to establish that the change was implemented to protect a domestic industry. Moreover, any such claims must
be supported by substantial evidence demonstrating the
objectives of such a change, which India did not provide.
Demonstrating that the impact of such a change resu lted in
favouring goods from some member countries over others
is also not sufficient in the absence of evidence that this was
the objective of the change.
Agreement on Trade-Related Investment Measures (TRIMS Agreement): oneof the multilateral agreements on tradein
goods; it prohibits trade-related investment measures, such as local content requirements, that areinconsistent with basic provisions
of GATT 1994
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Chapter 2 The World Trade Organization
WTO Rules Relat ing to Trade in Services
The General Agreement on Trade in Services (GATS) was negotiated at the Uruguay Round in
response to the exponential growth of the service economy in the years after the establishment
of the GATT. The communications and technology revolution necessitated a set of multilateral
rules to govern this rapidly expanding sector of the global economy. There were and still are
daunting challenges in developing rules to govern this area because trade in services is much
more complicated and varied than is trade in goods. For example, the border, so significant in
the trade in goods, plays very little part in the trade in services. A major challenge has been to
understand how services are traded, what services can be regulated, and how best to regulate
them. There were few precedents to build on, and the GATT itself was of limited help. For this
reason, the issue of services continues to be a negotiation agenda item in the WTO rounds.
GATS covers all internationally traded services, including, for example, banking, telecommunications, tourism, and professional services.
It is Canada's policy to provide open access to its markets in exchange for greater access to
foreign markets for its services. Canada has proposed improved market access in the following
service sectors:
•
•
•
•
•
•
accounting, engineering, and legal services;
financial services;
courier services;
tourism;
transport; and
the temporary movement of business people.
Different Types or Modes of Trade in Services
Four ways of trading services are recognized by the WTO negotiators:
• cross-border supply of services not requiring the movement of consumer or supplier-for
example, international telephone calls;
• consumption abroad where there is consumer movement-for example, tourism;
• commercial presence-for example, a foreign company setting up subsidiaries or
branches to provide services in another country; and
• temporary presence of natural persons to supply services in another country-for
example, consultants.
MFN Rule Applies to Services
Once a country allows foreign competition in a sector, equal opportunities in that sector
are given to service providers from all other WTO members. At the time that the GATS was
negotiated, a number of countries that already had preferential agreements on services with
specific trading partners, either bilaterally or in regional groups, were allowed to extend
that more favourable treatment by exempting their existing trading partners from the MFN
provision.
National Treatment Rule Applies to Services
Market access to the provision of services is not a right automatically extended by all countries to
all other member countries. Market access to individual countries is available only after negotia tions. As a result of these negotiations, a country's commitment appears in schedules that list the
sectors being opened and the extent of market access being given in each sector. Governments
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may limit the extent of market access; for example, they may impose restrictions on foreign
ownership in certain sectors. Once these commitments related to market access are made, however, the country is bound by them, just as it is bound by the tariff concessions it has agreed to
make with respect to trade in goods.
Protection of Intellectual Property
Intellectual property (IP) has been defined by the World Intellect ual Property Organization
(WIPO) as "creations of the mind" and can be divided into two categories: industrial property,
which includes patents, trademarks, industrial designs, and geographical indications of source;
and copyright, which includes literary and artistic works, including artists' performances, phonogram recordings, and radio and television content. IP was brought into the realm of WTO rules
for the first time with the negotiation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). As part of the Uruguay Round negotiations, this
agreement represents a significant step in international protection of intellectual property rights.
The extent of intellectual property protection and enforcement of intellectual property rights had
varied significantly from country to country. As this form of property gained in significance, the
considerable uncertainty as to its protection deterred a number of countries from trading in a
number of areas. The TRIPS Agreement attempts to bring protection ofIP under common international rules. The agreement establishes member countries' obligations to provide minimum levels of protection for copyright, trademarks, geographical indications, industrial designs, patents,
integrated circuit topographies (computer chips), and trade secrets.
The Basic Principles of Intellectual Property Protection
Two WTO non-discrimination rules apply to intellectual property protection: national treatment and MFN treatment. WTO members agreed that IP protection should ensure that producers and users benefit from technological innovation and technology transfer for the betterment
of economic and social welfare. The various forms of IP and their protection will be discussed
in Chapter 8.
Ensuring Transparency: Trade Policy Reviews
To ensure that trade regulations and policies are transparent, WTO member governments have
to inform the WTO of specific trade, services, SPS, TBT or any other WTO-related measures,
policies, or laws through regular notifications, and the WTO, through the Trade Policy Review
Body, conducts regular reviews of each country's trade policies. These reviews cover trade in
goods, services, and intellectual property. The Trade Policy Review Body is actually the WTO
General Council performing a trade policy monitoring function. The reviews, called "peer
reviews" because they are carried out by other WTO members, take into account member coun tries' wider economic and developmental needs, their policies and objectives, and the external
economic environment. All WTO members come under scrutiny, but the frequency of reviews
depends on the country's size. The four biggest traders at present- the European Union, the
United States, Japan, and China (referred to as "the Quad")-are examined approximately once
World Intellectual Property Organization (WIPO): aspecialized agency of the United Nations withamandatetoencourage
creative activity and to promote the global protection of intellectual property
Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement): acomprehensive multilateral agreement on the protection of intellectual property; it was agreed upon as apart of theUruguay Round negotiations that
created theWTO and covers copyright, trademarks, geographical indication, industrial designs, patents, layout design of integrated
circuits, and trade secrets
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Chapter 2 The World Trade Organization
every two years; the next sixteen biggest trading countries are reviewed every four years; and the
remaining countries are reviewed every six years, with the possibility ofless frequent reviews for
the least-developed countries. The reports, including the policy statement by the government
under review and the report written by the WTO Secretariat, are published on the WTO website.
Dispute Settlement in the WTO
The WTO dispute-settlement system was designed for settling disputes over existing rules within
the global trading system. It is not a rule-making body; it simply applies the existing rules to a
given set of facts. The dispute-settlement system has as its primary goal the positive resolution
of the dispute at hand.
Principles and Priorities
Although the GATT had a dispute-resolution procedure, it had many flaws that prevented it
from functioning effectively. There was no timetable for the resolution of disputes, which meant
that many cases dragged on for a number of years without a final resolution. Additionally, the
rulings were easy to block, which effectively allowed losing parties to circumvent the disputeresolution process by voting against the adoption of the Dispute Settlement Body report. A new
dispute-settlement process was adopted in the Uruguay Round negotiations, which set clear
time frames associated with different stages in the dispute-settlement process. These changes
also made it impossible for the country losing a case to block the adoption of the ruling, because
the old rule for adoption by consensus was eliminated. Instead, the rule is now the reverse.
Rulings are automatically adopted unless there is a consensus to reject a ruling; this is called a
"reverse consensus:' This means that decisions will be adopted unless every member of the dispute-settlement body, including the nation that has won the dispute, votes against its adoption.
The stated priority of the WTO dispute-settlement system is to settle disputes, not to pass
judgment. The only direction that comes from the WTO as a result of a dispute is a direction
that the losing member bring its laws or policies into conformity with WTO agreements. The
preferred solution is that the countries concerned discuss their problems and settle the dispute
by consultation. Thus, the first stage in any dispute is consultation between the governments
concerned, and even when a case progresses to later stages, consultation and mediation remain
available to the parties.
The Dispute Settlement Body
Disputes usually arise when one country adopts a trade policy measure or takes some other action
that is considered by one or more of its fellow member countries to be a breach of WTO obligations. The settlement of these disputes is the responsibility of the Dispute Settlement Body
(DSB), which is really the General Council of the WTO (comprising representatives from all
WTO members) sitting in a different capacity. The DSB has significant authority, which includes
• establishing panels of experts to hear a case,
• accepting or rejecting panel or appeal decisions,
• monitoring the implementation of rulings and recommendations of panels and appeal
bodies, and
• authorizing retaliation if a country does not comply with a ruling.
Figure 2.2 illustrates the key stages in the resolution of a WTO dispute.
Dispute Settlement Body (DSB): the General Council of theWTO (a ll WTO members) sitting inadifferent capacity-that is, to
supervise the WTO dispute-settlement system
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FIGURE 2.2
Resolution of a WTO Dispute
Consultations (60 days)
•
•
•
•
•
•
•
Panel established by the DSB
Terms of reference; composition
Panel examination; report issued to the DSB
(6-9 months)
Appellate review; report issued to the DSB
(60-90 days)
DSB adopts panel/ appellate report(s)
Implementation
(within "reasonable period of time")
Compliance issues (e.g., compensation
pending full implementation; reta liation
if no agreement on compensation)
The Panels
Panels are made up of three, and in some circumstances five, experts from different member
countries. A panel's function is to apply the evidence presented by the affected countries to the
appropriate WTO rules and decide whether there has been a breach of a WTO obligation. The
panelists are usually chosen in consultation with the disputing countries from a permanent list
of candidates from various member countries. If the disputing countries cannot agree on the
composition of the panel, the WTO Director-General will appoint the panelists. The panelists
serve independently in their individual capacities, and they may neither represent the countries
from which they originate nor receive instructions from any government. The panel's report is
passed to the DSB, which may reject the report only if there is a consensus among all members
to do so.
The Appellate Body
Either party to the dispute may appeal the ruling of a panel. Appeals are heard by three members
of the permanent seven-member Appellate Body. These individuals must have recognized standing in the field of law and international trade and m ay not be affiliated with any government.
They represent the range of WTO membership and are appointed for a four-year term. The
Appellate Body review is limited to issues of law covered in the panel report and to legal interpretations developed by the panel. The Appellate Body may not re-examine existing evidence
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
or consider new issues that were not raised before the DSB. The appeal can uphold, modify, or
reverse a panel's legal findings and conclusions. Decisions are to be made within 90 days. The
DSB then has 30 days to accept or reject the appeal decision, and, as with a panel decision, rejection is possible only by consensus, as described above.
Compliance with Rulings and Sanctions
The compliance phase of WTO dispute settlement does not always produce a timely and effective implementation of adopted rulings. There are two main reasons for this. The first is that
the deadlines for implementation or imposition of sanctions are often extended well beyond the
strict timetable that governs the earlier stages ofWTO disputes. The second and more important
reason is that disputing governments are free to reach settlements that are contrary to WTO
rules, even after a legally binding Appellate Body report has been adopted.
There are additional factors that contribute to delay and uncertainty. The procedural details
of compliance reviews are not well articulated in the dispute-settlement rules, and panel and
Appellate Body decisions are not specific about how compliance should be achieved. Theoretically, if a country has been found to be in violation of a WTO agreement, it should remedy the
default as soon as possible, and that should bring its policy into conformity with the ruling or
recommendation. In practice, matters are not so simple. Compliance involves not only law but
also international politics. Because of the delicate balance between individual country sovereignty on one hand and the supra-national legal obligations under a multilateral agreement on
the other, considerable leeway is allowed.
If the country is not able to bring its policy into compliance in the short term, it may be given
a "reasonable period of time" to do so. If it fails to comply, it must enter into negotiations with
the complaining country or countries in order to determine mutually acceptable compensation.
If no satisfactory compensation is agreed on, the complaining countries may ask the DSB for
permission to impose limited trade sanctions against the offending country. This compliance
phase of dispute settlement may be lengthy and is also largely beyond the control of the WTO.
Losing defendants have often exceeded the prescribed "reasonable" period of time to comply
with rulings; however, most governments comply with adopted rulings. Although the disputesettlement system is not a complete legal system such as would be found in the domestic courts
of individual countries, it provides the important element of flexibility in the WTO system and
may lead to satisfactory settlements for both parties.
WTO Achievements and Challenges
The WTO multilateral, rule-based trading system successfully facilitated liberalization of world
trade, especially of goods. This has had positive economic benefits and contributed to an increase
in world GDP.27
The WTO dispute-settlement system is considered to be one of the few effective state-to-state
dispute-resolution mechanisms internationally and the foundation of today's trading system. It
is widely used by member states. By 2018, over 573 requests of consultations had been brought
before it, and the compliance rate with decisions made by the WTO panels and the Appellate
Body is approximately 90 percent. To summarize, the WTO and its rules make global trade more
predictable, consistent, transparent, and enforceable. Non-discrimination, reciprocity, and transparency continue to be the foundational principles that support international trade and serve
as precedent for all other trade agreements. As decisions in the WTO are made by consensus,
it is one of the few intergovernmental organizations that accord equal weight to votes from developing and developed nations.
The WTO is currently facing significant challenges to its existence. The main criticisms relate
to the limited results of the trade negotiations of the protracted Doha round, in part due to the
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impediments created by consensus-based decision-making. Additionally, since 2001, the Doha
round's agenda items have become stale and are no longer relevant in light of the internet era
and the Fourth Industrial Revolution.
Further concerns exist with respect to current WTO rules and the WTO's perceived inability
to tackle unfair trading practices, such as industrial subsidies, or address issues regarding stateowned enterprises. Additionally, it has been noted that certain WTO members fail to consistently notify their trading partners of their subsidies, which indicates severe shortcomings in the
WTO's monitoring and transparency mechanism. The current trade rules have benefited some
but created inequality for others-another concern that is not successfully addressed by the
members of the WTO. Calls for WTO modernization are coming from members and the secretariat, and the need for reform is greatly exacerbated by the broader geopolitical developments;
the world has changed since 1995, but the WTO has not.
Partially in response to these concerns, many WTO members, including Canada, have
decided to pursue bilateral, regional, or multilateral trade deals outside of the auspices of the
WTO, relying on Article XXIV exception. Although RTAs are not inherently bad or good, there
is concern that a proliferation of these types of agreements will lead to increased fragmentation
and complexity of trade rules. The numerous rules that will need to be followed under the RTAs
will invariably increase costs for businesses worldwide to engage in international trade, and
some will not be able to compete effectively.
The rise of worldwide protectionist measures, in particular from the United States, is also
calling the WTO's legitimacy into question. President Trump's administration has threatened
to leave the WTO, has suggested an unwillingness to comply with WTO rulings, and has been
preventing efforts to staff four vacancies at the Appellate Body. Seven judges normally sit on
the Appellate Body, but as of January 2019, the bare minimum of three members are hearing appeals. This threatens to paralyze the dispute-settlement system at a time when numerous
dispute-settlement proceedings have been initiated.
Trends indicate the world is returning to power-based rather than rules-based trade relations.
Increased tariffs are the main driver, which are triggering tit-for-tat retaliations. The failure of
the WTO to reform quickly and of states to back the multilateral trading system can create further uncertainties, hurt business and investors worldwide, and create large disruptions to global
value-chain operations.
CRITICAL ANALYSIS: Business Law
National Treatment and Labelling Requirements: 05384: United States-Certain Country of Origin
Labelling (COOL) Requirements (WTO Appellate Body, 2008)28
In July 2008, the United States implemented new legislation
concerning the mandatory Country of Origin Labelling (COOL)
requirements. The COOL requirements included an obligation
to inform consumers at the retail level of the country of origin
of product s like beef and pork. To label a product as having US
ori gin, the beef and the pork had to be derived from animals
that were exclusively born, raised, and slaughtered in the US.
Cattle and hogs that were exported to the US for feeding or immediate slaughter would not qual ify for this designation.
Canad ian and Mexican producers export millions of live
cattle and hogs to the United States annually for either feeding
or slaughter. Before the 2008 COOL requirements the products
made from those animals were simply sold in supermarkets
as American beef or pork. Following the implementation of
COOL, cattle and hogs had to be segregated throughout the
value chain at an extra cost of about $90 CAD per beef animal,
increasing the price of Canadian and Mexican beef in comparison to US products. Alternatively, US beef and pork processors
had to reduce or stop their imports of Canadian and Mexican
livestock. This made Canadian and Mexican beef and pork less
competitive in the US market. The Canadian Cattleman's Association noted a decrease in US imports of Canadian feeder cattle of about 480,000 head in the first 80 weeks after the COOL
measure came into effect. Canada and Mexico challenged this
law in the WTO, arguing that it restricts market access and is a
technical barrier to trade.
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Chapter 2 The World Trade Organization
origin. Canada and Mexico stated that there were less-traderestrictive alternatives to COOL, and, in any event, the COOL requirements did not fulfill the objective of providing consumer
information on origin. Under the legislation the labels created
confusion and conveyed inaccurate information on the origin
of meat products. Canada and Mexico were successful before
both the WTO panel and the Appellate Body. On May 18, 2015,
the Appellate Body of the WTO issued a fourth and fina l ruling
confirming that US COOL requirements discriminate against
US imports of Canadian cattle and hogs.
Critical Analysis Questions
1. Read the case above and identify and explain the WTO
rules and agreements that are triggered.
2. The Canadian Cattleman's Association (CCA) noted the
US label pursuant to COOL requirements indicating BeefRibeye
Steak as a product of USA and Canada
Canada and Mexico argued that the true objective of the
COOL requirements was to protect the US domestic cattle
and hog industry, while the US argued that the labelling laws
were necessary to provide consumer information on product
adverse effects of COOL on the Canadian cattle and hog
industry. Which branch of the Canadian government did
CCA contact to request that they commence
proceedings in the WTO?
3. If the United States argued that the Canadian cattle and
hogs were subject to inhumane treatment in Canada,
what article of the GATI could it rely on to justify its
labelling and possibly import restrictions?
CRITICAL ANALYSIS: Business Law and Ethics
Hypothetical: Baby Formula Processing Requirements
For up to a year after birth, baby formula sometimes constitutes the sole source of nutrition for an infant. This is a period of rapid growth and brain development that affects key
aspects of a child's long-term health, and baby formula must
contain all the nutrients to properly address an infant's needs.
Canadian baby formula manufacturers have long adhered to
specific technical and quality requirements imposed by the
Canadian government. Canada is considering imposing new
processing regulations that are stricter on imported baby
formula than on domestic formula after a scandal over adulterated baby formula abroad. Unless manufacturers of baby
formula made elsewhere can illustrate that the new technical
and quality requirements are met, their product wil l not be allowed to enter Canada.
Critical Analysis Questions
1. What WTO rules are triggered by the proposed Canadian
measure to impose stricter controls on imported baby
formula?
2. If Canada alleges that it needs to protect the health of
the people in Canada, what are its options under
WTOlaw?
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CHAPTER SUMMARY
In this chapter, we discussed:
•
The rules governing international trade and where they
come from.
• The General Agreement on Tariffs and Trade (GATT) is
the predecessor of the WTO.
How the WTO was established and its purpose.
•
In 1994, an agreement to create the World Trade Organization (WTO) was reached.
The fundamental rules of the WTO.
Regional trade agreements are permitted pursuant to
Article XXIV of GATT, although they derogate from the
MFN rule.
Tariffs and non-tariff barriers to trade.
•
•
•
•
•
import licensing,
valuation of goods at customs,
pre-shipment inspections,
rules of origin, and
investment measures.
How trade in services differs from trade in goods.
GATT and WTO trading rules are based on three fundamental rules:
- the binding concessions rule,
- the most-favoured-nation (MFN) rule, and
- the national treatment rule.
How fair competition is protected in the WTO.
Countries may impose higher tariffs and quotas or bans
that would normally not be allowed by the WTO in the
following circumstances:
- actions to protect domestic industry from dumping,
- actions to counteract subsidies, and
- actions called safeguards.
•
Intellectual property protection provided by the WTO.
• The Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) protects intellectual property and covers copyright, trademarks,
geographical indication, industrial designs, patents,
layout design of integrated circu its, and trade secrets.
The WTO dispute-settlement system.
•
The exceptions to the fundamental WTO rules.
•
Generalized System of Preference (GSP): under this system, WTO members may give preferential treatment to
exports from developing countries;
• Article XX provides exceptions to the MFN and national
treatment rules on the basis of legitimate government
policies in the areas of morals, health, and the environment, among other policy concerns; and
The MFN and national treatment rules both apply to
services pursuant to the General Agreement on Trade
in Services (GATS).
•
The Dispute Settlement Body (DSB) is the General
Council of the WTO when acting in its role to supervise
the WTO dispute-settlement system.
The dispute-settlement system is made up of the panels and the appellate body.
The achievements and challenges of the WTO.
•
The WTO legal framework provides a stable environment for liberalization of world trade, especially of
goods, but is slow to adapt to the new needs of
members.
REVIEW QUESTIONS
1. Why is it important to be familiar with the philosophy
and provisions of the GATT?
2. Do the GATT and WTO require countries to engage in
freer trade? Explain your answer.
3. Describe the three fundamental rules developed by
th e GATT and incorporated into th e WTO.
4. What was the significance of the Uruguay Round ?
5. What is meant by a " bound ta riff"?
6. What is dumping? Is it illegal per se under the WTO?
What may member countries do if products are
dumped into their domestic market?
7. What is a subsidy? Is it illegal per se under the WTO?
What are member countries entitled to do if products
that are subsidized enter their domestic markets?
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
57
8. How do the WTO provisions on safeguards differ from
those on dumping and subsidies?
13. What are the major areas of intellectual property
9. How does the WTO serve the interests of business
14. Why is GATI Article XX so significant to a discussion
of whether the WTO has any role to play in the
protection of the environment? What is the major
underlying problem with this provision as a
foundation for individual countries attempting to
protect the global commons?
worldwide?
10. What is the Sanitary and Phytosanitary Measures
Agreement (SPS Agreement)? What is its significance
for global business persons?
11. What is the Agreement on Technical Barriers to Trade
(TBT Agreement), and what is its significance for
global business persons?
12. Why is agreement in trade in services so difficult?
How are the rules different from the rules governing
trade in goods?
protected by the TRIPS Agreement?
15. What is the difference between product-related and
non-product-related process and production
methods? Provide an example of each. What are the
WTO rules relating to each?
NOTES
1. "Understanding the WTO: Members and Observers"
(2019), online: World Trade Organization <https://
www.wto.org/english/ thewto_e/whatis_e/tif_e/
org6_e.htm>.
2. Marrakesh Agreement Establishing the World Trade
Organization, 15 April 1994, 1867 UNTS 154 (entered
into force 1 January 1995).
3. Ibid.
4. "Legal texts: The WTO agreements" (2019), online:
World Trade Organization <https://www.wto.org/
english/ docs_e/ legal_e/ ursum_e.htm>
5. European Communities- Regime for the Importation,
Sale and Distribution of Bananas (1997), WTO Doc WTI
DS27/ AB/ R (Appellate Body Report), online (pdf):
< https://docs.wto.org/dol 2fe/ Pages/SS/ di rectdoc.
aspx?filename=Q:/WT/DS/ 27ABR.PDF>
6. (1996), WTO DocWT/ DS8, 10, 11 / AB/ R (Appellate
Body Report), online (pdf): < https:// docs.wto.org/
dol2fe/ Pages/ SS/ directdoc.aspx?filename=Q:/WT/
DS/ 8ABR.pdf>.
7. Ibid at 16.
8. "Subsidies and Countervailing Measures" (2014),
on line: World Trade Organization <http://www.wto.
www.wto.org/ english/thewto_e/ whatis_e/ tif_e/
agrm8_e.htm#safeguards>.
10. European Communities-Measures Affecting Asbestos
and Asbestos-Containing Products (2000), WTO Doc
WT/ DS135/AB/ R (Appellate Body Report), online
(pdf): <https://docs.wto.org/dol2fe/ Pages/ SS/
di rectdoc.aspx?fi lename=Q:/WT/ DS/ 135ABR.pdf>
11. United States- Import Prohibition of Certain Shrimp
and Shrimp Products (1998), WTO Doc WT/ DS58/ AB/ R,
on line: World Trade Organization <https://www.wto.
org/ english/ tratop_e/ dispu_e/ cases_e/ ds58_e.htm>.
12. WTO DocWT/ DS 135, on line: World Trade
Organization <https://www.wto.org/ engl ish/
tratop_e/ dispu_e/ cases_e/ds 135 _e.htm>.
13. Ibid.
14. United States- Import Prohibition of Certain Shrimp
and Shrimp Products (1998), WTO Doc WT/ DS58/ AB/ R
at 60 (Appellate Body Report), online (pdf): <https://
docs.wto.org/ dol2fe/ Pages/ SS/directdoc.aspx
?filename=Q:/ WT/ DS/ 58ABR.pdf>.
15. United States-Import Prohibition of Certain Shrimp and
Shrimp Products, Recourse to Article 21.5 of the DSU by
Malaysia (2001 ), WTO Doc WT/ DS58/ AB/ RW.
org/ english/ thewto_e/ whatis_e/tif_e/ agrm8_e.
htm#subsidies>.
16. On line: World Trade Organization < https://www.wto.
org/ english/ tratop_e/ sps_e/ spsagr_e.htm>.
9. "Safeguards: Emergency Protection from Imports"
17. WTO Doc WT/ DS26, 48/ AB/ R, online (pdf) <https://
www.wto.org/ english/tratop_e/dispu_e/ hormab.pdf>.
(2014), online: World Trade Organization <http://
© [2020) Emond Montgomery Publications. All Rights Reserved.
58
Part I Public International Law
18. WTO Doc WT/ DS231 / 18, on line: <https://www.wto.org/
english/ tratop_e/dispu_e/cases_e/ds231 _e.htm>.
19. "Technical Information on Technical Barriers to Trade;'
(last visited 17 September 2019), on line: World Trade
Organization <https://www.wto.org/ english/
tratop_e/ tbt_e/ tbt_info_e.htm>; Article 2.4
Agreement on Technical Barriers to Trade, on line: World
Trade Organization <https://www.wto.org/ english/
docs_e/ legal_e/ 17-tbt_e.htm>.
20. "Article XXI : Security Exceptions" at 1, on line (pdf):
World Trade Organization <https://www.wto.org/
engl ish/ res_e/booksp_e/gatt_ai_e/ a rt21 _e.pdf>.
21. "Regional Trade Agreements;' online: World Trade
Organization <https://www.wto.org/ english/
tratop_e/ region_e/ region_e.htm >.
22. "Agreement on Import Licensing Procedures" (1994),
on line (pdf): World Trade Organization <http://www.
wto.org/english/docs_e/ legal_e/ 23-lic.pdf>.
24. "Uruguay Round Agreement: Agreement on
Preshipment Inspection" (2014), online: World Trade
Organization <http://www.wto.org/eng lish/ docs_e/
legal_e/ 21-psi_e.htm>.
25. "Technical Information on Rules of Origin" (2014),
online: World Trade Organization <http://www.wto.
org/english/ tratop_e/ roi_e/ roi_info_e.htm>.
26. WTO DocWT/ DS243/ R, online: <https://www.wto.
org/english/ tratop_e/ dispu_e/ cases_e/ds243_e.
htm>.
27. "Multilateralism in International Trade: Reforming the
WTO" (22 October 2018), on line: European Parliament
Think Tank <http://www.europarl.europa.eu/
thinktan k/en/ document.html?reference=
EPRS_BRl(2017)603919>.
28. WTO DocWT/ DS384, WTO (2016), online: <https://
www.wto.org/ english/tratop_e/dispu_e/cases_e/
ds384_e.htm>.
23. "Technical Information on Customs Valuation" (2014),
on line: World Trade Organization <http://www.wto.
org/ english/ tratop_e/ cusval_e/ cusval_info_e.htm>.
FURTHER READING
Michael Trebilcock, Robert Howse & Antonia Eliason, The
Regulation of International Trade, 4th ed (Abingdon:
Routledge, 2012).
Peter van den Bossche & Werner Zdouc, The Law and Policy
of the World Trade Organization: Text, Cases and
Materials, 4th ed (New York: Cambridge University
Press, 2017).
Jacqueline D Krikorian, International Trade Law and
Domestic Policy: Canada, the United States and the World
Trade Organization (Vancouver: University of British
Columbia Press, 2012).
WEBSITES
General websites with current international law
information:
British Broadcasting Corporation (BBC): <http://news.
bbc.co.uk>
Canadian Broadcasting Corporation (CBC): <http://
www.cbc.ca >
Canadian Council on International Law: <http://www.
ccil-ccdi.ca>
The Economist: <http://www.economist.com>
Estey Journal of International Law and Trade Policy
(recommended for peer-reviewed articles on international
law and trade policy): <https://law.usask.ca/ research/
publications/ estey-journal-of-international-law-andtrade-policy.php>
Global Affairs Canada: <https://www.international.gc.ca/
gac-amc/ index.aspx?lang=eng>
Legal Information Institute: The Institute is a global
organization for the dissemination of international law
information. Many countries have individual websites
for this. The three best for Canadians are
<http://www.canlii.org >,
<http://www.law.cornell.edu>, and
<http://www.worldlii.org >.
World Intellectual Property Organization (WIPO): < http://
www.wipo.org>
World Trade Organization: <http://www.wto.org >
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 2 The World Trade Organization
59
LIST OF CASES
European Communities-Measures Affecting Asbestos and
Asbestos-Containing Products (2000), WTO Doc WT/
DS135/ AB/ R (Appellate Body Report), online (pdf):
<https://docs. wto.org/ do I2fe/ Pages/SS/ di rectd oc.
aspx?filename=Q:/WT/ DS/ 135ABR.pdf>
European Communities- Measures Concerning Meat and
Meat Products (Hormones) (1998), WTO Doc WT/ DS26,
48/ AB/ R, online (pdf): <https://www.wto.org/english/
tratop_e/dispu_e/cases_e/ ds26_e.htmDocumentl >.
European Communities- Regime for the Importation, Sale
and Distribution of Bananas (1997), WTO Doc WT/ DS27I
AB/ R (Appellate Body Report), online (pdf): < https://
docs. wto.org/ dol2fe/ Pages/SS/ di rectdoc.
aspx?filename=Q:/WT/ DS/ 27 ABR.PDF>
European Communities- Trade Description of Sardines
Body), on line: <https://www.wto.org/ english/ tratop_e/
dispu_e/cases_e/ ds231 _e.htm >.
Japan - Taxes on Alcoholic Beverages II (1996), WTO Doc WT/
DS8, 10, 11 / AB/ R (Appellate Body Report), onl ine (pdf):
< https://docs.wto.org/ dol 2fe/ Pag es/SS/ di rectdoc.
aspx?filename=Q:/WT/ DS/ 8ABR.pdf>.
R v Hape, 2001 sec 26
United States-Import Prohibition of Certain Shrimp and
Shrimp Products (1998), WTO Doc WT/ DS58/ AB/ R,
online: <https://www.wto.org/english/tratop_e/
dispu_e/cases_e/ ds58_e.htm>.
United States- Rules of Origin for Textiles and Apparel
Products (2003), WTO DocWT/ DS243/ R (WTO Dispute
Settlement Body), online: <https://www.wto.org/
english/tratop_e/dispu_e/cases_e/ds243_e.htm >.
(2002), WTO Doc WT/ DS231 / 18 (Dispute Settlement
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand:
• the historical background leading to the conclusion of NAFTA and
laterCUSMA
• the similarity between provisions in NAFTA and the GATT
• NAFTA rulesfor trade in goods
• NAFTA rulesfor trade in services
• NAFTA intellectual property provisions
• environmental and labour protectionsunder NAFTA's side agreements
• dispute-settlement methods under NAFTA
• the rightsof foreign investors
Introduction 61
From NAFTA(1994) toCUSMA (2019): ABrief History 62
The Relationshipbetween NAFTAand the GATT 63
Rules Relating toTrade in Goods 64
Rules Relating to Trade in Services 72
Rules Relating toIntellectual Property 75
Protection of the Environment and Labour:The Side
Agreements 76
Dispute Settlement Under NAFTA 77
Rules Relating toInvestment 82
Chapter Summary 90
Review Questions 90
Notes 91
Further Reading 94
Websites 94
List of Cases 94
Introduction
The removal of trade barriers between countries leads to greater prosperity. This is certainly the
underlying philosophy of the World Trade Organization (WTO ). However, certain factors- the
WTO's policy of decision-making only by consensus, the long duration of its trade rounds, and
its efforts to ensure that countries' individual sovereignty will not be overridden-have contributed to the slow pace of global progress toward trade liberalization and economic cooperation.
This is one of the factors that has led to greater activity in the area of bilateral and regional trade
agreements. Different levels of integration have emerged and can be described in stages, beginning with the least integrated form of favourable treatment and progressing through five stages
to the most integrated form of cooperation thus far observed. These stages are not necessarily
progressive; it cannot be assumed that the formation of any one regional trade grouping will pass
through each of these stages in order. These stages are as follows:
• Pref erential tariff The countries involved offer each other lower tariffs than are applicable
to countries that are not parties to the agreement.
• Free trade area. Two or more countries agree to remove substantially all tariff and non-
tariff barriers between them while maintaining their own external tariff schedules against
other countries.
• Customs union. The countries involved elim inate trade barriers among themselves and
impose a common external tariff.
61
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Part I Public International Law
• Common market. The countries agree to common policies for the internal operation and
integration of the combined market that has been created.
• Economic and monetary union. The countries agree to create a single central bank,
coordinate monetary policy, and adopt a common currency, as well as create a common
market.
The formation of an agreement among nations that provides better terms for members than
for non-members is a derogation of the most-favoured-nation (MFN) principle. This was tolerated by the contracting parties to the General Agreement on Tariffs and Trade (GATT) for a
number of reasons. These arrangements were considered beneficial for fostering trade within
regions as long as they did not raise barriers to others. There were also historical relationships
to be considered, such as Britain's relationship with its former colonies and the desire of Middle
Eastern and Central American states to form regional agreements. Developing countries also
wanted the freedom to work together to achieve better economic conditions. The primary principle behind GATT's Article XXVI, which allows customs unions and free trade areas, is that the
arrangement must be trade-creating, not trade-restricting or trade-diverting-that is, there must
be no increase in trade barriers against third-party members of the GATT. The rules further
provided that the parties remove duties on substantially all trade among themselves, with the
exception of some quantitative and balance-of-payments restrictions, and that the parties must
notify the WTO before the agreement is implemented.
This chapter focuses on the North American Free Trade Agreement (NAFTA), 1 which exemplifies the free trade level of integration among Canada, USA and Mexico and explains the way
the agreement governs the tripartite relationship. This can then be contrasted with Chapter 4,
which focuses on the European Union (EU) and illustrates the greatest level of economic and
fiscal integration, the economic and monetary union.
From NAFTA (1994) to CUSMA (2019): A Brief History
Canadians have lived with the reality of a free trade agreement governing trade with our largest
trading partner, the United States, for three decades. The Canada- US Free Trade Agreement
(CFTA)2 entered into force on January 1, 1989. It was created, at least partially, as a result of
frustration with the apparent lack of progress toward the modernization of the GATT rules
in the Uruguay Round of trade talks. Because Canada and the United States had similar or
complementary commercial regulation in many areas and an enormous shared market, the two
countries were able to accelerate the process of facilitating freer trade between themselves on a
bilateral basis instead of through GATT.
Talks with Mexico followed several years later, with the result that NAFTA came into force on
January 1, 1994. Although Mexico was not a major trading partner for Canada at the time, it was
considered important policy for Canada to participate fully in NAFTA, as this would prevent the
United States from negotiating a separate agreement with Mexico. This eventuality was viewed as
problematic because it would create several bilateral US free trade agreements that would result
in Canada's being only one of the spokes around a US hub, with Mexico, Chile, and Costa Rica
forming the remaining spokes. In this scenario, the United States would benefit from an imbalance in bargaining power in each negotiation. Figure 3.1 illustrates the bilateral hub-and-spoke
trading arrangement that might have resulted and the multilateral NAFTA trading arrangement
that exists among the United States, Canada, and Mexico.
The impetus for NAFTA negotiations also arose in response to the consolidation of the
European Common Market and the rising Japanese economy. NAFTA was seen as a way to
counter the strength of the economies across the oceans and give North America a competitive edge.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
FIGURE 3.1
Bilateral Versus Multilateral Trading Arrangement
Bilateral Hub-and-Spoke
Trading Arrangement
Multilateral NAFTA
Trading Arrangement
8
8
In 2017, the United States, Mexico, and Canada started negotiating a trade agreement meant
to replace NAFTA. The new agreement, called Canada-United States-Mexico Agreement
(CUSMA),3 also known as USMCA, was signed on November 30, 2018 and the Protocol of
Amendment was signed on December 10, 2019. 4 As ofJanuary 2020, only Mexico had ratified
the trade deal and approved the amendments; Canada was waiting on its southern neighbour to
ratify the agreement before it finalized the ratification process domestically. s CUSMA updates
some NAFTA provisions and introduces new ones; however, the bulk of the deal remains true to
its original. Some of the areas that will be changed are industry specific. For instance, CUSMA,
once in force, will affect the automotive sector with regard to stricter rules of origin, the agricultural sector with regard to greater access to the Canadian market, the pharmaceutical industry
with regard to increased protections, and foreign direct investors with regard to the elimination
of the investor- state dispute-settlement mechanism between Canada and the US. Since the deal
has not been ratified, and once and if it is the implementation will not be immediate, the sections
below discuss NAFTA and highlight how CUSMA differs from it.
The Relationship between NAFTA and the GATT
NAFTA is much easier to understand if it is viewed in the context of the GATT, because the
approach and philosophy, the concepts and the language, all come from the GATT. NAFTA's
purpose was to create a free trade area characterized by national treatment, MFN treatment, and
transparency. More specifically, the agreement was intended to
•
•
•
•
•
•
facilitate the cross-border movement of goods and services within the free trade area,
promote conditions of fair competition within the free trade area,
protect intellectual property rights,
create effective procedures for joint administration of the agreement,
create effective mechanisms to resolve disputes, and
establish a framework for further cooperation to expand and enhance the benefits of the
agreement.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
Public International Law
CUSMA reiterates the above goals and includes the following aspirations:
• to protect human, animal, or plant life or health and advance science-based decisionmaking while facilitating trade between the member states;
• to promote high levels of environmental protection;
• to promote the protection and enforcement oflabour rights, the improvement of working
conditions, the strengthening of cooperation, and the parties' capacity on labour issues;
and
• to recognize the importance of increased engagement by Indigenous peoples in trade and
investment.
NAFTA has 22 chapters, 9 annexes, and no side letters, while CUSMA includes 34 chapters,
13 annexes, and 13 side letters. The structure ofNAFTA includes general provisions and several
industry- and sector-specific chapters. CUSMA takes a different approach, as there are provisions that will affect specific sectors referenced throughout the text. It is not within the scope
of this chapter to cover all of NAFTA's provisions or all of CUSMA's changes; it instead explores
some of the more salient provisions as they impact Canadian businesses.
Rules Relating to Trade in Goods
Tariffs
Each NAFTA country retains its own external tariffs that are applied to goods from non-member
countries but levies a lower tariff or no tariff on goods "originating" from the other NAFTA
members. NAFTA, over a period of ten years, eliminated virtually all tariffs on Canada- US
originating goods with the exception of tariffs that remain on some agricultural products from
Canada's egg, dairy, and poultry production sectors and on certain products, such as sugar, dairy,
peanuts, and cotton, from the United States. These reductions were substantial and resulted in
the average tariff on US goods falling from the pre-NAFTA average of 10 percent to less than
one-half of 1 percent. Mexico had previously had high tariffs and strict controls on imports,
and the virtual elimination of these trade barriers has contributed to a massive penetration of
imports into the Mexican market. The duty-free access to Canada-USA-Mexico originating
goods is not changed under CUSMA.
Rules of Origin
The rules of origin are as significant for the exporter as for the importer because they determine
which goods will qualify for tariff-free treatment under NAFTA. The favourable treatment provided to goods that originate in NAFTA countries is often referred to as area treatment-the
area being the territories of Canada, the United States, and Mexico. The rules of origin in NAFTA
run at least 180 pages. The rules are too complex to be examined in detail here; instead, we will
look at four basic rules that may be used to determine whether a good qualifies as an originating
good within the NAFTA area and is, therefore, eligible for preferential tariff treatment. Generally
speaking, a good qualifies for area treatment if it meets any of the following conditions:
1. The good is wholly obtained or produced in North America. This rule remains for the
most part unchanged; however, CUSMA makes minor updates to the definition of a
"wholly obtained or produced" good.
originating goods: goods that meet thelegal definitionfor having originated inaparticular jurisdiction; within NAFTA, goodsare
found to have met therules of origin when they meet oneof thefour criteriawithin the NA FTArules of origin
area treatment: treatment whereby beneficial NAFTAtariffsare availabletogoodsdeemed to originate in theNAFTAarea
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3
BOX 3.1
The North American Free Trade Agreement (NAFTA)
Case Highlight
UPSvCanada
Case Name and Tribunal
Decision
UPS v Canada (NA FTA Arbitration Tri buna l, 2007)6
Canada Post did not receive more favourable t reatment, because
Canada Post and UPS cannot be considered to be in "like circum-
Facts
UPS alleged that Canada Post was provided with ad vantages
that were not offered to UPS-specifically, that Canada su bsidized the costs of mail delivery by provid ing d irect payments
t o cert ain p u blication s t h rough its Postal Assistance Program
when t hose pu blications were sent t hrough Canada Post. This
st ances:' Canada Post serves a public policy function in Canada
because of the "universal service obl igation;' which requires that
it provide universal postal service throughout the country. UPS
does not have a similar requirement and likewise does not provide similar service. Therefore, Canada is not obliged to offer the
benefits of t he Postal Assist ance Program to UPS.
subsidy was not available to the publicat ions if they were sent
Analysis/Application
t hrough UPS.
Pr inciples of national treatment apply to trade in services.
Issue
Were t he benefits provided t o Canada Post but not to UPS a
violat ion of t he national treatment provisions of NAFTA?
NAFTA countries are required t o offer national t reatment only
to foreign investors that are in like circumstances to domestic
invest ors.
2. The good is substantially transformed within a NAFTA country with the result that
the tariff classification has changed. This rule and rule 3 below are modified under
CUSMA, with many product-specific rules of origin changed to affect some industries
significantly.
3. Each of the non-originating goods used in the production of the good has undergone a
change in tariff classification as a result of production in North America.
4. The finished good has not achieved a tariff-classification change but the good contains
sufficient regional-value content. This rule remains largely unchanged under CUSMA.
Tariff Classification and Certificate of Origin
The Harmonized Commodity Description and Coding System (HS) is the basis for tariff classifications under NAFTA and has been adopted by most of the world's major trading countries.
Developed by the World Customs Organization, the system comprises 21 sections divided into
97 chapters, which are then subdivided into headings and subheadings. Tariffs applied pursuant
to NAFTA are highly dependent on both the tariff classification of the particular good as well
as the origin of the good. Rules for area treatment are dependent on origin, while the tariff rate
is dependent on the tariff classification. Therefore, it is of the utmost importance for producers to carry out an accurate origin analysis to ensure that non-originating materials as well
as the finished goods are properly classified under the HS. Importers will require an accurate
certificate of origin, which acts like a passport for a particular product and needs to be presented at customs. Exporters should be aware of the potential legal liability for certificates that
are improperly completed. Importers, on the other hand, must be aware of the importance of
the certificate of origin when negotiating a purchase. They may wish to consider including a
term in their purchase order or other contractual document that stipulates that the exporter or
certificate of origin: asignedstatement, prepared by the exporter, providingborder services andgovernment officialswithinformationas to theplace of origin, assembly, or manufactureof goods being exported, and usually also providingthe HSclassification
number
© [2020) Emond Montgomery Publications. All Rights Reserved.
65
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Part I
Public International Law
manufacturer must provide a suitable certificate of origin and that, if the certificate proves to be
incorrect, incomplete, or unreliable, the purchaser or importer will be indemnified for any extra
costs or duties incurred as a result.
Importers cannot claim area or preferential treatment unless they possess a valid certificate
of origin. Importers must also make a written declaration, based on a certificate of origin, that
the good qualifies as originating, and they must possess a certificate of origin at the time the
declaration is made. These certificates are the responsibility of the exporter, although it may
be the producer that actually completes them. The three countries have developed a common
certificate of origin that may be issued for any single import or for multiple imports of identical
goods within a 12-month period.
The three NAFTA countries have provided for uniform regulations relating to the interpretation, application, and administration of the rules of origin, which in turn have been incorporated by each country into its domestic legislation.7 The parties have also agreed that
• each country must provide for the speedy issuance of advance decisions on rules of origin
queries;
• each country must provide exporters from other NAFTA countries with the same review
and appeal rights and advance rulings as are available to exporters within its own territory; and
• they will cooperate in administering the rules of origin and establish a working group to
address future amendments to the rules of origin.
These rules have not changed in CUSMA.
Technical Barriers to Trade and Technical Standards
NAFTA establishes clear rules aimed both at reducing the potential for using standards as a
disguised barrier to trade and at reserving the right of each government to impose standards
that are more stringent than international standards. The principle of national treatment is
confirmed with respect to standards provisions and trade in goods and services. The parties
have agreed not to use standards-related measures to create any unnecessary obstacles to trade
among the countries. The three countries have also agreed to work jointly to enhance the level
of safety and protection afforded human, animal, and plant life and health; the environment;
and consumers.
BOX 3.2
"Roll-Up:"'Roll-Down:' and Rules of Origin
Honda's assembly plant in Canada produced Civics using engines that were produced in Ohio using
Japanese parts. The principle of"roll-up" applies where a manufacturer imports parts that are then
substantially transformed into another intermediate part, the va lue of which helps fulfi l the valueadded requirement for the final good. Under CFTA, an intermediate part was considered wholly a
domestic part if 50 percent or more of its content was considered to be of regional value. If it was
found to have regional content of less than 50 percent, the value was "rolled-down;' and it would be
considered a wholly imported part. Canada and Honda claimed that the engines had a regional value
of 66 percent, which entitled them to roll up. If the values of the engines were permitted to be rolled
up, the cars would qualify for preferential treatment because they would meet the regional value
content requirement. However, the United States argued that the engines were not entitled to rollup because indirect costs for overhead and general expenses of doing business were included in the
calculation; when those were excluded, the engines had less than 50 percent regional content and the
va lue must, therefore, be rolled down.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
NAFTA countries are free to adopt, apply, and enforce standards-related measures, including measures relating to safety; the protection of human, animal, or plant life (or health); the
environment; or consumer protection. Member countries are free to choose the appropriate
level of protection based on an assessment of risk, but the requirements of national treatment
and MFN status apply once the standards have been created. There is also agreement to make
compatible the respective standards-related measures of the three countries. The Committee on
Standards-Related Measures has been established with representatives from each country. The
Committee's functions include
• monitoring the implementation and administration of the NAFTA provisions on standards-related measures, including the progress of the working groups and subcommittees;
• facilitating the process of making measures compatible;
• providing a forum for members to consult on standards matters, including the provision
of technical advice and recommendations;
• enhancing cooperation on standards-related measures and considering standards-related
measures of other organizations, including the GATT; and
• considering non-governmental, regional, and multilateral developments regarding standards-related measures, including relevant provisions of the GATT.
At the time NAFTA was negotiated, the WTO Technical Barriers to Trade (TBT) Agreement
and subsequent decisions and recommendations adopted by the WTO TBT Committee did not
exist, making the NAFTA technical barriers to trade provisions relatively outdated and limited in
scope. The CUSMA TBT chapter was modernized to be in line with international best practices
and reflect the WTO TBT Agreement.
CUSMA and TBT
The provisions and structure of the CUSMA TBT chapter incorporate the WTO TBT Agreement and WTO decisions to bring the North American TBT provisions into conformity with
WTO obligations. This chapter also mirrors the provisions of the comprehensive agreements
such as the Comprehensive and Progressive Trans Pacific Partnership (CPTPP) and the Comprehensive and Economic Trade Agreement (CETA), respectively ratified in 2018 and 2017.
This harmonization of TBT regimes should facilitate trade for companies that trade in the
NAFTA area but also do business worldwide, as they will be able to follow the same or similar
set of rules, saving costs and time. The provisions regarding the WTO TBT Committee have
significant overlap in CUSMA.
Sanitary and Phytosanitary Measures
Sanitary and phytosanitary (SPS) measures are taken by governments to protect humans, animals, or plants from pests, diseases, or contaminants. NAFTA does not provide for any specific
standard but sets out an approach designed to ensure that these measures are adopted for scientific reasons and do not result in measures that disguise trade protection. Each country may set
SPS measures at a level it considers appropriate provided there is scientific evidence to support
the measures.
sanitary and phytosanitary (SPS) measures: an expressionused inWTO and tradecircles that refers to any measure, procedure, requirement, or regulation taken by agovernment to protect human, animal, or plant life or health from the risks arising from
the spread of pests, diseases, or disease-causing organisms, or from additives, toxins, or contaminants found in food, beverages, or
feedstuffs
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BOX 3.3
The Supply-Management System in Brief
Canada's supply management system limits the supply of dairy, poultry and eggs to the quantity
that Canadians are expected to consume.8 The rationale for this system is that it maintains stable
and predictable prices for these commodities. Under this system, a national marketing agency determines production amounts for each commodity and then sets production quotas for each province.
To sell their products, farmers must hold a quota, which is essentially a license to produce up to a set
amount.9 There are only about 16,000 quota holders in Canada. 10 The quota prevents oversupply that
would cause prices to decline and disrupt farmers' incomes. 11 Quota holders are guaranteed a minimum price for their products.
The supply-management system impacts trade. In order to maintain supply levels of the commodities, Canada imposes high tariffs on foreign imports, which in turn makes these goods prohibitively
expensive for Canadians.12 Goods entering Canada beyond the allotted quantity under the regional
trade agreements will stil l be subject to high tariffs.
Critics of the supply-management system argue that Canadians overpay for eggs, dairy, and poultry products because the system inflates prices beyond what an open market would impose13 and
that it limits the variety of products available to consumers, leaving domestic supply as the default
option.
CUSMA and SPS
CUSMA's SPS chapter expands upon NAFTA and the WTO SPS Agreement and has new provisions to improve the compatibility of SPS measures of the three countries. The modernized SPS
chapter should facilitate trade in agriculture, fisheries, and forestry products by simplifying and
enhancing the rules on import checks, audits, equivalence, and regionalization.
Agriculture
Because the climate conditions and sensitive areas of agricultural trade vary among the three
countries, agricultural issues tend to be limited to trade between two parties- for example, the
United States and Mexico or the United States and Canada. For this reason, the three countries
agreed to a series of bilateral agreements on agriculture in certain areas. US - Canada agricultural
tariffs continued to be covered by the CFTA after the negotiation of NAFTA. Each of the three
countries agreed to revise its domestic support policies to ensure minimal distortions in trade.
Nagging problems in sensitive areas have, however, continued for the three parties. The United
States and Mexico have d ifferences over sugar, fruit, and corn, and Canada has had continuing
problems protecting its supply management system for its dairy, poultry, and egg sectors.
CUSMA and Agriculture
Under CUSMA, some of these issues are addressed. The agriculture chapter includes new
requirements on science-based regulations and risk analysis and creates a new m echanism to
resolve issues cooperatively among the three nations. 14 Additionally, CUSMA clarifies how US
wheat is classified in Canada, which will reduce administrative burden for wheat farmers .
Pursuant to CUSMA, the Canadian supply management of dairy, eggs, and poultry products in Canada is relaxed and grants more access to US products on a duty-free basis for
certain quantities.15 In exchange, Canadian dairy and food manufacturers of sugar beets,
peanuts, and other products will benefit from a SO-percent reduction in tariffs on these products in the US.16
supply-management system: a system regulating the supplyofpoultry, eggs, and dairy into the Canadian market
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
Energy
Energy was a critical issue in the negotiations for NAFTA. Energy provisions apply to crude oil,
natural gas, refined products, basic petrochemicals, coal, electricity, and nuclear energy. Because
Canada is the United States' largest foreign supplier of oil, natural gas, and electricity, the negotiations were of the utmost importance to both parties.
Canada's goals in the NAFTA negotiations were to
• maintain and enhance its US-energy-export position,
• avoid a separate US- Mexico trade agreement that could relegate Canada to a "spoke"
relationship, and
• coordinate Canadian and US regulatory policies on Canadian natural gas exports
(following an attempt by California to inhibit Canadian natural gas sales).
Because the North American market was largely integrated at the time of the NAFTA negotiations, tariffs were not an issue.
The energy chapter ofNAFTA reiterates national treatment requirements, tax rules, and general quantitative limitation rights, and requires parties to keep market-based objectives in view
by ensuring that domestic regulatory bodies "avoid disruption of contractual relationships to the
maximum extent practicable, and provide for orderly and equitable implementation appropriate to such measures:' 17 Canada has retained the right to have all significant energy contracts
reviewed by the National Energy Board (NEB), which is required to give effect to the NAFTA
provisions. With respect to natural gas exports, the NEB assesses longer-term export applications with a market-based approach that includes a domestic consumer-complaints procedure,
export impact assessment, and public interest scan.
During the domestic consumer-complaints procedure, the NEB considers complaints from
Canadian natural gas market participants that claim they are not able to buy gas on the terms
and conditions (that is, price) similar to the terms and conditions that are applied in the export
context. The export impact assessment allows the NEB to determine whether the Canadian
energy market can adjust to incremental increases of gas exports without causing Canadians
difficulty in meeting their energy needs at market prices. This assessment effectively measures
the impact of the proposed export on Canadian energy and natural gas markets. Finally, the NEB
assesses the impact of the export on the public interest by looking at factors such as the nature
of the contract, the impact on pipelines, potential environmental effects of the proposed export,
and the likelihood that the licensed volumes will be taken.
All three countries are prohibited from imposing minimum or maximum import or export
price requirements, although import and export licensing systems are allowed. In situations of
short supply, import and export restrictions on energy trade are allowed within carefully defined
limits. These include
• preventing or relieving critical shortages on a temporary basis,
• conserving exhaustible natural resources, and
• ensuring essential supplies for domestic industries.
Any restrictions on exports based on the above must be imposed equally on the domestic
market. There are also provisions allowing a party to restrict imports or exports for reasons of
national security.
National Energy Board (NEB): theCanadian regulatory agencyresponsible for monitoring the use of energy resources in Canada
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BOX 3.4
Canadian Blended Crude Oil to Benefit from CUSMA
One of the provisions of CUSMA favourably modifies a rule of origin with respect to blended crude
oil. Canadian producers will be able to transport crude oil containing up to 40 percent of non-originating diluent in pipelines without affecting the status of the oil as a product eligible for duty-free
treatment under the agreement.18 When producers transport oil by pipeline, the oil needs to be
diluted. Blended crude oil often does not qualify as "wholly obtained or produced" in Canada if the
diluent does not qualify as a NAFTA originating good.19 As such, some producers do not benefit from
duty-free treatment under NAFTA and pay US duties on their shipments. This change will resolve this
technical issue and save producers up to $60 million a year in duties and other fees on Canadian
crude exports to the us.20
CUSMA and Energy
CUSMA eliminates a separate energy chapter; provisions related to energy are spread throughout the agreement and attached by way of a separate enforceable bilateral US-Canada side letter
on energy regulation and regulatory transparency, which does not apply to Mexico.
Cultural Industries
Culture as a component of international trade is increasing in value. A 2018 UN report states
that trade in creative goods more than doubled from $208 billion in 2002 to $509 billion in 2015
and continues on a steady increase.21 As trade liberalization has increased, culture has been
drawn in without the negotiating parties really agreeing as to how it should be handled. The
difficulty originates with a fundamental difference of opinion as to the nature of culture and
cultural goods.
Some believe that culture includes only the fine arts and excludes books, magazines, films ,
television programs, and popular music. These items are considered to be commodities to be
governed by market forces alone. Those with this view see cultural policies as barriers to trade
that should be dismantled in a trade-liberalization process. On the other side of the debate,
culture is seen as extending beyond the fine arts, and cultural goods and services are viewed as
vehicles for transmitting intangibles such as ideas, values, identity, and a sense of shared experience and community.
These different perspectives lead to conflicting views on whether domestic governments
should support culture. In many countries, including Canada, domestic markets are often not
large enough for cultural industries to achieve the economies of scale necessary to compete with
large multinational entertainment industries. Many governments intervene to ensure access to
local markets for Indigenous cultural goods and services. Measures to support culture corn monly take the form of public funding, controls on foreign access to distribution and retail services markets, and controls on foreign ownership. These measures are usually aimed at ensuring
that local production remains viable, not at keeping foreign cultural goods out.
NAFTA contemplates a cultural-industries exemption, but the degree of protection it provides is debatable because NAFTA itself has no provision for cultural industries. Instead, it incorporates the provisions of the CFTA into the NAFTA text. The CFTA defined five types of
cultural activity:
1. printed publications,
2.
3.
4.
5.
film and video,
music recording,
music publishing, and
broadcasting.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3
The North American Free Trade Agreement (NAFTA)
The cultural exemption provides that cultural industries are exempt from the provision of the
CFTA other than in certain specified situations but then provides that another member country
may retaliate against the use of the cultural exemption by taking actions of"equivalent commercial effecf'22 Thus, the protection provided is flawed and may, as one writer has described it, "be
more diplomatic in nature than legal:'23
CUSMA and Culture
CUSMA retains the cultural-industries exception contained in NAFTA, which is a key provision
for Canada's cultural sovereignty, including in the online environment, and adds new provisions
on dispute settlement and retaliation.24
Government Procurement
Chapter 10 of NAFTA is devoted to government procurement (the purchase of goods and
services by governments) because the value of government-purchased goods and services
in the three NAFTA countries is substantial. Procurement is defined to include leases and
rentals as well as the sale of goods and services. Governments and government-owned enterprises are affected by this provision. Member countries are committed to giving providers
of goods and services from other NAFTA countries treatment no less favourable than that
given to domestic providers. A transparent non-discriminatory process for tendering and bid
review has been established. This includes advance publication of invitations to bid, requirements for qualification of suppliers, time limits for tendering, requirements on documentation, and a procedure for the review of the bidding process by an independent body in each
of the member countries.
One weakness of these provisions is that they do not clearly apply to subnational governments (provinces, for example) or their agencies, as was illustrated in a Chapter 11 dispute,
described below.
BOX 3.5
Case Highlight
ADF Group Inc v United States of America
Case Name and Tribunal
Issue
ADF Group Inc v United States of America (NAFTA ICSID Award,
2003)2 5
Was the state of Virginia bound by the government procurement provisions of NAFTA?
Facts
Decision
In the late 1990s, the Department ofTransportation in the state
of Virginia issued a bid for the Springfield Interchange highway
improvement project. ADF, a subsidiary of a Canadian company, subcontracted to supply the structural steel requ ired for
the project. As contemplated by a combination of state and
federal law that funds state highway projects, the ADF subcontract contained a "Buy America" clause, specifying that only
steel fabricated in the US could be used in the project. ADF
wanted to bring US-origin steel materials to their production
facilities in Canada for fabrication there. ADF submitted a claim
to arbitration against the United States in mid-2000, asserting
that the "Buy America" law prevented it from fabricating the
steel for the project in Canada and violated NAFTA's investment
chapter. ADF claimed $90 million in damages.
In the unanimous award, the tribunal rejected ADF's claims
under two NAFTA provisions because those provisions do not
apply to government procurement such as the supply of steel
for the Springfield Interchange project. Although on the face of
it, the "Buy America" clause violated the Article 1106 provision
prohibiting a government preference for the goods and services of the country's own territory, this provision was superseded
by Article 1108 of NAFTA, whereby these obligations do not
clearly apply to all actions by state or provincial governments.
Analysis/Application
NAFTA provisions on government procurement apply to federal entities only as wel l as to subnational governments that
have agreed to be bound by them.
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CUSMA and Procurement
When CUSMA is implemented, the government procurement arrangements will be changed
significantly. In 2014, the renegotiated WTO Agreement on Government Procurement (GPA)
entered into force.26 Canada and the United States agreed to maintain access to each other's
procurement markets via the GPA rather than adopt new obligations under CUSMA.27 The
GPA is far greater in scope than NAFTA's government procurement provisions and grants access
to Canadian businesses that want to bid on projects in 37 US states and avoids the uncertainty
of Article 1108 of NAFTA.28 Canada and Mexico will adhere to the government procurement
regime set out in the CPTPP, which includes other beneficial provisions, such as online bidding,
that the GPA does not.29
Rules Relating to Trade in Services
The services provisions of NAFTA impose a general set of obligations on the governments of the
member countries relating to the production, distribution, marketing, sale, delivery, and purchase
of a service, as well as the presence in one member country of a service provider from another
member country. The member countries agreed to extend national treatment and MFN treatment
to each other's service providers. They also agreed to waive any requirements for local presencethat is, they do not require that a service provider have a local office. Some quantitative restrictions
are tolerated. Existing non-discriminatory measures that limit the number of service providers or
the operations of service providers are protected if they are listed in annexes to NAFTA.
Services Covered by the Agreement: Exceptions and Reservations
An important topic for a country such as Canada, which has a stronger tradition of providing
public services than the United States or Mexico, is the issue of protecting services that have
traditionally been provided by the public sector. Under Article 1108 ofNAFTA, the parties listed
non-conforming measures under the jurisdiction of the federal or provincial governments that
BOX 3.6
Case Highlight
Cross-Border Trucking
Case Name and Tri bunal
Issue
In the Matter of Cross-border Trucking Services (NAFTA Arbitral
Did the United States vio late the requirements of national
treatment and MFN treatment by not allowing Mexican trucking firms to operate in the United States?
Panel, 2001 )30
Facts
The United States had a moratorium on accepting applications
from Mexican-owned t rucking firms to operate in the US but
was accepting appl icat ions from Canadian t rucking firms to
operate in the US. The United States had listed this as an Annex 1 reservat ion to NAFTA, but t his reservat ion had expired.
Mexico alleged t hat the United States was in violation of Article 1202 (national treat ment for cross-border services) and/or
Article 1203 (most-favoured-nat ion treatment for cross-border
services). The United States alleged that Mexican trucking
companies can be treated differently from US and Canadian
trucki ng firms because Canada had wha t the United States
considered to be an "equivalent" regulatory system, while
Mexico did not and, therefore, was not in "like circumst ances"
for the purpose of t he relevant articles of NAFTA.
Decision
The United States was in violation of its obligations under Article
1202 (national treatment for cross-border services) and Article
1203 (most-favoured-nation treatment for cross-border services).
Analysis/Application
The fact that the Mexican regulatory system may be inadequate is an insufficient legal reason not to consider applications from Mexico. The panel did not determine that NAFTA
parties cannot set the level of protection they deem appropriate, nor did it determine that the safety standards set by NAFTA
members must be applied. However, failing to consider and
award applicat ions on the basis of nationality is a prima facie
case of discriminatory t reat ment.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
they wish to protect from the disciplines of the services provisions. Annex I of NAFTA covers existing measures, and Annex II allows new non-conforming measures if they are listed.
Both the federal government and the provincial governments participated in protecting their
respective areas of legislation. Because of the potential overlap in these areas, it was not always
clear which government was responsible for listing the reservation. Successive Canadian govern ments have taken the position that our public health care system is protected and that services
that existed prior to the agreement are protected.
CUSMA and Services
The chapter on cross-border trade in services in CUSMA retains the major characteristics of the
NAFTA counterpart but slightly expands exceptions in areas pertaining to health, education,
and other social services; culture; maritime cabotage; fisheries; and Aboriginal and minority
affairs.31 The CUSMA chapter also enhances the transparency and predictability requirements
for service providers but fails to include modernization with respect to e-service providers.
Professional Licensing and Certification
Under Chapter 16 ofNAFTA, professional licensing and certification must be based on objective
and transparent criteria. They should be no more burdensome than necessary to ensure quality
of service and must not represent a disguised restriction on trade in services. A major obstacle
to free trade in services has been the inability of various professional communities to establish
acceptable international standards for professional accreditations. Even the EU, which has been
the most successful example of regional agreement and integration, has had problems in this
area. Each of the NAFTA member countries has agreed to encourage its own professional bodies
to develop mutually acceptable standards for licensing and provide for reciprocal recognition.
The member countries have agreed to provide a fair review and a reply to any application for
professional licensing by an individual from another member country.
CUSMA and Professional Services
Unlike provisions in Chapter 16 ofNAFTA, CUSMA includes an annex on professional services
that comprises non-binding guidelines for mutual recognition agreements for the professionalservices sector as well as an annex on delivery services and a committee on transportation
services. 32
Temporary Entry of Business Persons
Business persons are defined as citizens of a NAFTA member country who are engaged in trade
in goods, services, or investment. There are several categories:
• business visitors engaged in international activities such as research and development,
production, marketing, sales, distribution, or service;
• traders in goods or services between their own country and another NAFTA country;
• investors seeking to commit a substantial amount of capital, employed in a supervisory,
executive, or skilled capacity;
• managerial, specialist, or executive intra-company transferees; and
• specified professionals who meet professional qualifications.
The three countries have agreed to grant temporary entry to these business visitors on a
reciprocal basis. NAFTA residents entering another NAFTA country on business must present
the required documents, including a passport, and proper verification of the individual and the
business purpose of the visit. Unlike in the EU, these provisions do not create a common market
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
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for freedom of movement of labour within the area-that is, they do not give a resident of one
country the right to take up residence and work in another member country.
CUSMA and Temporary Entry of Business Persons
The CUSMA provisions on temporary entry look the same as under NAFTA despite Canada's
negotiating team pushing for an expansion of the eligibility requirements for work visas for Canadian business professionals, including those in finance and in the digital industries.33
Financial Services
The financial services provisions are found in Chapter 14 of NAFTA, which provides for activities relating to the financial institutions of the member countries, investment in financial
institutions, and cross-border trade in financial services. Services covered include insurance,
securities, and banking. The provisions apply to subnational governments (provinces, for example) and some self-regulatory bodies. A number of obligations have been created that include
•
•
•
•
the right to transfer profits,
the right to fair treatment upon expropriation or acts tantamount to expropriation,
limitations on imposition of special formalities, and
an obligation to refrain from lowering standards in order to attract investment.
All countries are allowed to make reservations for non-conforming measures relating to
financial services, and these reservations are listed in the annexes to NAFTA. General obligations that conform to similar obligations in the services agreement include the following:
• National treatment. In addition to the normal requirement to give treatment no less
favourable than that extended to domestic providers, NAFTA countries have agreed to
provide equality of competitive opportunity.
• MFN treatment. This is the usual requirement of treatment no less favourable than is
given in like circumstances to investors of other countries.
• Right of establishment. This is the right to establish a business in another country without
establishing previous residency or citizenship in that country.
Although national service providers of the member countries may establish financial institutions in any other member country, that country has the right to require an investor to incorporate under the domestic law of the host country and may impose terms and conditions on that
incorporation. This provision is significant to the banking industry, where the objective of the
United States was to obtain the right for its banks to establish branches in Canada and Mexico.
Also particularly relevant to banking are a number of concessions made by Canada to the
United States in the CFTA. These commitments to the United States continue under NAFTA.
They include
• exemption from Canadian prohibition of non-resident ownership of more than 10 percent of shares in trust and insurance companies;
• exemption from prohibition oflimits on non-resident ownership of more than 25 percent
of shares of a trust company, insurance company, or Canadian chartered bank;
• exemption from Canadian asset ceiling rules, which limit aggregate asset holdings of
foreign banks to 12 percent of the banking sector; and
• permission for US investors to open multiple branches in Canada without approval from
the minister of finance.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
The government of Mexico agreed to allow financial service providers incorporated in another member country to establish financial institutions in Mexico, subject to certain aggregate
market capital restrictions for a six-year transitional period. After this period, NAFTA allowed
Mexico to prevent purchases of Mexican banks by the United States and Canada for a further
three years if foreign banks controlled more than 25 percent of the market.
CUSMA and Financial Services
CUSMA makes some adjustments to its NAFTA financial services chapter by clarifying the
national treatment and MFN provisions, increasing transparency requirements, and incorporating other technical changes in line with modern times.34 These changes in CUSMA will
significantly affect the financial services industry with respect to very technical matters. For
example, under CUSMA, financial institutions will be able seek out low-cost delivery centres
in the three member countries for transfer of information services and location of computing
facilities.35
Rules Relating to Intellectual Property
Intellectual property rights include patents, trademarks, and copyright. Owners of these forms
of intangible property have exclusive rights to the use and protection of their property within
the country that has conferred protection. Canada and the United States imposed obligations
on Mexico in this area because it did not have a history of enforcement or the sophisticated
legal rules to deal with infringement of these rights. NAFTA requires that its members amend
domestic law to include specific enforcement obligations that are based on the following four
international agreements:
1. the Geneva Convention for the Protection ofProducers ofPhonograms, 1971;
2. the Berne Convention for the Protection of Literary and Artistic Works, 1971;
3. the Paris Convention for the Protection of Industrial Property, 1967; and
4. the International Convention for the Protection ofNew Varieties of Plants, 1978 and 1991.
In addition, the parties agreed to the principle of national treatment with respect to recognition of rights and enforcement of rights.
CUSMA and Intellectual Property
CUSMA's Chapter 20 is 63 pages long and makes significant changes in the laws governing intellectual property among the three nations.36 For instance, the copyright term has increased from
eight years to ten. The copyright term has increased from life of the author plus 50 years to life
of the author plus 70 years.37
There is a compensation mechanism built in under CUSMA in the event the Canadian
Intellectual Property Office (CIPO) delays issuing patents, and pre-established damages
have been introduced for trademark counterfeiting.38 CUSMA also stipulates that the three
member countries must pass legislation that would allow border services to seize suspected
trademark-counterfeit goods and pirated copyright goods while they are in transit. 39 The
CBSA currently does not have this authority. The CBSA would also have expanded competencies to determine if seized goods are infringing and destroy them once such determin ation is made.40
CUSMA's intellectual property provisions for the most part reflect the CPTPP free trade deal
that Canada entered into force in December, 2018, and puts the provisions in line with other
international intellectual property treaties.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
Protection of the Environment and Labour: The Side Agreements
NAFTA marked the first time that labour and environmental provisions were associated with a
free trade agreement. They were not integrated into NAFTA but were negotiated as separate side
agreements: the North American Agreement on Environmental Cooperation (NAAEC)41 and
the North American Agreement on Labour Cooperat ion (NAALC). 42 The two side agreements
contain lofty objectives such as fostering the protection and improvement of the environment in
the territory of the parties and the improvement of working conditions and living standards in
each party's territory. The hope of achieving these objectives is, however, diminished by the principle that each country, while agreeing in principle to high standards, is free to establish its own
levels of environmental and labour protection and to enforce those domestic laws.
CUSMA and Labour and the Environment
The provisions on labour and the environment are incorporated into the body of CUSMA
rather than into stand-alone agreements, which illustrates a shift in the way these obligations
are viewed among the three nations. It is no longer strange to include environmental and labour
provisions into the body of a free trade agreement. The CPTPP and the CETA both have similar commitments imbedded and, at the time of writing, it is the federal government's policy to
ensure these matters are included in all of Canada's modern trade agreements.
The CUSMA labour chapter expands on the obligations referenced in the NAALC by explicitly incorporating the International Labour Organization Declaration on Fundamental Principles and Rights at Work. 4 3 The new labour provisions include an obligation on member states
to pass legislation that
•
•
•
•
prohibits the importation of goods produced by forced labour,
addresses violence against workers exercising their labour rights,
ensures that migrant workers are protected under labour laws, and
implements policies that protect against employment discrimination on the basis of
gender. 44
Mexico is most affected by these provisions in CUSMA, as at the time of negotiations it
did not have robust labour and environmental protection laws domestically, while the US and
Canada have long established similar protections in their jurisdictions. For example, Mexico will
have to implement significant changes in its justice system so workers have the right to place
secret-ballot votes.
The automotive manufacturing sector is also affected by the new labour-related provisions
in CUSMA.4 5 The CUSMA rules of origin chapter includes a labour-value content requirement
whereby a percentage of a vehicle's value must be produced by workers earning at least US$16/
hour in order for the vehicle to be deemed as originating from a CUSMA country.46
CUSMA reiterates and expands on NAAEC obligations to maintain high levels of environmental protection while ensuring that trading partners do not gain an unfair trading advantage
by not enforcing their environment laws.47 CUSMA's new environmental provisions address
trafficking in wildlife, timber, and fish, and include a commitment to prohibit subsidies that
negatively affect fish stocks and to address ocean litter, among other obligations.48
North American Agreement on Environmental Cooperation (NAAEC): the side agreement on environmental protection
for the NAFTA region negotiated by Canada, the United States, and Mexico after NAFTAwas signed but before it was ratified by US
Congress
North American Agreement on Labour Cooperation (NAALC): the side agreement on labour protection for the NAFTA
region negotiated by Canada, theUnited States, and Mexico after NAFTAwas signed but beforeit was ratified by US Congress
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
Unlike the side agreements where the NAAEC and NAALC have separate dispute-resolution
mechanisms, CUSMA's trade-dispute settlement provisions are applicable to environmental and
labour disputes.49
Dispute Settlement Under NAFTA
Trade disputes are bound to arise under any trade agreement. These disputes sometimes stem
from problems unforeseen at the time of negotiation. More commonly, they are due to the diversity of political, economic, and social pressure experienced by member countries as they attempt
to honour their multinational commitments, which curtails complete freedom of domestic
policy. There are three main categories of dispute-settlement methods provided for in NAFTA,
excluding those in the side agreements:
• Chapter 20. General dispute resolution available only to governments,
• Chapter 19. Anti-dumping (AD) and countervailing duty (CVD) dispute resolution, and
• Chapter 11 . Investor-state dispute resolution.
General Dispute Resolution: Chapter 20
The NAFTA Chapter 20 process is available exclusively to the national governments of the parties; only they may request a Chapter 20 panel review. This provision applies to all disputes
between the parties regarding the interpretation or application of the agreement and to situations where a party alleges that another party is contravening the agreement. It is also the provision used if a party alleges nullification or impairment ofNAFTA's benefits. To establish this
complaint, a party must show that a measure otherwise consistent with NAFTA has resulted in
the impairment of an expected NAFTA benefit and that this outcome was not anticipated at the
time the agreement was negotiated.
If a dispute arises that falls under Chapter 20, the parties have a duty to consult. If consultation does not result in agreement, the matter is referred to the Free Trade Commission (the
Commission), which is composed of an equal number of cabinet-level representatives from each
country. The Commission has a secretariat to assist it. If the Commission fails to resolve the
dispute, either party may request that it refer the matter to compulsory binding arbitration or to
a panel of experts (a NAFTA binational panel). Binational panels are composed of five members
that are selected from a roster prepared by each country.
It is important to note that the decision of a panel under Chapter 20 is not binding. A Chapter 20
panel may produce an initial report that contains recommendations for the resolution of the
dispute and provide an opportunity for the parties to present further views. There is no provision
in this process for representation of anyone other than the parties; there is no contemplated role
for private parties or for provincial or state participation in this process.
If any party disagrees with the panel's recommendations for resolution in the initial report,
that party may present written comments within 14 days. The panel may then reconsider the
report and issue a final report, which is due within 30 days of the issuance of the initial report.
nullification or impairment: acomplaint referring to the nullification or impa irment of benefits a party could reasonably expect under atrade ag reement; to establish this complaint under NAFTA, it is necessary toshow that a measureotherwise consistent
with NAFTA hasresulted in the impairment of an expected NAFTAbenefit and that this outcome was not anticipated at thetime the
agreement wasnegotiated
Free Trade Commission: provided for under NA FTA, it iscomposedof an equal number of Cabinet-level representatives fromeach
country and is thebody charged with theresponsibility toconsult when there is adispute between parties to NA FTA
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Part I Public International Law
This procedure reinforces the intention that Chapter 20 panels function in an advisory role
as well as an adjudicative one. Chapter 20 provides that the disputing parties "shall agree on
the resolution of the dispute, which normally shall conform with the determinations and recommendations of the panel:' Whenever possible, the resolution should consist of either nonimplementation or removal of a measure not conforming to the agreement or compensation.
If the Commission does not agree on the resolution of the dispute, the party that considers its
fundamental rights or anticipated benefits under the agreement to have been impaired may
suspend benefits of equivalent effect to the other party until there is a resolution of the dispute.
The Chapter 20 process combines elements of political negotiation with some judicialization
of dispute settlement. Judicialization, or the use of adjudicative procedures, is characterized by
impartial judges applying agreed-upon rules or standards to the facts of a case. This represents
a compromise of factors acceptable to the parties. The United States had the most to gain from
the retention of negotiated settlements, which preserve sovereignty and reward political power,
but Canada wanted dispute settlement to be characterized as much as possible by adjudicative
procedures. Canada, with a smaller economy and a significant dependence on the United States
as its largest customer, had a greater need to see the terms of the agreement honoured and the
dispute-settlement system work effectively.
It should be noted that NAFTA Chapter 20 permits the three countries to select the forum
for the dispute. They may choose that the matter be settled by a binational panel and follow
the process outlined above or opt for the matter to be resolved under the auspices of the WTO.
Recall that the WTO Agreement contains general rules for international trade that apply to
WTO member states. These rules were considered in Chapter 2 of this text. WTO panels adjudicate whether a WTO member has complied with these general rules. If a country is found to be
non-compliant with WTO rules, it is expected to amend its law so that it becomes compliant.
The choice is left to the discretion of the parties to the dispute. Many disputes that concern
countries outside of NAFTA as well as NAFTA members and that do not touch on application
of domestic law are heard by the Dispute Settlement Body (DSB) of the WTO to ensure other
affected countries can participate.
CUSMA and Chapter 20
On Canada's insistence, CUSMA preserves the essence of the state-to-state dispute-resolution
process in Chapter 20 and incorporates provisions that ensure that parties cannot unreasonably
delay or avoid the formation of a panel.SO
BOX 3.7
Chapter 20: General Dispute Resolution Mechanism
UNDERNAFTA
It is possible to summarize the key points of the general dispute resolution process established by
Chapter 20 as follows:
the process is available only to the national governments of the parties,
parties must consult before referring the matter to a panel,
the decision of a panel is not absolutely binding on the parties, and
the p rocess combines political negotiation with adjudicative procedures.
judicialization: the process of ensuring that disputes are settled by impartial judges applying existing and transparent rules or
sta ndardstothe facts of the case
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
Anti-Dumping and Countervailing Duty Dispute Resolution: Chapter 19
As we know from our study of the WTO, dumping and subsidies are frowned upon but not
illegal. Under WTO rules, importing countries are permitted to levy duties on goods that are
dumped or subsidized according to the domestic law of the importing country, which is expected
to conform to the overall prescription of the WTO. Under NAFTA, each country retains its own
AD and CVD laws, but a system of binational panels oversees the competent investigating
authorities in each country and determines whether they are applying their own law fairly to
the situation. A country can comply with its WTO obligations but contravene its own domestic
legislation with respect to how it applies the AD and CVD laws. The role of the binational panel
review is to determine whether the domestic laws were fairly and correctly applied.
Binational Panel Review
Under NAFTA Chapter 19, each country replaced its judicial review of final AD and CVD duty
determinations with a binational panel review. Under GATT/WTO rules, and under Canadian,
US, and Mexican law, AD and CVD duties cannot be imposed unless there is a finding of dumping or subsidy and a finding of material injury or threat of material injury to a domestic industry.
NAFTA provides that a review based on the administrative record of a final AD or CVD determination of a competent investigating authority may be requested in order to determine whether
such determination was in accordance with the AD or CVD law of the importing party. "Competent investigating authority" is defined in Canada as the Canadian International Trade Tribunal
(CITT) or the deputy minister of national revenue (customs and excise); in the United States,
it is defined as the International Trade Administration of the US Department of Commerce
(Commerce) or the US International Trade Commission (ITC); and in Mexico, it is defined as
the designated authority within the Secretariat of Trade and Industrial Development (SECOFI).
The panel appointed to review an AD or CVD may uphold the final determination of the
competent investigating authority or remand it to the investigating authority for action consistent with the panel's decision. Remand is the process by which a higher court or tribunal sends
a case back to the original body to be dealt with again.
However, the panel does not have the power to substitute its own decision for that of the
investigating authority; it may only agree with the decision or remand the case. Panels must
apply the same domestic substantive law that the administering agency in the importing country
must apply. This law is defined in Article 1904 ofNAFTA as "relevant statutes, legislative history,
regulations, administrative practice and judicial precedents:'si The standard of review has been
defined by reference to specific legislation in each of the three countries with the intention that it
be the same as would be applied by the reviewing court of the importing country. The Baby Food
case in Box 3.8 illustrates the decision-making process and the effect of a finding of dumping.
binational panel: apanel of trade experts convened under the provisions of theCFTAor NAFTAto settleadispute that has arisen
under the provisions of Chapter 19 or 20of NAFTA
competent investigating authorities: thedomesticbody in eachof the NAFTA member countries that hastheresponsibility of
making decisions as towhether anti-dumpingor countervailingduties should be imposed; in Canada, it isthe Canadian International
Trade Tribunal (CITT) or deputy minister of national revenue (customs and excise); in the United States, it isthe International Trade
Administration of theUSDepartment of Commerce or the US International Trade Commission (ITC); and in Mexico, it isthedesignated
authority within the Secretariat ofTrade and Industrial Development (SECOFI)
Department of Commerce (DOC): a USdepartment that is one of the principal decision-makers (that is, a competent investigating authority under NAFTA) in cases for determining whether import duties will be payable in light of allegations of dumping
or subsidy
remand: the process by which a higher court or tribuna l sends a case back to the original body to be dea lt with aga in, usually
within certain parametersset by thehighest court or tribunal
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Part I
BOX 3.8
Public International Law
Case Highlight
Baby Food Dumped in Canada
Case Name and Tribunal
Issue
In the Ma tter of Certain Prepared Baby Food Originating in or Ex-
Did the CITT make an appropriate finding of injury given that
Heinz's profits still increased during the period in question and
that other reasons for Heinz's loss of market share were recognized by the committee?
ported From the United States of America (Injury) (NAFTA Bina-
tional Panel, 1999)52
Facts
A preliminary finding of dumping was made by Canada's deputy minister of national revenue (customs and excise) after an
investigation found that the export price of Gerber baby food
was substantially lower than its normal price, with a weighted
average dumping margin of 59.76 percent. Of the baby food
that was being imported into Canada from the United States,
100 percent was found to have been dumped. Canada's only
other supplier of baby food, Heinz Canada, initiated this process by filing a complaint and claiming that it was materially injured; its domestic production and sales had declined
more than 20 percent, and it lost tens of millions of dollars
between the first and second fiscal years investigated by the
tribunal. The overall market for baby food shrank during the
same time and, while Heinz claimed that its sales should have
been much higher, the company still increased its profits by
1O percent during the same period of time. CITT cited three
reasons for loss of operating profits: (1) cost and expense increases, although Heinz admitted that these had nothing to do
w ith dumping; (2) volume losses, which w ere experienced by
both Gerber and Heinz as a result of declining birth rates and
a move to homemade baby food and alternative food; and (3)
price erosion, which was not entirely a result of cost increases
and volume declines. The preliminary finding of dumping was
upheld by the CITT.
Decision
The determination of injury was appropriate. Heinz should
have been able to post greater profits in the second fi scal year
investigated by the committee than it did in the first, and it
would have done so had it not been for the dumped Gerber
baby food.
Analysis/Application
Even if a domestic producer is still profitable, it may be able to
make a successful case for injury w here its profits should have
been higher but for an instance of dumping. Similarly, when
multiple factors can account for injury, a domestic producer
may still be able to make a successful case for injury when
dumping is one of several causes of the inj ury. It need not be
the sole cause of the injury.
Aftermath
Following this decision, Gerber left the Canadian market.This led
the CITT to hold a public interest hearing on reducing the antidumping duties by two-thirds because of the negative impact
the loss of competition for baby food would have on low-income
families and because of the resulting loss of consumer choice.
Gerber products did not return to the Canadian market following
this decision until the company was acquired by Nestle in 2007.
Composition of the Panels
According to Article 1901 .2( 1), the panels will be made up of five members who "shall be of good
character, high standing and repute, and shall be chosen strictly on the basis of objectivity, reliability,
sound judgment and general familiarity with international trade law:' Each of the parties will maintain separate rosters of potential panelists. Panel members must be citizens of one of the parties.
Unlike Chapter 20 panels, Chapter 19 panels are accessible by private parties. This is consistent with the fact that a Chapter 19 review is an extension of domestic proceedings. In addition, there is generally less government involvement with a Chapter 19 review than with a
Chapter 20 review. In Chapter 19 reviews, decisions are intended to be binding upon the parties
and there is no provision for political negotiations, as there is with a Chapter 20 review. The fact
that private parties have standing in this review process also contributes to some of the intensive
lobbying that we have seen from industry groups in the United States.
Time Limits for Panel Decisions
One of the objectives of the parties to NAFTA was to see disputes resolved in a timely fashion.
For this reason, strict tim e limits were imposed. In most cases, there should be a final decision
within 315 days of the date on which a request for a panel is made. Generally, panels have met
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
these time limits, although there have been exceptions due to panelists stepping down to avoid
any appearance of conflict and also due to the remand process, because successive remands may
result in substantial delays before a final determination is made.
The Effect of Chapter 19 Panel Decisions
The decision of a panel is binding on the parties with respect to the particular matter that is
before the panel. The finality of the panel's decision is further emphasized by the provision stating that a final determination by a panel may not be reviewed under the judicial review procedures of the importing party provided that the panel determination was requested within the time
limits set out in NAFTA.
The Extraordinary Challenge Committee
The only exception to the rule of finality of Chapter 19 panel decisions is found in the
extraordinary challenge procedure. The procedure provides for the establishment of an
Extraordinary Challenge Committee (ECC) made up of three members selected from a joint roster composed of judges or former judges. This provision allows an involved member government
to request the extraordinary challenge procedure where it is prepared to make an allegation that
• a member of the panel was guilty of gross misconduct, bias, or a serious conflict of interest, or otherwise materially violated the rules of conduct; or
• the panel seriously departed from a fundamental rule of procedure; or
• the panel manifestly exceeded its powers, authority, or jurisdiction set out in this articlefor example, by failing to apply the appropriate standard of review; and
• any of the above actions has materially affected the panel's decision and threatens the
integrity of the binational panel review process.
If an ECC finds that the narrow grounds for an extraordinary challenge have been established, the ECC may vacate or remand the binational panel decision. The drafters of the extraordinary challenge process expected that it would be used infrequently. The role of the ECC is to
determine whether the binational panel conducted their assessment in an appropriate manner.
This does not involve reviewing the evidence but, rather, reviewing the process by which the
panel conducted its work.
CUSMA and Chapter 19
CUSMA retains the substance of Chapter 19 and reaffirms the rights and obligations of the
parties under three WTO agreements that deal with trade remedies, namely the Agreement on
Safeguards, the Anti-Dumping Agreement, and the Agreement on Subsidies and Countervailing
Measures.s3 CUSMA adds new provisions that improve transparency and facilitate investigations.s4 Under the new provisions, Canada, USA, and Mexico will make additional legal, policy,
and case-specific information available to the public electronically and establish an electronic
filing system, which will allow easier access to interested parties to participate in trade remedy
investigations.ss CUSMA also enhances the notification and information-disclosure requirements and facilitates exchange of information between the CUSMA member states. S6
extraordinary challenge: achallenge that may bebrought by one of the NAFTAparties against the finding of abinational panel,
wherethe panel has committed aspecified procedural error and that error has materially affected the panel's decision and threatens
the integrity of the panel review process
Extraordinary Challenge Committee (ECC): abodyestablished underthe CFTA and NAFTA, composedof three members who
arejudges or retired judges, to hear any extraordinary challenges brought under NAFTA
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Part I Public International Law
BOX 3.9
Chapter 19: The Anti-Dumping (AD) and Countervailing
Duty (CVD)
Dispute Resolution Mechanism Under NAFTA
The AD and CVD dispute resolution mechanism can be summarized as follows:
the dispute-resolution mechanism provides binational panel review of final AD and CVD
determinations;
the panel issues a single, binding decision- it is empowered to remand the case to the
national competent investigating authorities;
the interested parties may request a panel and have a right to be heard; and
a panel decision is binding subject to an "extraordinary challenge:·
Rules Relating to Investment
It is much easier to understand the investment provisions ofNAFTA if the history and proliferation of bilateral investment treaties (BITs) is understood. When first developed, their princi-
pal purpose was to protect the investments of firms from capital-exporting nations (developed
nations), and they were typically negotiated between a developed nation and a less-developed
nation that wished to attract foreign investment and was prepared to provide assurances of fair
treatment for investors. BITs have been the model for the investor-state protection provisions in
NAFTA and most negotiations on investor-state protection. To date, more than 2,900 of these
treaties have been concluded,57 most between a capital-exporting or developed country and a
capital-importing or less-developed country. What is significant about the incorporation of the
provisions in NAFTA and other more recent multilateral trade agreements is that the provisions
now apply between developed countries with active domestic policies, freedom of the press, and
open and transparent judicial processes.
The Usual BIT Provisions
Generally, BITs were designed to address the fears of foreign investors and are, for this reason,
very similar in terms of substantive provisions. They include rules on scope and coverage, general standards of treatment, performance requirements, transfer of funds, expropriation, and
dispute settlement.
Scope and Coverage
Provisions include rules that define "investment" and "investor" and lay out the territorial and
temporal scope of the agreement. There may also be provisions that exclude certain economic
activities reserved for the state.
General Standards of Treatment
These provisions mandate the expectation of fair and equitable treatment, usually with a reference to the principles of customary international law. It is here that we find the requirements for
bilateral investment treaty (BIT): an agreement between two countries establishing the terms and conditions for private
investment by nationals andcompanies of onecountry inthe other country; typically, aBITgrants investments madebyan investor
of one contracting state in the territory of the other a number of protections, including the right to fair and equitable treatment,
protection from expropriation without compensation, free transfer of capital and profits, and full protectionandsecurity
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
national treatment and MFN treatment. The national treatment and MFN rules apply to investments in a similar way to how they apply to goods and services.
Performance Requirements
At one time it was common for host countries to impose restrictions on foreign investors such
as local sourcing, local participation in ownership, and location requirements. These became
less common in the 1990s and are now generally considered unacceptable. Modern BITs do
not permit such restrictions, and NAFTA prohibits specific performance requirements for both
goods and services.
Transfer of Funds
All BITs state that the host country must guarantee the free transfer of funds related to investments to investors of the other party.
Expropriation
Under customary international law, states are allowed to expropriate foreign investment as long
as it is done on a non-discriminatory basis (that is, respecting the principles of national treatment
and MFN treatment), for a public purpose, under due process oflaw, and with compensation.
Dispute Settlement
In traditional treaty practice, disputes between the contracting parties are settled under the general dispute- settlement mechanism included in the treaty. Most BITs, however, include separate
provisions for the settlement of investor-state disputes. At one time, a foreign investor was limited to bringing a claim against the host state in the host state's domestic courts or to having its
home state assume the investor's claim against the host state. BITs allow the investor to sue the
host government directly and are thus remarkable for their extension of public international law
to relationships between the state and private parties. Some 163 states, including Canada, have
ratified the Convention on the Settlement ofInvestment Disputes between States and Nationals of
Other States (ICSID Convention) .58 As such, common practice in modern investment agreements is to provide the investor with the choice of referring the dispute to local courts or to
arbitration under the ICSID Convention.
Most agreements also include an alternative form of arbitration, commonly under the United
Nations Commission on International Trade Law (UNCITRAL) rules. In some cases, the International Chamber of Commerce is also available to resolve disputes.
Under most BITs there is no requirement that local remedies must be pursued or exhausted
prior to international arbitration. Under the typical BIT, the investor simply submits the
notice of claim to the appropriate authority of the responsible government, which then
responds by putting into motion the constitution of the appropriate arbitral tribunal. Thus,
the process is ad hoe, and the arbitrators are private agents, typically private lawyers or academics. Much has changed since NAFTA was signed and BIT signing activity has exploded.
This area, once the preserve of diplomats and state governments, now falls within the purview of the transnational adjudicator. Nuances and ambiguities of these treaties unimagined
by the negotiators are now being plumbed by talented arbitrators as well as vocal members
of the public.
One of the most common criticisms of the BITs by members of the general public is that the
right to sue is determined by the investor's status as an alien. Although this special status was
created in recognition of the particular vulnerability of the foreign investor and reflects the longstanding concern of international law for the rights of aliens, it does result in the foreign investor
having access to a process and remedy not available to domestic investors.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
Public International Law
Investment Provisions under NAFTA: Chapter 11
The investment provisions are among the most important in NAFTA. They provide for
• common rules for the treatment of investment by investors from other NAFTA countries,
• easing of existing investment restrictions, and
• resolution of disputes between investors and governments.
The definition of investment is broad. It includes a business; a share of a business; real estate
or other assets acquired for business purposes; interests in construction contracts, turnkey projects, or concessions; and interests involving a commitment of capital in which remuneration
depends on production, revenues, or profits. Specifically excluded from the definition of investment are claims to money arising from commercial contracts for the sale of goods or services
and the extension of trade financing credit. The obligations undertaken by the NAFTA countries
include the usual national treatment and MFN undertakings. The three governments have agreed
to restrict investment-related performance requirements. With respect to expropriation-the
taking of private property by government for government purposes-the three countries have
agreed to treat investors in accordance with international legal concepts of minimum acceptable
treatment. Expropriation may take place only for a public purpose, on a non-discriminatory
basis, and in accordance with the principles of due process oflaw.
The provisions of Chapter 11 were included in NAFTA to provide assurance of fair treatment
for foreign investors making investments in any one of the three NAFTA countries. Historically, foreign investors have suffered at the hands of host governments in a number of ways that
include seizure of property without compensation, lack of transparent laws and due process, and
unfair treatment by local courts, as well as the most important drawback, which is the traditional
international law principle that individual persons may not sue sovereign states.
Under NAFTA Articles 1115-1138, an investor can bring a claim directly against a member
state for alleged breaches of its obligations. An impartial arbitral panel will be set up under
ICSID or UNCITRAL rules; these are discussed in greater detail in Chapter 10. The arbitral
decision is binding and enforceable in the member states. Canada has faced the largest number
of investor-state arbitration claims-about 39 out of a total of 84 claims against all three countries-and several public interest groups have voiced strong opposition to the rights provided to
NAFTA investors under this chapter.s9
The investor- state provisions of Chapter 11 of NAFTA have proved to be controversial and
have spawned considerable commentary in the popular press as well as in academic circles.
Some observers decry the establishment of "secret tribunals" and the serious "weakening of
national sovereignty"60 and believe that the provisions were drafted for the benefit of big business. The most widely expressed concern is that they create a regulatory chill that dissuades governmental authorities from pursuing social and environmental regulations for fear of challenge,
thus effectively limiting government power to balance public and private interests. Proponents of
the provisions take an opposite view, arguing that the rules allow Canadian businesses to operate fairly and freely abroad, to benefit from national treatment, and to be protected from unfair
government actions. To receive these benefits, they argue, Canada must in turn treat foreign
investments as fairly. Advocates see Chapter 11 as the culmination of a decades-long struggle
to provide assurances of fairness for foreign investors, providing countries with cost-effective
access to capital and encouraging increased efficiency of the market for goods and services in
North America.
expropriation: thetaking of privateproperty by government for government purposes
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
TABLE 3.1
Comparison of NAFTA Chapter 11 Provisions and BIT Provisions
Short Title BIT Provisions
Corresponding
NAFTA Article
Nature of Obligation in NAFTA
1101
Defines qualifying investors and investment s. Parties
reserve the right to exclusive performance of activities
reserved to the state in annex Ill, and to provision of
social welfare and other public services
Nationa l treatment
1102
Parties shall accord treatment no less favourable than
accorded in like circumstances to its own investors
Most-favou red-nation
t reatment
1103
Parties shall accord treatment no less favourable than
accorded in like circumsta nces to investors of any other
party or of a non-party
Sta ndard of treat ment
1104
Parties shall accord the better of national treatment
and MFN t reatment
Minimum standard of
t reatment
1105
Parties shall accord treatment in accordance with internat ional law, includ ing fai r and equ itable treatment
Performance requirements
1106
No part y may impose or enforce performance
requirements in connection with t he establishment,
acquisition, expansion, management, conduct, or
operation of an investment
Transfers
1109
Parties agree to permit all transfers relating to
investment freely and without delay
Expropriation
1110
No party may directly or indirectly expropriate an
investment or take a measure tantamount to expropriation, except for a public purpose, on a non-discriminatory basis, in accordance w ith the due process of
law, and on payment of compensation
11 15-1138
After consultation or negotiation, investor may submit
claim to arbitration under ICSID Convention, additional
fac ility rules of ICSID, or UNCITRAL arbitration rules
Scope and Coverage of
various public services
General Standards of Treatment
Dispute settlement
The difficulty with so much of the commentary on Chapter 11 is that it ignores the very significant contribution of the BITs to the substance of Chapter 11 and fails to recognize that these
provisions are not nearly as revolutionary as either the proponents or detractors would have us
believe. Table 3.1 illustrates the similarity between NAFTA Chapter 11 provisions and the provisions found in most BITs.
CUSMA and Investment
CUSMA largely preserves the investment obligations under NAFTA while it modernizes them
to reflect provisions of new international treaties, like the CPTPP, and incorporates language
regarding aligning investment with corporate social responsibility standards, such as the OECD
Guidelines for Multinational Enterprises. 61 However, CUSMA significantly alters the disputeresolution provisions for investor-state disputes.
CUSMA eliminates future investor-state arbitration proceedings between US and Canadian
parties. Once CUSMA is in force, Canadian and American investors will not be able to access
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Part I Public International Law
the investor-state dispute-arbitration process and will have to sue the governments of Canada
and the United States in the domestic courts, as domestic investors do. This is in response to
growing criticisms of the investor-state dispute-resolution processes and in recognition that US
and Canadian courts are generally perceived as being impartial and able to afford justice to both
foreign and domestic investors. Mexico, Canada, and the US have also agreed to a transitional
period of three years, during which the original NAFTA dispute-resolution provisions will continue to apply only for investments made prior to the entry into force of CUSMA.
Under CUSMA, the United States and Mexico have agreed to retain the NAFTA bilateral
investment dispute mechanism for a narrow set of claims of direct expropriation, violations of
national treatment, or violations of the MFN provision of CUSMA, with additional limitations
to the latter. However, CUSMA requires Mexican and US investors to "exhaust local remedies"62
by first filing their complaints in the courts or administrative tribunals of the host state-the US
or Mexico-and waiting 30 months before initiating arbitration unless such action would be
"obviously futile:'63
If Mexico or Canada do not uphold their investment obligations, Canadian investors in
Mexico and Mexican investors in Canada can have their claim determined by an independent
arbitral tribunal that usually comprises three arbitrators. Their disputes will be heard pursuant to
the dispute-resolution provisions of the CPTPP, which both countries have ratified. The CPTPP
grants access to international investor-state mechanisms for dispute settlement, enabling foreign investors to enforce their rights against the host state of the investment in an independent
international arbitration proceeding similar to the NAFTA dispute-resolution process.
Cases Decided Under NAFTA-Chapter 11
Of the six categories listed in the BIT discussion above- scope and coverage, general standards
of treatment, performance requirements, transfer of funds , expropriation, and dispute settlement-the two most litigated and controversial areas under Chapter 11 ofNAFTA have been
the provisions relating to general standards of treatment and expropriation. The following three
cases (Boxes 3. 10, 3. 11 , and 3.12) are examples of how some of these issues have been decided
by the tribunals.
BOX 3.10
Case Highlight
Loewen Group, Inc and Raymond L. Loewen v United States of America
Case Name and Tribunal
Loewen Group, Inc and Raymond L. Loewen v United States of
America (ICSID Award, 2003)64
Facts
The investor, Loewen Group, Inc (Loewen), a Ca nadian funeral
home operator, made a claim under Chapter 11 as a result of a
judgment awarded against it in a Mississippi state court for approximately $500 million. The commercial transaction that was
the subject of the litigation had been worth less than $5 million, but the jury, encouraged by various prejudicial comments
about foreign multinationals versus a "good ole Mississippi boy;'
awarded punitive damages to teach the foreign interlopers a
lesson.65 Loewen was unable to meet the bonding requirements for an appeal, which would have req uired it to provide
125 percent of the judgment, totalling $625 million. Loewen was
forced to settle the case under conditions of "extreme duress"66
and agreed to pay $175 million to the plaintiff, O'Keefe. Largely
as a result of this case, Loewen encountered financial difficulties and filed under US bankruptcy legislation and ceased to
exist as a business entity. All of its business operations were reorganized as a US corporation. Immediately before going out of
business, Loewen's interest in the NAFTA claim was assigned to
Nafcanco, a Canadian subsidiary of the US corporation that acquired Loewen's business. The claim under NAFTA alleged that
the trial court's fai lure to curb extensive prejudicial testimony
and counsel comment was a violation of Article 1102 (national
treatment), as well as Article 1105 (treatment in accordance with
international law), and that the excessive verdict and judgment
and the Mississippi court's arbitrary application of the bonding
requirements were also a violation of the standard of treatment
obligation (Article 1104)- specifically, fair and equitable treatment. Loewen also claimed a violation of Article 1110- the expropriation provision.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3
The North American Free Trade Agreement (NAFTA)
Issue
Analysis/Application
Was Nafcanco a party for the purposes of Chapter 11 of NAFTA?
A private agreement to settle a matter out of court is not a
government "measure" within the meaning of Chapter 11 of
NAFTA. The purpose of Chapter 11 of NAFTA is to provide foreign businesses with a remedy for the actions of a foreign government. When the foreign business is bought by a domestic
business, it will cease to have the necessary standing under
Chapter 11 and the tribunal will have no jurisdiction under
NAFTA to make a determination.
Decision
The tribunal found that the Mississippi court decision was improper and discreditable and not consistent with minimum
standards of international law and fair and equitable treatment;
however, Loewen's case failed because the business operations
had been reorganized as a US corporation and there was therefore not continuous national identity between the time that
the claim arose and the date of resolution of the claim.
BOX 3.11
Case Highlight
Meta/clad Corp v United Mexican States
Case Name and Court
Decision
Meta/clad Corp v United Mexican States (ICSID Award, 2001)67
The tribunal, in a decision that has been widely criticized by
legal observers, found that there had been a violation of Article
11OS because the Mexican government had failed to provide
a transparent and predictable framework for the investor and
a violation of Article 111 O on the basis that the municipality's
action amounted to an indi rect expropriation.
The decision was reviewed by the BC Supreme Court (i n
accordance with the provisions of the arbitral rules) at the
request of the Mexican government. The BC court di sagreed
with the tribunal's finding of a breach of Article 1 105 and
w ith the finding of indirect expropriation under Article 1110.
The BC court did find, however, that the state government
had effectively rendered the complainant 's investment
worthless by declaring the concession an ecologi cal preserve, and that this amounted to a direct expropriation.
Facts
Metalclad, a US firm, had obtained all necessary federa l permits and assurances from the Mexican government to operate
a hazardous-waste disposal facility in the state of San Luis Potosi but was denied a permit by the local municipality and by
the state government, which declared the land in question to
be an ecological preserve once it became clear how much local
opposition there was to the activities of the US company. Metalclad, no longer able to proceed with its planned operation,
p roceeded against the Mexican government under Chapter 11
of NAFTA, al leging a violation of Article 11 OS-failure to provide t reatment of a foreign investor in accordance with internationa l law, including fair and equitable treatment- and a
violation of Article 1110, the expropriation section.
Analysis/Application
Issue
Did Mexico's denial of a permit to Metalclad amount to expropriation under Artic le 1110 of NAFTA, necessitating
compensation?
BOX 3.12
A successful claim of direct expropriation can be made where
a complainant can demonstrate that government action resulted in its investment being rendered worthless.
Case Highlight
Chemtura Corp v Canada
Case Name and Tribunal
Issue
Chemtura Corp v Canada (NAFTA Arbitration Tribunal, 2010) 68
Was the ban on lindane an indirect expropriation ?
Facts
Decision
Chemtura Corp is a US-based agro-chemical company. It
brought a notice of arbitration under the Chapter 11 provisions of NAFTA, challenging Canada's ban on the use and sale
of the agricultural pesticide lindane. Lindane was banned in
more than 50 countries, as it was a recognized neurotoxin and
widely suspected to be a carcinogen.
The tribunal dismissed Chemtura's claim. Per the NAFTA decision in Pope v Talbot,69 an indirect expropriation requ ires
that the complainant show "substantial deprivation" of an investment. Although the tribunal agreed that the dispute involved an "investment capable of being expropriated;' it did
not fit the requirement that the investment be an "enterp rise"
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
Public International Law
because Chemtura as a company was made up of more than
just the chemical s it sold. Moreover, because lindane was
only one chemical that Chemtura sold and the facts demonstrated that its business actually grew in the year following
the ban on lindane, Chemtura could not demonstrate "substantial deprivation" of its investment. Finally, since the Canadian government took action only with respect to lindane
and not other aspects of Chemtura's business, its actions
were not seen to have controlled Chemtura to the point of
expropriation.
Analysis/Application
Demonstrating that expropriation has occurred requires more
than showing that government action has negatively affected
business outcomes. It must be shown to substantially deprive
the investor of its investment.
What the decided cases illustrate generally is how narrowly the tribunals interpret their jurisdiction and generally how careful they are not to expand the effect of the investor-protection
provisions or to intrude into areas of domestic social and economic policy.
CRITICAL ANALYSIS: Business Law
Canadian Company's Parking Project Rejected in the USA
ParkRUs Ltd (ParkRUs) is a Canadian corporation with principal
business activity consisting of the development and operation
of parking facilities. ParkRUs wholly owns Parking Inc (Parking),
a US subsidiary. Parking entered into an agreement with the municipality ofTucson, Arizona, to construct and operate car parks
in the city. Parking had spent months and thousands of dollars
preparing the proposal and had obtained other necessary permits from the state authorities to operate the car park. The municipality rejected Parking's first proposed project to build and
operate a parkade in the city centre. The municipality advised
that the project was situated in the city centre and in a culturally
protected area designated by the federal government. However,
according to Parking, the city authorized another investor, a local
company, to build parking facilities in the same location in the
city centre despite the federal-protection designation.
Critical Ana lysis Question
Parking brought a claim under Chapter 11 of NAFTA alleging
that the US violated a number of its NAFTA obligations and
claiming damages that arose therefrom. Parking likely claimed
a breach of which NAFTA provisions? Why?
CRITICAL ANALYSIS: Business Law and Ethics
Ethical Concerns and Environmental Regulation
Trade in agricultural products significantly expanded under
NAFTA; however, critics note that it came at the expense of
smaller farmers, who were not able compete with an increase
in the number of pesticide-heavy factory farms, particularly in
Mexico. Small farmers resorted to deforestation to farm more
land and were still unsuccessful. Additionally, the increased
demand for agricultural products led to unsustainable water
use. Similarly, the expansion of the mining sector, especially in
Mexico, came at the expense of local landowners, with subsequent industrial pollution . At the time that NAFTA came into
force, Mexico's environmental laws were lax and enforcement
virtually non-existent; critics note that even after almost three
decades, they are yet to improve significantly. There are cases
that indicate that the poor environmental regulatory regime
prompted some Canadian and US companies to move their
operations to Mexico to reduce their environmental-compliance costs.
On the other hand, NAFTA provided Mexico exponential
economic growth and jobs for a growing population. Mexico's
agricultural exports constitute an important source of foreign
exchange and exports to Canada and the US. The increased
presence of some foreign companies in the agricultural sector
has also shown improvements in labour standards and implementation of sustainable environmental practices.
Critics argue that CUSMA's environmental chapter is not
much of an improvement from the NAFTA side agreement,
NAAEC, as it fails to reference global climate change or the
Paris Agreement. Environmental groups suggest that CUSMA's
environmental provisions are inadequate due to the vague and
unenforceable language that gives the three trading partners
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3
too much leeway in the type of environmental laws and policies they pursue domestically, if any at all. At the time CUSMA
was negotiated, environmental advocates were vying for inclusion of binding environmental provisions for climate, water,
and land pollution and provisions that would ensure the seven
international environmental multilateral agreements-namely,
the Basel Convention, the Convention on Biological Diversity, the
Conven tion on International Trade in Endangered Species of Wild
Fauna and Flora, t he Montreal Protocol, t he Rotterdam Convention, the Stockholm Convention, and the United Nations Framework Convention on Climate Change- were ratified by all t hree
countries, which would ensure greater accountability among
t he three nations for breaking environmental rules.
The North American Free Trade Agreement (NAFTA)
Critical Analysis Questions
1. Some sovereignty is surrendered w hen a country signs
an international agreement. What role should trade
agreements play with respect to environmental
policies?
2. In your opinion, is it ethical for a company to take
advantage of lax environmental regulations to reduce
it s operating costs and thus increase its profits? Why or
w hy not?
3. If a certain course of action with respect to the
environment is illegal in Canada but legal in Mexico,
which lega l standard should a Canadian company
follow when operating in Mexico? Why?
© (2020] Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
CHAPTER SUMMARY
In this chapter, we discussed:
Historical background leading to the conclusion of
NAFTA and later CUSMA.
NAFTA came into force in 1994 in response to growing
competition abroad and created the largest free trade
area in the world at the time.
CUSMA is yet to be ratified by all three member countries but is not a complete overhaul of the NAFTA.
The similarity between provisions in NAFTA and the
GATT.
• The concepts and the language of the NAFTA come from
the GATT.
NAFTA rules for trade in goods.
• NAFTA creates a free trade area characterized by national treatment, MFN treatment, and transparency.
NAFTA rules for trade in services.
NAFTA members extend national treatment and MFN
treatment to each other's service providers and waive
requirements for local presence.
NAFTA intellectual property provisions.
Owners of intangible property have exclusive rights to
the use and protection of their property within the
country that has conferred protection.
• Canada and the United States have imposed obligations
on Mexico in this area.
Environmental and labour protections under NAFTA's
side agreements.
• NAAEC does not prescribe environmental standards;
however it calls for trilateral cooperation among the
member states.
• NAALC attempts to harmonize labour standards among
the three member states.
Dispute-settlement methods under NAFTA.
• Chapter 20: General d ispute resolution available only to
governments.
• Chapter 19: Anti-dumping (AD) and countervailing duty
(CVD) dispute resolution.
• Chapter 11: Investor-state dispute resolution
The rights of foreign investors.
• The investment provisions in Chapter 11 are among the
most important in NAFTA and provide for
- common rules for the treatment of investment by investors from other NAFTA countries,
- easing of existing investment restrictions, and
- resolution of d isputes between investors and
governments.
REVIEW QUESTIONS
1. What is the difference between a free trade area and
a customs union? Why do both appear to derogate
from the MFN principle?Why are they tolerated and
approved by the WTO?
6. How much progress has been made in achieving
common technical standa rds in NAFTA? What is the
basic principle that applies to the setting of these
standards by each country?
2. Explain why the provisions and general philosophy of
NAFTA are so similar to the provisions of the GATT.
7. Are the provisions on sanitary and phytosanitary
measures in NAFTA significantly different from the
3. What is the significance of rules of origin and what is
area treatment? Is it necessary for goods to be wholly
obtained or produced in North America to qualify for
area treatment? Explain.
4. What is the HS and why is it so important for the
international trade in goods?
5. What is the significance of a valid certificate of origin?
provisions in the WTO?
8. Do NAFTA member countries have the same AD and
CVD rules?
9. Have Canadian social services been protected under
NAFTA and, if so, how?
10. Do we have complete freedom of labour movement
in NAFTA? Explain your answer.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
11. Describe the financial services provisions in
NAFTA and compare them with the philosophy
behind the investment principles in NAFTA and
91
foreign-investor protection generally (BITs). Why
are these concepts related?
12. Describe the characteristics of the three disputeresolution mechanisms under NAFTA.
NOTES
1. North American Free Trade Agreement Between the
Government of Canada, the Government of Mexico and
the Government of the United States, 17 December
1992, Can TS 1994 No 2, 32 ILM 289 (entered into
force 1 January 1994), online: Government of Canada
< https://www.internationaI.gc.ca/ trade-com merce/
trade-agreements-accords-commerciaux/ agr-acc/
nafta-alena/fta-ale/ index.aspx?lang=eng>.
2. 27 ILM 281 (1988), (entered into force 1989), on line:
Government of Canada <https://www.international.
gc.ca/trade-commerce/ trade-agreements-accordscommerciaux/ agr-acc/ united_states-etats_unis/ ftaale/ background-contexte.aspx?lang=eng>.
3. Not yet in force; available online: Government of
Canada <https://www.international.gc.ca/tradecommerce/trade-agreements-accords-commerciaux/
agr-acc/ cusma-aceum/ text-texte/ toc-tdm.
aspx?lang=eng >.
4. Protocol of Amendment to the Agreement between
the United States of America, the United Mexican
States, and Canada, Office of the United States Trade
Representative, online: <https://ustr.gov/sites/
default/ files/ files/ agreements/ FTA/ USMCA/ Protocolof-Amendments-to-the-United-States-MexicoCanada-Agreement.pdf>.
5. Amanda Connolly, "With the House of Commons
Adjourned for Su mmer, Here's Where Things Stand
with NAFTA;' Global News (20 June 2019), online:
<https://globalnews.ca/ news/ 5411239/
new-nafta-ratification-su mmer-2019/>.
6. ICSID Case No UNCT/ 02/ 01 , online: Global Affairs
Canada <https://www.international.gc.ca/tradeagreements-accords-commerciaux/topics-domaines/
disp-diff/ parcel.aspx?lang=eng>.
7. In Canada, this has been accomplished through the
NAFTA Rules of Origin Regulations SOR/ 94-14
pursuant to the Customs Tariff, SC 1997, c 36, and the
Customs Act, RSC 1985, c 1 (2nd Su pp).
8. John Paul Tasker, "How Canada's Supply Management
System Works;' CBC News (16 June 2018), online:
<https://www.cbc.ca/ news/ pol itics/
canada-supply-management-explainer-1.4708341 >.
9. Ibid.
10. Ibid.
11. Ibid.
12. Ibid.
13. Ibid.
14. Mary E Burfisher, Frederic Lambert & Troy D
Matheson, "IMF Working Paper: NAFTA to USMCA:
What Is Gained?" (26 March 2019), on line:
International M onetary Fund <https://www.imf.org/
en/ Publications/ WP/ lssues/ 2019/ 03/ 26/
NAFTA-to-USMCA-What-is-Gained-46680>.
15. Kathy L Krug, " USMCA- lmpact on Agricultu re"
(November 2018), online: Norton Rose Fulbright
<https://www.nortonrosefulbright.com/ en/
know ledge/ publications/f3a05b3f/
usmca- -impact-on-agriculture>.
16. Ibid.
17. Art 606-2: Energy Regulatory Measures, North
America Free Trade Agreement on line: NAFTA
Secretariat < https://www.nafta-sec-a Iena .o rg/ home/
texts-of-the-agreement/north-american-freetrade-agreement?mvid=l &secid=6ac38ba0-fdfl4e8b-80ae-8957d3528949#A606>.
© [2020) Emond Montgomery Publications. All Rights Reserved.
92
Part I Public International Law
18. Canada-United States-Mexico Agreement, supra
31. Cross-Border Trade in Services Chapter Summary (last
note 3, eh 4, Annex 4-B, "Product-Specific Rules of
modified 17 June 2019), on line: Government of
Origin:'
Canada <https://www.international.gc.ca/ trade-
19. John M Weekes et al, "NAFTA 2.0: Drilling DownThe Impact of CUSMA/USMCA on Canadian
Energy Stakeholders" (March 2019) 7:1 Energy
Regulation Quarterly. Online: <http://www.
energyregulationquarterly.ca/articles/ nafta-2-0drilling-down-the-impact-of-cusma-usmca-oncanadian-energy-stakeholders#sthash.lrlnyKUx.
dpbs>.
20. Ibid.
21. "Creative Economy Outlook: Trends in International
Trade in Creative Industries" (2018), online (pdf):
United Nations Conference on Trade and Development
<https://unctad.org/ en/ Publicationslibrary/
ditcted2018d3_en.pdf>.
22. Article 2106 of NAFTA, Cultural Industries, on line:
OAS <http://www.sice.oas.org/trade/ nafta/chap-21 .
asp>
23. Barry Appleton, Navigating NAFTA: A Concise User's
Guide to the North American Free Trade Agreement
(Scarborough, Ont: Carswell, 1994) at 191.
24. Cultural Industries Summary (last modified 11 July
2019), on line: Government of Canada <https://www.
international.gc.ca/trade-commerce/ tradeagreements-accords-commerciaux/ag r-acc/cusmaaceum/culture.aspx?lang=eng >.
25. ARB (AF)/00/1, online: ltalaw <https://www.italaw.
com/cases/43>.
26. Government Procurement Summary (last modified
17 June 2019), online: Government of Canada
< https://www.internationaI.gc.ca/ trade-com merce/
trade-agreements-accords-commerciaux/ agr-acc/
cusma-aceum/government_ procurement-marches_
publics.aspx?lang= eng >.
27. Ibid.
28. Ibid.
commerce/trade-agreements-accords-commerciaux/
agr-acc/ cusma-aceum/ cbts-cts.aspx?lang=eng>.
32. Ibid.
33. Temporary Entry Chapter Summary (last modified 29
November 2018), on line: Government ofCanada
<https://www.international.gc.ca/trade-com merce/
trade-agreements-accords-commerciaux/agr-acc/
cusma-aceum/temporary_entry-admission_temporaire.
aspx?lang=eng>; Sophie Nicholls Jones, "The New
NAFTA: Know the Impact of USMCA on Your Business"
(19 December 2018), online: Chartered Professional
Accountants Canada <https://www.cpacanada.ca/en/
news/ world/2018-12-19-usmca-nafta>.
34. Financial Services Chapter Summary (last modified 10
July 2019), online: Government of Canada <https://
www.international.gc.ca/ trade-commerce/ tradeagreements-accords-commerciaux/ agr-acc/ cusmaaceum/financial_services-services_financiers.
aspx?lang= eng>.
35. Christopher N Alam, "USMCA Updates Financial
Services Free Trade Chapter" (5 November 2018),
online: Gowling WLG <https://gowlingwlg.com/ en/
insig hts-resources/ articles/ 2018/
usmca-updates-financial-services-free-tradechapte/>.
36. Mark Evans & David Schwartz, "USMCA versus NAFTA:
What's Changed and What It Means for Intellectual
Property in Canada" (22 October 2018), online:
Lexology.com <https://www.lexology.com/ library/
detail.aspx?g=005d72 1O-cc24-4bd1-bad089963f0cd918>.
37. Intellectual Property Chapter Summary (last modified
10 July 2019), on line: Government of Canada <https://
www.international.gc.ca/trade-commerce/ tradeagreements-accords-commerciaux/agr-acc/ cusmaaceum/ ip-pi.aspx?lang=eng>.
38. Ibid.
29. Ibid.
39. Ibid.
30. Secretariat File No USA-MEX-98-2008-01, online: OAS
Foreign Trade Informa tion System <http://www.sice.
40. Ibid.
oas.org/DISPUTE/ nafta/english/U98081 ae.asp>.
© (2020] Emond Montgomery Publications. All Rights Reserved.
Chapter 3 The North American Free Trade Agreement (NAFTA)
41. 32 ILM 1480 (1993), online: Commission for
Environmental Cooperation <http://www.cec.org/
about-us/ NAAEC>.
42. 32 ILM 1499 (1993), on line: Government of Canada
< https://www.ca nada .ea/ en/ em pi oyment-socia 1development/services/la bou r-rel ation s/ i nternationa I/
agreements/ naalc.html#naalc>.
43. Labour Chapter Summary (last modified 18 July
2019), on line: Government of Canada < https://www.
international.gc.ca/trade-commerce/tradeagreements-accords-commerciaux/ agr-acc/ cusmaaceum/ labour-travail.aspx?lang= eng>.
44. Ibid.
93
S6. Ibid.
S7. "International Investment Agreements Navigator"
(2019), online: United Nations Conference on Trade and
Development Division on Investment and Enterprise
< https://i nvestme ntpol icy.u netad .org/
international-investment-agreements>.
S8. Database of ICSID Member States (2019), online:
International Centre for Settlement of Investment
Disputes < https://icsid.worldban k.org/ en/ Pages/
about/ Database-of-Member-States.aspx>.
S9. Riyaz Dattu & Sonja Pavic, "Canada Seeks to Reform
NAFTA's Investor-State Dispute Settlement Chapter"
(23 August 2017), onl ine: Osler, Hoskin & Harcourt LLP
4S. Ibid.
< https://www.osler.com/ en/ resources/ cross-borderI
2017/ canada-seeks-to-reform-nafta-s-investor-
46. Ibid.
state-d isp >.
47. Environment Chapter and Environmental
Cooperation Agreement Summary (last modified 11
July 2019), online: Government of Canada <https://
www.international.gc.ca/trade-commerce/tradeagreements-accords-commerciaux/ agr-acc/cusmaaceum/ enviro.aspx?lang= eng>.
60. One example is the program "Trading Democracy" by
Bill Moyers, aired on PBS, February 5, 2002.
48. Ibid.
61. Investment Chapter Summary (last modified 10 July
2019), online: Government of Canada < https://www.
international.gc.ca/trade-commerce/tradeagreements-accords-commerciaux/ agr-acc/ cusmaaceum/ investment-investissement.aspx?lang=eng>.
49. Ibid and see Evans & Schwartz, supra note 35.
62. USMCA: Investment Provisions (3 April 2019), onl ine
SO. David A Gantz, "The United States-Mexico- Canada
Agreement: Settlement of Disputes" (2 May 2019),
on line: Rice University's Baker Institute for Public Policy
< https:/ /www.ba keri nstitute.org/ med ia/fi les/ fi Ies/
d 14a5a86/ bi-report-050219-mex-usmca-3.pdf>.
S1. NAFTA, supra note 1, eh 19, art 1904.
S2. USA-98-1904-01, on line: OAS Foreign Trade
Information System <http://www.sice.oas.org/
di spute/ nafta/ english/CaUS980401 e.asp >.
S3. Trade Remedies and Related Dispute Settlement
(Chapter 19) Summary (last modified 10 June 2019),
online: Government of Canada < https://www.
international.gc.ca/ trade-commerce/tradeagreements-accords-commerciaux/agr-acc/ cusmaaceum/ dispute-differends.aspx?lang=eng>.
S4. Ibid.
SS. Ibid.
(pdf): Congressional Research Service <https://fas.org/
sgp/ crs/ row/ IFl 1167.pdf>.
63. Chapter 14, Investment, CUSMA, note 29, online
(pdf): Government of Canada < https://www.
international.gc.ca/trade-commerce/ assets/ pdfs/
agreements-accords/ cusma-aceum/ r-cusma-1 4.pdf>.
64. ARB(AF)/ 98/ 3, online: Ito/ow <https://www.italaw.
com/ cases/ 632>.
6S. Opinion of Sir Robert Jennings (on the General
Nature of Claim) at para 138, online (pdf): italaw
< https://www.ita law.corn/ sites/default/files/ casedocu m ents/italaw9045.pdf>.
66. ARB(AF)/ 98/ 3, Award, at para 7, on line: Ito/ow
< https://www.ita law.corn/sites/d efault/ files/ casedoc u ments/ ita0470.pdf>.
67. ARB(AF)/97/ 1, on line: Ito/ow < https://www.italaw.
com/cases/671 > and 2001 BCSC 664.
© (2020] Emond Montgomery Publications. All Rights Reserved.
94
Part I Public International Law
68. Chemtura Corp (formerly Crompton Corp) v
69. Pope & Talbot Inc v Government of Canada, UNC/TRAL
Government of Canada, Award (2 August 2010),
(Award, 1976), online: ltalaw < https://www.italaw.
on line: lta/aw < https:// www.italaw.com/ sites/ default/
files/ case-documents/ itaO 149_ 0.pdf>.
com/ cases/ 863>.
FURTHER READING
Barry Appleton, Navigating NAFTA: A Concise User's Guide to
the North American Free Trade Agreement (Scarborough,
Ont: Carswell, 1994).
Marian Weaver, ed, NAFTA at 20: Overview, Trade Effects, and
Impact on Agriculture (New York: Nova Science
Publishers, Inc, 2015).
James M Cypher & Mateo Crossa, "Dancing on Quicksand:
Replacement" (Mar/Apr 2019) 341 Dollars & Sense
14-21.
James McBride & Mohammed Aly Sergie, "NAFTA's
Economic Impact" (1 October 2018), online: Council on
Foreign Relations < https://www.cfr.org/ backgrounder/
naftas-economic-i mpact>.
A Retrospective on NAFTA on the Eve of Its
WEBSITES
Government of Canada on CUSMA: <www.international.gc
.ca/trade-commerce/trade-agreements-accords-
Export.gov: <https://2016.export.gov/ FTA/ index.asp>
commerciaux/ agr-acc/cusma-aceum >
LIST OF CASES
ADF Group Inc v United States of America (NAFTA ICSID
Award, 2003) ARB (AF)/ 00/ 1, online: ltalaw < https:! ! www.
italaw.com/cases/ 43>.
In the Matter of Certain Prepared Baby Food Originating in or
Exported From the United States of America (Injury)
(NAFTA Binational Panel, 1999), USA-98-1904-01, online:
OAS Foreign Trade Information System < http://www.sice.
oas.org/dispute/ nafta/ english/ CaUS980401 e.asp>.
In the Matter of Cross-border Trucking Services (NAFTA
Arbitral Panel, 2001 ), Secretariat File No USAMEX-98-2008-01, online: OAS Foreign Trade Information
Loewen Group, Inc and Raymond L Loewen v United States of
America (ICSID Award, 2003) ARB(AF)/ 98/ 3, online:
lta/aw < https://www.italaw.com/ cases/ 632>.
Meta/clad Corp v United Mexican States (ICSID Award, 2001)
ARB(AF)/ 97/ 1, online: ltalaw < https://www.italaw.com/
cases/ 671 > and 2001 BCSC 664.
UPS v Canada (NAFTA Arbitration Tribunal, 2007), ICSID
Case No UNCT/ 02/ 01, online: Global Affairs Canada
< https://www.i nternatio na I.gc.ca/trade-ag reementsaccords-com mercia ux/ to pics-doma ines/ d isp-d iff/
parcel.aspx?lang=eng>.
System < http://www.sice.oas.org/ DISPUTE/ nafta/
english/U98081 ae.asp>.
© [2020) Emond Montgomery Publications. All Rights Reserved.
CHAPTER 4
The European Union and Other
Regional Trade Arrangements
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand:
• the historical development of the European Union
• governance of the European Union
• law-making in the European Union
• the EU'sand Canada'seconomic and trade relationship under CHA
• certain EU laws relevant to Canadian businesses
• the impact of Brexit on the EU and Canada
• other regional trade arrangements
Introduction 95
The Historical Development of the European Union 95
Governance of the European Union 99
Law Enforcement in the European Union 103
CETAand Canadian Business 104
European Union Lega l Provisions Relevant to Canadian
Business 109
Brexit and the EU 118
Other Regional TradeArrangements 119
Chapter Summary 126
Review Questions 126
Notes 127
Further Reading 131
Websites 131
List of Cases 131
Introduction
After the United States, the European Union (EU) is Canada's second-largest trading partner and
the world's largest single common market, with over 500 million consumers.1 Since the entry
into force in 2017 of the Canada- European Union Comprehensive Economic and Trade Agreement (CETA) 2 - an all-inclusive and progressive free trade agreement that covers most aspects of
the Canada- EU economic relationship- trade in goods and services has significantly increased
between Canada and the EU. Canada exported $85.2 billion in goods and services to the EU in
2018, compared to $55.3 billion in goods and services in 2011, and the total imports into Canada
from the EU topped $63 billion.3 Because of its significance to trade in Canada, the EU will be
explored in depth in this chapter. The last part of the chapter will briefly outline other regional
trade agreements and groupings that Canadian businesses should be aware of and consider when
assessing strategies for doing business internationally.
The Historical Development of the European Union
Early Development
After the Second World War, Europe's primary concern was establishing long-lasting peace and
security. The destruction and suffering caused by the two world wars made peace a fundamental
political and economic priority. Today's EU is a result of a long journey toward achieving this
goal, which started with the European Coal and Steel Community (ECSC), which was formed
in 1952. Its members were France, Belgium, Germany, Italy, Luxembourg, and the Netherlands.
95
© [2020) Emond Montgomery Publications. All Rights Reserved.
96
Part I
Public International Law
BOX 4.1
Why Do the Names We Use for the European Union Change?
In this book, you will notice that three different abbreviations for the European Union are used. This
reflects the changes in name that have occurred over the years. So, if we are referring to an event at
a certain point in time, we refer to the union using the name it had at that time. These names, their
abbreviations, and their dates of creation are as follows:
the European Economic Community (EEC): created in 1957 by the Treaty of Rome;
the European Community (EC): created in 1986 after the Single European Act; and
the European Union (EU): created in 1993 by the Treaty on European Union.
Recognizing that coal and steel were sources of military development and might, Robert
Schuman, the French foreign minister, created a plan that would make any war between France
and Germany impossible and that would lead to the creation of the "United States of Europe."
The treaty creating the ECSC was the first step toward this federalist idea. Under the ECSC, treaty
member states agreed to remove tariff barriers on shipments of coal, iron, and scrap metal. The
integration of coal, iron, and steel industries among the original members was intended to create
economic and military unity between France and Germany, thus preventing another war, and
establish a framework for all countries to develop peacefully, cooperatively, and interdependently.
In 1957, the same six countries founded the European Atomic Community and, more importantly, signed the Treaty of Rome.4 It was this treaty that established the European Economic
Community (EEC). The treaty has had far-reaching effects on Europe's economic history and,
indeed, on today's global trading environment. While the ECSC removed tariffs on coal and steel
only, the purpose of the Treaty of Rome was to create a common market in which all countries
agreed to gradually eliminate all trade barriers among themselves and form a common external
tariff on all goods entering the EEC and further the goal of economic interdependence as a
means to permanent peace. Even at this stage the EEC was able to negotiate trade agreements
with non-EEC countries and demonstrate its potential to become a major international actor
and regain its influence on the world political stage, which had been lost as a result of the Second
World War and the rise of the United States.
Important Treaties in the EU's Development
The Single European Act
After 1957, the next major development for Europe was the adoption of the Single European Act, 5
signed by the then 12 members of the EEC, which became the European Community (EC) in
1986. The stated objective of the Act was to progressively establish a single market by the end of
1992. The single market was envisaged as an area without internal borders to goods, services,
capital, and people. To achieve the single market, member states had to abolish barriers of all
kinds; harmonize rules, legislation, and tax structures; strengthen their monetary cooperation;
and impose measures to encourage European firms to work together. As well, the four freedoms
of the single market were promoted:
1. Unrestricted movement ofgoods- ensures that imports move freely within the EC once
they enter any member state.
Treaty of Rome: thefounding treaty establishing the European EconomicCommunity (EEC), signed by France, Belgium, Germany,
Italy, Luxembourg, andthe Netherlands
four freedoms of the single market: created by the EU in the Single European Act of 1986, they are freedom of movement of
goods, unrestricted movement of capital, unrestricted movement of services, and unrestricted movement of people
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
2. Unrestricted movement of capital- enhan ces competition and choice in financial services, gives borrowers access to more diverse and cheaper financing, and permits more
competitive financing for investment and trade within the EC.
3. Unrestricted movement ofservices- frees the movement of services among member states.
4. Unrestricted movement ofpeople-allows labour to move freely within the EC.
Additional goals included eliminating technical barriers-that is, once a product met the
technical standards of any EC member, it would have unrestricted distribution to all EC coun tries. A further goal was the removal of all fiscal barriers-that is, reducing the differences in
indirect taxes that distort trade among member states. An additional and very important goal
was to open the public procurement market to competition from firms from other countries.
The Maastricht Treaty
The Treaty on European Union (TEU), or the Maastricht Treaty, entered into force in 1993.
It was this treaty that gave birth to the European Union as a new legal entity and changed the
name of the European Community to the EU. This treaty also created the European concept of
the three pillars, which set out the distribution of responsibilities in the EU between the new
legal entity and the member states (see Table 4. 1).
This agreement resulted in significant progress toward greater integration of European monetary, foreign, and social policy. European federalists hoped for a commitment to economic and
monetary union at this meeting, while others took the view that economic and monetary union
necessarily entailed political union.
The Treaty of Amsterdam
The Treaty of Amsterdam,6 signed in 1997, was negotiated to provide clarification on civil rights,
personal mobility and citizenship, common foreign policy, and security as well as to set some
TABLE 4.1
The Three Pillars Showing the Distribution of Responsibilities in the EU
The First Pillar
The Second Pillar
The Third Pillar
(Areas where member states have reli nquished some of their sovereignt y to EU
institutions)
(Matters managed on an
intergovernmental basis)
(Matters relating to police and
judicial cooperat ion in criminal
matters-managed on an intergovernmental basis)
Customs union and the single market
(including the four freedoms)
Foreign policy
Security policy
Police cooperation
Agricultural policy
Racism
Environmental policy
Crime
Competition and trade policy
Terrorism
Fiscal and monetary issues (common
currency)
Treaty on European Union (TEU), or MaastrichtTreaty: agreement signed on February 7, 1992, and entered into force in
1993 in the Dutch city of Maastricht; it gave impetus to further integration of the EU, particularly in theareas of economic union,
political integration, social policy, and foreign policy; and it changed thename of theEuropean EconomicCommunity to the European
Union and created the European concept of thethree pillars
three pillars: terminology adoptedby theEU, after theMaastricht Treaty, that describes the distribution of responsibilities in the EU
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pre-conditions for further expansion of the EU community. The treaty incorporated the principles of the Schengen Agreement7 on the gradual abolition of border checks for people crossing
national borders within the EU. A single external frontier was agreed on where checks would be
carried out in accordance with harmonized rules for a common visa regime and an improved
coordination of police, customs, and the judiciary. At present, 22 member states in the EU participate in Schengen along with non-EU members Norway, Iceland, Liechtenstein, and Switzerland. Except for cooperation between police forces and the judiciary, the United Kingdom and
Ireland do not as yet participate in this arrangement.
The Treaty of Nice
The Treaty of Nice, 8 in force since 2003, redefined, clarified, and extended the legislative, administrative, executive, and judicial powers of the EU, which in turn increased opportunities for
qualified majority voting.
The Treaty of Lisbon
Because the institutions and the governance of the EU have been developed by successive treaties
over a period of years, it is generally acknowledged that there is a need to consolidate all existing
European treaties into a single document that can serve as a constitution for the EU. However,
despite successive intergovernmental conferences that have been held to try to accomplish this,
a constitution for the EU remains elusive. The most recent attempt to do so, commencing with a
draft constitution in 2004, ultimately failed when voters in France and the Netherlands defeated
the draft constitution in specific referenda held for the purpose of approval of the initiative.
The Treaty of Lisbon9 was a more modest attempt to achieve some of the constitutional
reforms that failed to pass in the new draft constitution proposed in 2004. It came into effect on
December 1, 2009, and accomplished a number of things, including the following:
• merged the EU and the European Community into a single European Union based on
two treaties of equal status: a revised TEU and the Treaty on the Functioning of the European Union (TFEU), 10 which is essentially a renamed Treaty of Rome;
• abolished the three-pillar structure;
• gave legal effect to the Charter of Fundamental Rights of the European Union (the Charter),11 which had previously been unclear;
• gave the European Central Bank official status as an EU institution and gave the European
Council the right to appoint presidents of the European Central Bank through a qualified
majority vote; 12
• gave the European Council an official institutional role in the EU and empowered it to
define the political direction and priorities of the EU;13
• created the permanent position of president of the European Council, with the roles of
external representation, driving consensus, and settling divergences among member
states; 14
• gave more power to the European Parliament, with the result that the Council of the
European Union and the European Parliament are jointly responsible for the legislative
function of the EU; 15 and
• changed the apportionment of Member of European Parliament (MEP) seats among
member states and allowed for the number of MEPs to be fixed and redistributed among
member states so that they remain proportional to the number of citizens in each state.
The total number ofMEPs was limited to 750 plus the president of the Parliament. 16
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4
BOX 4.2
1957
1973
1981
1986
1995*
2004
2007
2013
The European Union and Other Regional Trade Arrangements
Present Member States in the EU and Their Accession Dates
Belgium, France, Germany, Italy, Luxembourg, the Netherlands.
Denmark, Ireland, United Kingdom.
Greece.
Portugal, Spain.
Austria, Finland, Sweden.
Hungary, Poland, the Czech Republic, Slovakia, Slovenia, Lithuania, Estonia, Latvia, Cyprus,
Malta.
Romania, Bulgaria.
Croatia.
•Norway did not join in 1995, its electorate having defeated approval for membership in a national referendum.
The Charter of Fundamental Rights of the European Union
In 2000, the European Commission, the European Council, and the EU Parliament jointly
signed and proclaimed the Charter of Fundamental Rights of the European Union (the Charter).
The Charter incorporates a sweeping range of civil, political, economic, and social rights and
synthesizes the constitutional traditions and international obligations common to the EU member states. The rights described are divided into six categories: dignity, freedoms, equality, solidarity, citizens' rights, and justice. These rights go well beyond the enshrined rights in Canada
and the United States, referring to such rights as the right to reconciliation of one's family and
professional life and the right to social security benefits, services, and health care.
The Common Currency
After many years of doubt as to whether the goal of a common currency for Europe would be
achieved, the euro was adopted as the common currency for 11 member states on January 1,
1999. The 11 member states were Belgium, Germany, Spain, France, Ireland, Italy, Luxembourg,
the Netherlands, Austria, Portugal, and Finland. In 2019, 19 EU states and 4 non-EU statesAndorra, Monaco, San-Marina, and Vatican City- were using the euro. The 19 EU states are collectively known as the eurozone or euro-area.17 Euro notes and coins have replaced the national
currencies in all participating member states, and the dual circulation period for old and new
currencies ended in 2002. The transition was achieved remarkably smoothly, and statistics indicate substantial transaction-cost savings due to the adoption of the euro. The European Central
Bank, located in Frankfurt, is responsible for ensuring that member states conform to the common currency rules.
Membership of the EU
From its original six members, the EU has expanded to 28. The population of the EU now
exceeds 500 million people. North Macedonia, Montenegro, Serbia, Albania, and Turkey remain
candidates for membership. is
Governance of the European Union
Setting the Legislative Agenda: The European Council
The European Council is tasked with defining "the overall political directions and priorities"
of the Union. 19 Made up of the presidents and/or prime ministers of all the member countries,
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FIGURE 4.1
Institutions of the EU
I
European
Commission
European Council
I
Cou ncil of the
European Union
~/
European
Parliament
Court of Justice of the
European Communities
European Court
of Auditors
it provides the high-level political direction for policy in the EU. Because of its high-level focus
on setting the broad policy agenda, the European Council is often considered to be the motor
of European integration. As an intergovernmental forum, it does not create law in any sense.
It meets up to four times a year with the president of the EU Commission. These meetings are
referred to as EU summit meetings. The president of the European Council provides external
representation for the EU, drives consensus among member countries, and settles divergences
among member states.
Law-Making in the European Union: The Council of the European Union,
the European Parliament, and the European Commission
The Council of the European Union
Care must be taken not to confuse the Council of the European Union (an official law-making
component of the EU system) with the European Council (the intergovernmental body described
above). The Council of the European Union was previously the only official law-making body
of the EU system; however, changes in the Treaty of Lisbon altered this by increasing the power
of the European Parliament. Now, the Council of the European Union (the Council) is one half
of the legislative arm of the EU with the other half being the European Parliament, described in
the next section.20
Most of the responsibilities of the Council relate to the community domain and include passage of EU laws jointly with the EU Parliament, coordination of the broad economic policies of
member states, conclusion of international agreements, and approval of the EU budget jointly
with the EU Parliament. The responsibility to develop a common foreign and security policy
and to coordinate cooperation between the national courts and police forces in criminal matters relates to areas in which member states have not relinquished their national powers but are
simply working together (the second and third pillars shown in Table 4.1).
The European Parliament
Since 1979, MEPs have been elected directly by the more than 500 million citizens of EU member countries. Elections are held every five years for the 750-member chamber. MEPs do not sit
in national blocs but in Europe-wide political groups.
The EU Parliament has three main roles: to pass European laws, to provide democratic
supervision, and to approve the budget. The European Parliament can appoint and dismiss the
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
Commission and oversees how the money in the budget is spent. The European Parliament has
proven to be an effective check on the Commission and has a significant role in passing most EU
legislation and the budget. Its influence and power are widely recognized by lobbyists representing business interests and being present in Brussels in an effort to sway EU decision-makers.
The European Commission
The term "European Commission" is used in two ways: (1) to describe its commissioners and
(2) to describe its structure.
Commissioners to the European Commission are appointed by their home countries-at
present, one is appointed per country. A new Commission is appointed every five years, with
member state governments first agreeing on a designate as the new Commission president. Once
this individual is approved by the EU Parliament, she, in discussion with member governments,
chooses the other members of the Commission. The choices must then be approved by the EU
Parliament. Although the appointed commissioners have often held political positions in their
countries of origin, once they are members of the European Commission they are committed
to acting in the interests of the EU as a whole and do not take instructions from their national
governments. This commitment reflects the intention that the Commission be independent of
national governments because its mandate is to represent and uphold the interests of the EU as
a whole.
The Commission has two functions: first, to draft proposals for new European laws, which
it presents to the EU Parliament and the Council; and second, to function as the EU's executive
arm-that is, to be responsible for implementing the decisions of Parliament and the Council
and to manage the day-to-day business of the EU by implementing policies, running programs,
and "paying the bills:' The Commission remains politically accountable to the EU Parliament,
which has the power to dismiss the whole Commission by adopting a motion of censure. The
Commission attends all the sessions of the EU Parliament, where it must clarify and justify its
policies and reply to written and oral questions posed by MEPs.
The term "European Commission" also refers to the institution itself and its staff. The dayto-day running of the Commission is carried out by administrative officials, experts, translators,
and secretarial staff that number more than 25,000 people.
The Commission has four main roles: proposing new legislation, implementing EU policies
and the budget, enforcing European law, and representing the EU internationally. It is the Commission that represents the EU in trade negotiations worldwide.
EU Law and Member State Law
Article 13(2) of the TEU states "Each institution shall act within the limits of the powers conferred on it in the Treaties, and in conformity with the procedures, conditions, and objectives set
out in them:'21 This means that the EU's institutions- the Council, Parliament, and the Commission-have competence to make laws only in certain fields. Article 3 of the TFEU sets out the
following competencies as falling within the EU's institutions' exclusive jurisdiction:
(a)
(b)
(c)
(d)
(e)
the customs union;
the competition rules necessary for the functioning of the internal market;
monetary policy for the member states whose currency is the euro;
the conservation of marine biological resources under the common fisheries policy; and
common commercial policy (which concerns trade with third countries).
The EU also has exclusive jurisdiction to negotiate and enter into certain international
agreements.
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Pursuant to Article 4 of the TFEU, the EU shares competencies with the member states in
law-making in the areas of
(a) its internal market;
(b) aspects of social policy;
(c) economic, social, and territorial cohesion (that is, addressing the economic regional disparities in the EU);
(d) agriculture and fisheries, excluding the conservation of marine biological resources;
(e) the environment;
(f) consumer protection;
(g) transport;
(h) trans-European networks;
(i) energy;
(j) freedom, security, and justice; and
(k) common safety concerns in public-health matters.
Pursuant to Article 6 of the TFEU, the EU has competence only to "support, coordinate or
supplement the actions of Members States" in the following areas:
(a)
(b)
(c)
(d)
(e)
(f)
(g)
the protection and improvement of human health;
industry;
culture;
tourism;
education, vocational training, youth, and sport;
civil protection; and
administrative cooperation.
The capacity of the EU Parliament, Council, and Commission to make laws is limited by the
EU treaties, and it should be clear that EU member states retain exclusive jurisdiction to make
domestic laws within their purview as long as these do not conflict with their EU treaty obligations. For instance, although competition law is harmonized across EU, contract law is not. This
means that a Canadian company interested in doing business with another company in the EU
needs to be aware of both types oflegislative regimes and understand which laws are created and
harmonized throughout the EU, which laws will be unique to each EU member state, and how
these laws affect the business transaction.
Harmonization of Law in the EU
The single market of the EU is created by harmonizing the laws of the member countries. This is
the process of making the different countries' laws uniform in either form or results. EU law has
primacy over domestic law of each member state. 22 The supremacy of EU law over domestic law
is necessary to ensure uniform application of the laws in all member states.
The TFEU gives the Council and the European Commission power to make regulations,
issue directives, take decisions, and make recommendations or deliver opinions. The effect of
these actions may be explained as follows:
regulations: binding law in itsentirety and directly applicablein all member states
directive: document used in the EUto help achieve harmonization of law; it prescribes objectives for legislation and is binding
uponeach member country, but leaves theformand method used to achieve the result toindividual member countries
decision: a legally binding order made by the Council or the European Commission on the member state, firm, or individual to
whomit isaddressed
recommendation: a not legally binding but highly persuasive statement made by the Council or the European Comm ission
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
• A regulation is binding in its entirety and is directly applicable in all member states. Regulations are the most powerful of the EU legislative tools, as they are of general application
and impose common requirements on everyone that falls within the scope. This is the
method commonly used to regulate agriculture and competition.
• A directive prescribes objectives and is binding on each member state to which it is
addressed, although the national authorities of the member state are free to determine
the form and method that will be used to achieve the mandated result. Countries usually
have three years to implement a directive. Examples of directives include establishing EU
environmental and product-liability rules.
• A decision is binding on the member state, firm, or individual to whom it is addressed. An
example of this is the decision by the European Commission that Microsoft had violated
EU competition law by leveraging its near monopoly for PC operating systems. 23
• A recommendation or an opinion is of persuasive value but has no binding effect. For example,
when the Commission issued its recommendation on videoconferencing to help judicial services work better across borders, this had no legal consequences on the EU member states.
Law Enforcement in the European Union
The European Commission
The European Commission ensures that EU law is properly applied in all the member states. If
an EU country is not applying an EU law, the Commission will advise the member government
in an official letter stating the details of the infringement and setting a deadline for a response. If
the response of the member state is deemed by the Commission to be unsatisfactory, the Commission will refer the matter to the European Court of Justice (ECJ).
The European Court ofJustice
One of the reasons for the EU's success lies in its adherence to the rule of law. Relations among
member states and EU's citizens are governed by a solidified legal framework. This legal certainty
affords a stable business environment and eliminates major risks. The cornerstone of this legal
system and its ultimate overseer is the ECJ. Established in 1952, the ECJ is based in Luxembourg.
Its function is to settle legal disputes between EU member states and EU institutions, businesses,
and individuals, and to ensure that EU legislation is interpreted and applied uniformly in all EU
countries. It interprets the law in disputes arising among private individuals, businesses, and
governments. When a national court of a member state is unable to determine the law, it will
refer the matter for interpretation to the Court of Justice.
Judgments of the ECJ are decided by a majority and pronounced at a public hearing. Unlike
in the common law tradition, dissenting opinions are not expressed.
In 1989, a Court of First Instance was created to assist in handling the ECJ's workload and to
provide EU citizens with better legal protection. This court rules on actions brought by private
individuals, companies, and organizations, and it rules in cases that relate to competition law
and intellectual property. It is important to keep in mind that, in the context of trade, the ECJ
primarily deals with issues affecting intra-European trade. Any disputes related to trade between
the EU and non-EU states are taken up in other forums , such as the WTO, or through private
dispute-settlement mechanisms, such as the International Centre for Settlement of Investment
Disputes. That said, some legal issues related to trade are taken up by the ECJ, such as issues
related to European competition law.
The Court ofAuditors
The Court of Auditors, established in 1975, ensures that the EU budget is correctly implemented
and that sound financial management is practised. This court is completely independent of the
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other EU institutions. The Court of Auditors provides the EU Parliament and the Council with
an annual audit report. It comprises one member from each EU country, appointed by the
Council for a renewable term of six years.
As evidenced by the discussion of the treaties above, the EU exists and evolves only by virtue
of agreements between member states. In the simplest terms, the treaties created an international
organization that is called the EU, whose initial goal was a durable peace. However, the EU has
evolved into a complex semi-state-like entity, or an entirely novel form of political organization, and has met and exceeded its initial goal. The EU includes direct representation of citizens
through the EU Parliament, close coordination of national governments through the Council
and the Commission, and enforcement of the law through the ECJ, while reaching deep into
all aspects of the political, economic, and social lives of the 500 million people living in the EU
through the law-making and harmonization process. It is the most successful example of economic and political integration in the world.
The next section discusses the trade and economic relations between the EU and Canada and
explores EU laws that Canadian businesses should be familiar with should they wish to enter
the EU market.
CETA and Canadian Business
The EU Commission negotiated CETA, with oversight from the EU Parliament and the Council,
on behalf of its 28 member states. The Canadian federal government together with representatives from the provinces and territories were involved in the negotiations from Canada's side.
Following seven years of negotiations, CETA was signed on October 30, 2016, and entered into
force provisionally on September 21, 2017.
CETA is a landmark agreement meant to boost trade between Canada and the EU; diversify
Canada's exports and investments; and promote labour rights, environmental protection, and
sustainable development. It represents tremendous opportunities for business on either side of
the Atlantic. The following sections discuss what CETA is, what it covers, how it impacts businesses, and what "provisionally in force" means.
WhatCETA/s
CETA is a trade deal between the EU and Canada that establishes a free trade area in conformity
with Article XXIV of GATT 1994 and Article V of the GATS. However, it is more elaborate than
a simple agreement to eliminate all tariffs, since it encompasses the majority of economic issues
between Canada and the EU.
CETA is divided into thirty chapters and two protocols, as well as a number of annexes, and
covers issues relating to trade in goods, services, trade remedies, sanitary and phytosanitary
measures, investment, e-commerce, mutual recognition of professional qualifications, competition policies, subsidies, intellectual property, labour, the environment, and other matters.
What CETA Covers
With over 1,500 pages in the agreement and hundreds of pages in annexes and guides, CETA is
truly a comprehensive agreement and covers most aspects of Canada- EU economic relations, all
of which cannot be reviewed in this text. The aspects of CETA that will be discussed below are
•
•
•
•
•
•
trade in goods,
rules of origin,
customs and trade facilitation,
trade in services,
investment protection, and
government procurement.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4
The European Union and Other Regional Trade Arrangements
105
CETA Chapter 2: Trade in Goods
Since the goal of any trade agreement is to spur trade, the existing tariffs and other trade barriers have to be removed. CETA removes 98 percent of duties, taxes, and other import fees on
goods traded between the EU and Canada. An additional 1 percent will be phased out over a
seven-year period. Prior to CETA, only 25 percent of EU tariff lines on Canadian goods were
duty-free. This change will amount to approximately $880 million in saved duties per year once
all the tariff reductions are in effect. 24
Since both Canada and the EU member countries are members of the WTO, CETA had to
be drafted in conformity with all of the WTO agreements. In other words, the national treatment and MFN as well as other WTO rules are imbedded and expanded on in CETA and the
EU, and Canadians can expect to trade in a non-discriminatory market for their goods and
services.
The EU is an economic and monetary union, and as such the member countries do not retain
their own external tariffs. This means that Canadian goods are subject to the same duty-free
treatment regardless of the country through which they enter the EU.
Duty-free treatment is applied to goods entering the EU based on the type of good and
whether it complies with CETA rules-of-origin requirements. The type of good is determined
BOX 4.3
Examples of Canadian Sectors Benefitting from CETA
The Canadian agricultural, forest, metal, fish, seafood, automotive, and oil and gas sectors benefit from CETA:
The agricultural sector. Goods such as maple syrup,
frozen-potato products, cooking oils, lentils and grains,
and baked goods are duty-free. Other products, such
as starches, will become duty-free by 2024. Pork and
beef products are duty-free but subject to a quota.
Canadian poultry and eggs, which are subject to a
supply-management system, are excluded and remain
protected under CETA.
Forest products and metal products. Previously, EU tariffs
on forest and metal products ranged from 1O percent to
12 percent. They are now duty-free, affording a competitive advantage to Canadian exporters over their US and
China counterparts.
Fish and seafood. Over 96 percent of Canadian fish and
seafood products are tariff-free, and the remainder will
become duty-free by 2024. Prior to implementation,
fish and seafood products were subject to between 11
percent and 25 percent in duties in the EU. This again
makes Canadian fish products more competitive, allowing Canadian fish producers to export more to the EU
market free of hefty tariffs.
The automotive sector. EU tariffs are eliminated on all
Canadian auto parts and on some vehicles, such as road
tractors and firefighting vehicles. Tariffs on all remaining types of vehicles will be phased out by 2024. Under
CETA, Canada will be able to export up to 100,000
vehicles annually to the EU under more liberal rules
of origin. However, since the EU is a major manufacturer and exporter of vehicles, the impact of duty-free
treatment is likely to have a greater effect in Canada, as
phasing out the 6.1 percent Canadian tariff over seven
years should make vehicles produced in EU more pricecompetitive in the Canadian market. This should provide
greater choice to Canadian consumers and make car
prices more competitive.
The oil and gas sector: Canadian oil and gas products
are tariff-free and quota-free (the previous EU tariff was
as high as 8 percent), granting Canadian businesses an
advantage over competing exports from countries such
as Russia.
Logging is one key area where Canada benefits from CETA.
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by using the combined nomenclature, which uses the Harmonized Commodity Description
and Coding System (HS) along with additional subdivisions that are in use within the EU. The
way the CETA rules of origin are implemented in Canadian law and the HS system are discussed
in greater detail in Chapter 5. The section below highlights the CETA rules of origin25 and how
they apply to goods going from Canada to the EU.
Rules of Origin under CETA
Complex, globalized supply chains and varied production and assembly locations often make
it difficult to establish where a product comes from. Rules of origin are significant because
they will determine what tariff rates, if any, will apply to goods being imported into the EU or
Canada. The CETA Protocol on Rules of Origin and Origin Procedures (Protocol) sets out how
customs officials in the EU and Canada are to assess whether a product is "made in Canada'' or,
for example, "made in France:' The Protocol simplifies the rules of origin as compared to other
trade agreements. Some of CETA's more salient rules of origin are summarized in Box 4.4.
CETA Chapter 6: Customs and Trade Facilitation
CETA's customs and trade facilitation chapter26 aims to reduce transaction costs and increase
efficiency of customs processes while ensuring national security is not compromised. To this
end, the chapter includes provisions on transparency, release of goods, fees and charges, risk
management, automation, and review and appeal processes.
Pursuant to the transparency articles, the EU and Canada must publish online all regulations
governing all customs matters and any changes, making it more accessible to exporters and
importers.
BOX 4.4
CETA Rules of Origin
1. A good t hat has been wholly obtained in the EU or
Canada or has been produced exclusively from
produced from imported wood, but as long as it is
classified under a different HS heading and conforms to
originating materials wil l qualify for CETA tariff
treatment. Goods that are "wholly obtained" in a country
the PSRO it will be classified as an EU or Canadian
product eligible for duty-free treatment.
are generally natural products or made entirely from
3. In contrast to NAFTA, a regional-value-content approach
nat ural product s. Examples are harvested vegetables,
fru it, minerals, wood, and fish caug ht within Canadian
4. To qualify for CETA treatment, processing operations
or EU t erritorial wat ers.
is not used under CETA.
in the EU or Canada but were sufficiently produced in
normally have to be carried out either in the EU or in
Canada. However, Canadian producers can use materials
originating in the EU or Canada, and vice versa, to
the EU or Canada may quality for CETA tariff treatment if
t he criteria for "sufficient production" is met. The criteria
for determining sufficient production is described in
ensure compliance with the ru les. For example, a pencil
containing graphite from Sweden and basswood from
Ontario would get preferential treatment.
2. A good that is based on materials that do not originate
Annex 5 to the Protocol, which lists product-specific
rules of origin (PSROs).27 A product that is produced
5. As a general rule, to receive preferential tariff treatment,
EU-origin goods must be shipped directly from an EU
using materials not sourced in the EU or Canada can still
country to Canada, and vice-versa, or transshipped
be considered o riginating in the EU or Canada if it
satisfies the applicable PSRO. It is imperative to identify
through another country, as long as they remain under
customs control and do not undergo any further
the correct HS classification number in order t o find the
appropriate PSRO. For example, flooring may be
production.
combined nomenclature: the system of classification of goodswithin theEuropeanUnion forthe purpose of assessing tariff rates
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Chapter 4 The European Union and Other Regional Trade Arrangements
The release-of-goods process is simplified for low-value and low-risk goods, and all goods can
be released at the first point of arrival in the importing country and without prior payment of
duties and taxes. With low-risk or no-risk goods, exporters can provide advance electronic submission for cargo reporting, release, and entry and accounting, thus expediting the release and
processing of shipments at customs. Pursuant to CETA, the EU and Canada will work toward
coordinating their various agencies to centralize import and export data and document requirements and verifications in a single location.
Both Canada and the EU ensure that all administrative actions and decisions made regarding
the import of goods can be promptly reviewed by judicial, arbitral, or administrative tribunals.
CETA Chapter 9: Trade in Services
As discussed in Chapter 2, trade in services refers to the production, distribution, marketing,
sale, and delivery of a service, including payment for and use of that service by a consumer
across borders.28 The exchange is in intangible products, like advice or expertise. The services
chapter in CETA reiterates Canada's and the EU's commitments to WTO's national treatment,
MFN treatment, and market access rules. The EU is the largest importer of services in the world,
and this chapter affords Canadian service providers the same treatment as local EU providers.
Mining, energy, environmental, engineering, and other professional Canadian service sectors are
likely to benefit greatly from CETA. Not all service sectors are included. The excluded service
sectors encompass public services such as health; public education; the collection, purification,
and distribution of water; and other social services, as well as cultural policies. This ensures that
governments remain free to enact the policies and programs based on their priorities and objectives in these fields.
The CETA market access obligation prohibits numerical limits on the number of service
suppliers, the total value of services transactions or assets, the total number of service operations or the total quantity of service output, or the total number of natural persons who may be
employed in a certain service sector.
CETA Chapter 8: Investment Protection
Direct investments by Canadian companies in the EU totalled $232 billion in 2016. In the same
year, direct investments from European companies in Canada totalled $247 billion, representing
30 percent of total foreign investments in Canada. Although investment is distinct and separate
from trade in goods or services, its economic importance to both Canada and the EU cannot
be ignored. As such, CETA (like NAFTA) includes a separate, comprehensive chapter on investment protection29 that seeks to facilitate increased investment between Canada and the EU by
giving investors greater market access, certainty, stability, transparency, and legal protection for
their investments.
To achieve these goals, CETA's investment chapter outlines broad market access, national
treatment and MFN provisions, and creates a new dispute-resolution tribunal to address disputes arising between foreign investors and the states.
The provisions regarding establishment of investments prohibit Canada and the EU from
applying unjustified barriers on the entry into their markets of new investments. Specifically,
measures may not be adopted or maintained that restrict the number of enterprises that may
carry out an economic activity, the total value of transactions or assets, the number of operations or the total quantity of output, or the number of individuals that may be employed in a
particular sector. Additionally, the market access article specifies limits to government requirements that restrict the forms of legal entity an enterprise may take, such as a requirement for a
joint venture or the participation of foreign equity.
The non-discrimination section requires Canada and the EU to treat each other's investors
no less favourably than they treat any other investor in their territory. The investment protection
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section grants investors protection from illegitimate government actions, such as denial of justice or of due process, or illegal expropriation. The reservations and exceptions section codifies
the ability of governments to act in the public interest when regulating in areas such as health,
safety, and the environment, as well as other sensitive policy areas, such as Indigenous affairs.
Additionally, CETA created an independent and transparent institutionalized dispute-settlement tribunal, revised the process for selecting tribunal members, set out additional ethical requirements for
tribunal members, and provided for a unique appeal process and a robust enforcement mechanism.
The dispute-resolution system affords investors recourse to compensation when there is evidence that an EU host state has breached its obligations, including those prohibiting discrimination or expropriation, and that the investor has suffered losses as a result.
CETA Chapter 19: Government Procurement
Canadian federal, provincial, and municipal governments and their EU counterparts purchase
goods and services domestically and abroad. Goods and services will be sourced, usually through
a public tendering process for government projects at any level, whether for the construction of a
school or a new highway. The EU's impressive $3.3 trillion per year in government purchasing
activity affords significant potential market opportunities to Canadian companies to bid on EU
projects. CETA expands on the WTO's Agreement on Government Procurement (GPA)JOrules
and opens greater market-access opportunities for Canadian and EU suppliers across all levels
of governments. Businesses benefit from rules regarding non-discrimination, impartiality, and
transparency in their procurement activities. Canadian and EU businesses can rest assured that
they are competing on an equal footing in another party's government procurement markets
when they bid on opportunities covered by CETA.
It is the first time Canadian businesses have guaranteed and secure access to opportunities
to supply their goods and services to EU regional and local governments as well as a wide range
of entities operating in the utilities sector. To determine if CETA applies to a particular procurement activity at any level of government, EU and Canadian suppliers must refer to CETA
annexes. The applicable contract values at which CETA obligations are triggered are also specified in the annexes and range from $237,700 for goods to $9,221,026 for construction services. 31
These procurement thresholds are consistent with those that Canada applies in the WTO GPA.
CETA also provides additional provisions on topics including bidding timeframes, the registration process, screening, and supplier eligibility.
CETA Provisionally in Force
CETA is a comprehensive agreement, and some of its subject matter falls under both EU and
member states competencies. As such, it is considered a "mixed agreement"; EU institutions alone
cannot sign on behalf of all members on all issues. In order for the agreement to be fully applied, it
must be ratified by both the European Parliament and every single EU member state.32 All member states have signed the agreement, allowing it to be provisionally applied and, as at the time of
writing, 13 members have completed the ratification process, leaving 15 who still need to do so. 33
Approximately 90 percent of the agreement already applies and benefits companies in Canada
and the EU. Areas that are not yet in force but will be following full ratification are
• investment protection,
• investment market access for portfolio investment, and
• the investment court system.
CETA rules are implemented across the EU. However, they are not the only relevant legal
provisions that will govern business transactions between Canadian and EU businesses. The
section below explores additional laws that Canadian businesses need to be aware of when doing
business within the EU and with EU companies.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
109
European Union Legal Provisions Relevant to Canadian Business
For goods imported into the EU, the most important standards for businesses to be aware of are
those that pertain to product safety, technical standardization, packaging, and labelling.
Product Safety in the EU
Product safety for general products in the EU is governed by the General Product Safety Directive 2001/95/EC (GPSD). 34 Businesses importing products into the EU must ensure that the
products comply with the general safety requirements, that customers are warned of the risks
that the products might pose, and the appropriate precautions they should take when using the
products. Businesses also have the responsibility of notifying the appropriate authorities when
they become aware that a product has subsequently become dangerous. The definition of a safe
product is noted in Box 4.5.
Producers are required to place only safe products on the market, and a product will be
deemed safe if it conforms to community standards governing the safety of that product or,
in the absence of community standards, if it conforms to the standards of the member state in
whose territory it is marketed.35
Certain products have additional specific safety rules that must be applied, such as chemicals,
toys, personal protective equipment, cosmetics, pharmaceuticals, machinery, and recreational craft.
BOX 4.5
Safe Product Definition
A safe product is defined under t he GPSD as being
any product which, under normal or reasonably foreseeable conditions of use ... does not present any
risk or only the minimum risks compatible with the
product's use ... taking into account the following
points in particular:
(i) the characteristics of the product, including its composition, packaging, instructions for assembly and, where applicable, for installation and
maintenance;
BOX 4.6
(ii) the effect on other products, where it is reasonably foreseeable that it will be used with other
products;
(iii) the presentation of the product, the labelling, any warnings and instructions for its use and
disposal, and any other indication or information
regarding the product;
(iv) the categories of consumers at risk when using
the product, in particular children and the elderly.36
A "dangerous product" is any product that does not meet
this definition.37
The EU Bans the Sale of Non-Child-Resistant and Novelty Cigarette Lighters
At the time that t he European Commission considered this
issue, an estimated 1,500 to 1,900 injuries and 34 to 40 deaths
were occurring each year in the EU as a result of children playing with lighters and causing serious fires. Concerned about
t hese statistics, and noting that many other countries, including Canada, the United States, Australia, and New Zealand, already had similar policies in place, the European Commission
banned the sale of non-child-resistant and novelty cigarette
lighters in 2008. This decision affected the sale of 98 percent
of all lighters sold in the EU every year, requiring that they be
child-resistant and that they comply with the general safety requirements of the European standard on lighter safety (EN ISO
9994) 38 in order to be sold in the EU. It directed that specific
technical requirements must be met in order for lighters to be
excluded from the requirements of this standard and t hat no
lighters may be placed for sale on the EU market that resemble
objects that could be appealing to children, such as t oys, mobile phones, food, and cars. Additional technical specifications
laid out the requirements for child-proof lighters pursuant to
European Standard EN 13869:2002.39 As a result of t his decision of the European Commission, anyone wishing to import
lighters for sale in the EU must comply with the standard for
lighter safety as well as the technical standards required for
child-resistant lighters.40
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Product Liability
In 1985, the EU passed the Directive on Product Liability. A system of almost strict liability is
mandated by this directive, which has been widely perceived by American legal scholars to have
brought European law with respect to products closer to that of the United States and to exceed
the criteria for liability in Canada, which sets a lower standard for manufacturers and distributors. Changes to the 1985 directive are forthcoming.41 There is also the Machinery Directive
(2006),42 which expands the system of strict liability in the EU to protect the health and safety of
workers against risks of defective machinery. This directive should be considered in conjunction
with the Directive on General Product Safety mentioned above, which imposes a general duty
of safety on producers of consumer products.
Technical Standardization
Many products are required to adhere to certain technical standards in order to be sold in the
European market. Any products imported into the EU for sale and use therefore must also conform to those technical standards. The EU has been working toward harmonizing its technical
standards over the years, and in many industries harmonization has occurred.
Depending on the industry, European standards are set by one of three pan-European standards bodies: The European Committee for Standardization (CEN), The European Committee for Electrotechnical Standardization (CENELEC), and The European Telecommunications
Standards Institute (ITSI).
In order to determine whether a product meets the technical standard in question, a conformity assessment must take place. This process examines a product to determine whether it
complies-for example, in its design and production-with the requirements of the relevant
technical directive. This can be done by either the manufacturer or by third-p arty notified
bodies in EU member states. Mutual recognition agreements exist between the EU and Australia, Canada, Israel, Japan, New Zealand, Switzerland, and the United States.43 CETA incorporates and expands on the Canadian and EU mutual recognition agreement. When a product
conforms with the technical standards of the EU and passes the relevant conformity assessment,
it will be marked with "CE;' which will allow the product to be placed on the market.
Packaging
Environmental and health requirements exist with respect to the packaging of goods in the
EU. Directives have been passed outlining rules for packaging and packaging waste, which require waste recovery of packaging by way of recycling programs and reuse programs. Packaging
must clearly indicate what materials were used in a good's production. According to the directive, businesses in the EU member states must keep the amount of packaging to a minimum,
for environmental reasons, and still maintain adequate safety and hygiene for consumers. They
must also reduce the amount of hazardous substances and materials in packaging material and,
wherever possible, create reusable or recoverable packaging. 44 Specific requirements also exist to
ensure that packaging of food products is safe.45
Labelling
Products sold in the EU must also comply with EU labelling requirements. Specific requirements
exist for food, household appliances, footwear, textiles, cosmetics, chemicals, detergents, and
strict liability: fromearly tort law, theimposition of theburden of compensationonthe person who had causedan injury, despite
the absence of any blameworthy conduct on their part; alsocal led liability without fault
notified bodies: third-party organizations accredited to carry out conformity assessmentswith harmonized European standards
or EuropeanTechnical Assessment
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Chapter 4 The European Union and Other Regional Trade Arrangements
dangerous substances. Additional requirements exist for labelling related to ecolabels-a voluntary labelling system that identifies eco-friendly products, energy consumption and energy efficiency, and fuel consumption and C02 emissions of new cars. 46 Each of these labelling regimes
is detailed, and it is beyond the scope of this textbook to outline their requirements.
Sanitary and Phytosanitary Measures
Any good imported into the EU must comply with the EU's sanitary and phytosanitary requirements. Requirements exist in a number of sectors, including food and feed safety, animal health,
plant health, and public health.
Food and Feed Safety
The EU food and feed safety law47 is aimed at protecting human and animal life and health.
Food placed on the market must not be dangerous. Individuals or corporations defined as "operators" under the legislation are tasked with ensuring that the food legislation is respected by the
food-related business under their control. Operators have the responsibility to ensure that food
is traceable at all stages of the production, processing, and distribution process,4 8 and they also
have the responsibility to take the product off the market and inform the relevant authorities
when they become aware of potential hazards. When food or feed from a non-EU member
country poses a risk to human or animal health or to the environment, the European Commission can suspend imports of that product. Additional rules exist for residues, pesticides,
veterinary medicines, and contaminants in and on food; genetically modified food and feed,
bio proteins, and novel foods; groups of food products (for example, mineral water, cocoa, and
quick-frozen food) and foodstuffs aimed at specific populations (for example, foods for infants
and young children); marketing and labelling requirements for feed materials, compound feedingstuffs, and feedingstuffs intended for particular nutritional purposes; and materials intended
to come into contact with foodstuffs.49
Animal Health
A number of general rules apply to animals and animal products that are imported into the EU,
including the rules that the exporting country must be authorized to export the good into the
EU, the processing facility must be approved to import the product into the EU, and a health certificate signed by a veterinarian from the exporting company must accompany the animal and
animal products. Additionally, the products may be inspected at the border as they are imported
into the EU. 50 If an outbreak of disease in a non-EU member country poses a threat to animal
or public health, the EU can take temporary protective measures, including suspending imports
from that country. Under CETA, the parties can take precautionary measures in a more nuanced
way and temporarily restrict imports only with respect to a specific region where there may be
a threat and not the entire country.
Plant Health
Similar to the legislation on animal health, EU legislation on plant life and health requires that
products imported into the EU comply with certain sanitary and phytosanitary requirements.
Some products simply cannot be imported into the EU, while others require a plant health
certificate. All imports of plants may be subject to inspection upon arrival, and plants must
come from an importer that is authorized to import into the EU. All plant imports must also
be announced to the customs office of the point of entry prior to arrival. As is the case for animal products, should a plant or a plant product from a non-EU member country potentially
pose a risk to the EU, the member country or the Commission may take temporary emergency
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measures. The EU Plant Health Directives 1 restricts the introduction of organisms that are harmful to plants or plant products, and it covers the following:
•
•
•
•
•
•
•
fruit, in the botanical sense, other than that preserved by deep freezing;
vegetables, other than those preserved by deep freezing;
tubers, corms, bulbs, and rhizomes;
cut flowers;
branches with foliage;
cut trees retaining foliage; and
plant tissue cultures.
Public Health
EU public health legislation is aimed at protecting EU citizens from major health threats. The
legislation provides for monitoring and controlling communicable diseases, controlling products
that lead to health issues, such as tobacco, and monitoring drug precursors.
EU, TBT, SPS, and International Commitments
Product standards and technical regulations are implemented to ensure the protection of human,
animal, or plant life or health, and protection of the environment. However, as tariffs are elim inated, technical standards and sanitary and phytosanitary measures may become a tool for
trading partners to block imports. The EU, like Canada and other countries, is free to make rules
regarding product safety as long as they are not meant to create obstacles to trade. The EU's laws
must comply with its WTO's Technical Barriers to Trade (TBT) Agreement, Agreement on the
Application of Sanitary and Phytosanitary (SPS) Measures obligations, and any additional rules
under regional trade agreement obligations.
For instance, SPS and TBT rules were one of the most significant barriers to Canadians seeking to do business in the EU. CETA includes a chapter on TBTs (Chapter 4) and a chapter on SPS
(Chapter 5), and their provisions ensure the EU's and Canada's standards are not used illegally
to stymie trade, are transparent, and are streamlined to accept mutually recognized health and
safety assessments for certain products.
Intellectual Property Law
Since the EU is a member of the World Intellectual Property Organization (WIPO) and the
WTO, it is, therefore, a signatory to the Trade-Related Aspects of Intellectual Property Rights
(TRIPS) agreement.52 In addition to provisions in the TRIPS and WIPO agreements that apply
to the EU, the EU has passed a number of directives regarding various aspects of intellectual
property protection.
Copyright Protection in the EU
The duration of copyright in the EU is set at the life of the author plus 70 years pursuant to the
Council Directive 93/83/EEC of September 27, 1993,53 which coordinates certain rules relating to
copyright and rights related to copyright applicable to satellite broadcasting and cable retransmission. The protection of moral rights has not been addressed by EU directives related to copyright
and is left to national legislation. Efforts made by the EU on the issue of copyright have created separate legislation: directives on the protection of computer programs, resale rights, copyright in the
information society, protection of databases, satellite and cable, rental rights, and semiconductors.
Patent Protection in the EU
Patent protection in the EU can be granted either by way of national patents in EU member
states or by way of European patents that are granted by the European Patent Office. In 2013,
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Chapter 4 The European Union and Other Regional Trade Arrangements
legislation creating a unitary patent protection in the EU came into force; however, as of the
time of writing the system is yet to be implemented. The new system creates a single patent that
provides legal title to a patented invention across 26 of the EU member states (Spain and Croatia
chose not to participate).54 This system is expected to be in effect sometime in 2020.55
Trademark Protection in the EU
Like patents, trademarks can be registered at the national level or by way of an EU trademark
(EUTM) . Registering a trademark as "EUTM" protects the mark in all member states of the
EU. Trademarks in the EU are governed by the Trade Mark Directive and the Regulation on the
European Union Trade Mark.56 EU trademarks are issued for ten years and can be renewed for
successive ten-year terms. At the EU level, no protection is available to unregistered trademarks,
while at the member-state level some protections are afforded.
Geographical Indications in the EU
Given the extent of agricultural production in EU member states, geographical indications (Gis)
are of great importance to the EU. Many European Gis are commonplace, such as "Champagne;'
"Scotch whiskey;' "Cognac;' and "Roquefort cheese:' Because the EU is a signatory to the TRIPS
agreement, the rules contained within it pertaining to geographical indications apply. The EU
is also continuing to negotiate recognition for its geographical indications on a bilateral basis
through individual trade agreements. For example, under CETA, the EU successfully included
GI protections for a number of products like the Italian Parma dry cured ham "Prosciutto di
Parma:' "Parma;' as a name for a product class, cannot be used by any other producer in Canada.
Similarly, pursuant to CETA, Canadian producers may use the names "Asiago;' "fontina;' "Gorgonzola;' "Munster;' and "feta'' only if they appear with the qualifiers "imitation;' "style;' "kind;'
or the like in the labelling.
Enforcing EU Intellectual Property Rights
Regulation (EU) No 608/2013 of the European Parliament and of the Council lays out the ways
in which the customs authorities of EU member states may intervene in the event they believe
that goods entering the EU may violate intellectual property rights. In 89 percent of the cases in
which goods were detained, the goods were either destroyed after ( 1) the owner of the goods and
the rights-holder agreed on destruction or (2) after a court case was commenced by the rightsholder for infringement of its intellectual property rights.57
BOX 4.7
Role of Customs in Enforcing EU Intellectual Property Law
Customs authorities play a significant role in the enforcement of EU intellectual property law as it
relates to counterfeit goods and pirated works brought into EU member states, which is happening
in an increasingly significant number of instances. In 2018, more than 30 million articles were suspected by customs of violating intellectual property rights. 58 In 2017, 40,000 detention cases were
registered by customs, with the main source country of these products being China.59 Foodstuffs
accounted for 24 percent of articles detained at customs, followed by toys, cigarettes, and clothing.60
While customs agencies can take the initiative to seize goods bel ieved to be counterfeit, procedures
also exist for the rights-holders to file an application for action in the event that they believe their
intellectual property rights are being infringed.
Different customs rules apply to goods in transit through the EU; however, a case discussed below
(see Box 4.8) makes it clear that, under certain circumstances, goods in transit through the EU may be
inspected at the same level of scrutiny vis-a-vis intellectual property laws as are goods destined for
the EU market.
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BOX 4.8
Public International Law
Case Highlight
Counterfeit Goods
Case Names and Court
Koninklijke Philips Electronics NV v Lucheng Meijing Industrial
Company and Others (European Court of Justice, 2011) and
Nokia Corporation v Her Majesty's Commissioners of Revenue
(European Court of Justice, 2011 )61
Facts
In these two cases, counterfeit goods were seized as they were
passing through member states of the EU on their way to their
final destination. In the Philips case, pirated electric shavers
were found in the port of Antwerp with no final destination
specified. Philips requested that these devices be destroyed. In
the Nokia case, counterfeit mobile phones were seized at London's Heathrow airport en route from Hong Kong to Colombia.
EU rules of customs provide for certain procedures to be followed for goods in transit through the EU with a final destination of a non-EU member country. However, in order for these
rules to apply, the goods may not actually enter the EU market.
Decision
Customs authorities may stop counterfeit or fake goods, but
there must be more than mere suspicion that the goods will
enter the EU market. This threshold may be met where the
operators are about to direct their goods toward EU customers or if they have disguised their commercial intentions. Commercial intentions may be found to have been disguised if the
destination of the goods is not declared, if there is missing information about the identity or address of the manufacturer
or consignor of the goods, if there is a lack of cooperation with
the customs authorities, or if information obtained through
documents or correspondence indicates that the goods are liable to be diverted to EU customers.
Analysis/Application
Counterfeit goods may be stopped by EU customs authorities
even where they are destined for non-EU countries.
Issue
Can the goods be destroyed by the customs authority even
though they were only passing through the EU en route to another country that is not an EU member state?
EU and International IP Commitments
Through CETA and in addition to their international treaties' commitments, Canada and the EU
made specific guarantees for copyright, trademarks, designs, patents, geographical indications,
and plant varieties, as well as for intellectual property enforcement measures. Examples include
an additional period of protection for eligible pharmaceutical products, eight years of protection
for data filed with regulators as part of a regulatory approval process, ten years of protection for
plant-protection products (for example, pesticides), and provision for court injunction enforcement options.
Competition Law
Competition law has always been of central importance to the EU. It involves such sensitive areas
as national regulatory goals, market power, and political strategy. European competition policy
rests on two main rules set out in the TFEU. 62 First, Article 101 of the TFEU prohibits agreements between two or more independent market operators which restrict competition. 63 This
provision covers both vertical agreements and horizontal agreements. A vertical agreement is
an agreement made between parties that are at different levels of the production process, such
as a distribution agreement between a manufacturer and a retailer or agent. Vertical restraint
agreements vary widely in their terms and their effect; however, some of these agreements will
be found by the European Commission to violate the terms of Article 101.
vertical agreement: an agreement made between parties who are at different levels of theproduction process, such as adistribution agreement between amanufacturer and aretailer or agent
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Chapter 4
The European Union and Other Regional Trade Arrangements
115
A horizontal agreement is an agreement between competing firms in the same industry that
may result in reduced competition-for example, common pricing policies, common production quotas, and information sharing. The creation of a cartel between competitors, which may
involve price-fixing and/or market sharing, is an example of the most egregious illegal conduct
breaching Article 101.
The second principal rule articulated in Article 102 of the TFEU prohibits firms that hold
a dominant position in a given market to abuse that position-for example by charging unfair
prices, by limiting production, or by refusing to innovate to the prejudice of consumers.64
Article 101: Concerted Market Behaviour
This provision generally prohibits concerted market practices "which may affect trade between
Member States and which have as their object or effect the prevention, restriction or distortion
of competition within the common markef'6s The provision enumerates specific market activities of particular concern-namely, price-fixing, limitations on production, market sharing,
discrimination among parties, and tie-ins.
Particularly worrying to the Commission is an exclusive distribution agreement whereby the
producer agrees to supply the product only to a particular distributor within a particular territory, often buttressed by attempts to prevent third parties from selling into the contract territory
of the designated distributor. The use of export bans that prohibit a distributor from exporting the product outside a designated area will be judged particularly severely, as will any other
attempt to establish absolute territorial protection for a distributor. If a firm is contemplating
an exclusive distribution agreement, legal advice should be sought because an exemption may
be required. A firm may qualify either for a block exemption or for an individual exemption.
The article addresses only joint or collusive conduct as opposed to the conduct of a single
actor. One of the major goals of Article 101 is to preserve the single European market and to
prevent its fragmentation into single-country markets.
BOX 4.9
Case Highlight
Single-Country Market
Case Names and Court
Consten & Grundig v European Commission (European Court of
prices than Consten had set. Consten sued UNEF in France, and
the case was referred to the ECJ.
Justice, 1966)66
Issue
Facts
The German company Grundig appointed the French company Consten as its exclusive dealer for Grundig products in
France, the Saar, and Corsica. Consten undertook not to sell
products that would compete with Grundig products and not
to export the Grundig products directly or indirectly to any
other countries. Grundig had appointed dealers in other European countries and had imposed similar restrictions on them.
Another French company, UNEF, bought Grundig products
from a German dealer and sold them in France at cheaper
Can a manufacturer restrict imports and exports of its products
within the common market by imposing territorial prohibitions
and limitations on its dealers?
Decision
The Court held that such restrictions are a violation of the
Treaty of Rome and that artificial national divisions of the common market are prohibited. The cou rt concluded that para llel imports are valuable because they reduce national price
differences.
horizontal agreement: an agreement between com peting firms in the same industry, which may result in reduced competition- for example, common pricing policies, common production quotas, and information sharing
block exemption: an exemption availablefor generic types of agreements, including specialization agreements, research and
development agreements, vertical restraint agreements, technology-transfer agreements, andfranchising agreements
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BOX 4.10
Public International Law
Case Highlight
The T-Mobile Case
Case Names and Court
T-Mobile Netherlands BVand Others (European Court of Justice,
2009)67
Decision
The court concluded that the single meeting among competitors influenced the conduct of the market and that this was a
violation of Article 101 of the TFEU.
Facts
In 2001, five operators in the Netherlands had their own mobile telephone network. They met once to discuss the reduction of commissions paid to dealers for concluding postpaid
subscription agreements with consumers, which were to take
effect in September 2001.
Analysis/Application
It is unlawful under Article 101 ofTFEU for companies to interfere in the natural workings of the market by coordinating their
actions. A single meeting between companies may constitute
a concerted practice in breach of community competition law.
Issue
Did the behaviour of the five mobile telephone network operators amount to a concerted practice?
Exemption from the Application of Article 101
Agreements that on their face are violations of Article 101 may be eligible for exemption . Although an individual exemption may be sought from the European Commission, this is an
expensive undertaking and not to be embarked upon lightly. The philosophy of the Commission is that, to qualify for exemption, an agreement that restricts competition must contribute
to the improvement of production or distribution or promote technical and economic progress
and constitute an improvement on the situation that would not otherwise exist. Block exemptions are available for generic types of agreements. Agreements that come within the terms of a
block exemption do not need to be notified and approved by the Commission. Block exemptions
are available in a number of areas, including specialization agreements, research and development agreements, vertical restraint agreements, technology transfer agreements, and franchising
agreements. Expert legal advice is required for a firm contemplating such agreements in the EU.
Article 102: Control of Market Power
While Article 101 addresses the concerted behaviour of two or more firms, Article 102
addresses the behaviour of a single, dominant firm that abuses its m arket power. The provision
does not prohibit m arket power or monopoly in itself; rather, it prohibits the abuse of m arket
power. The Google case discussed in Box 4.11 is an example of how the EU Commission has
dealt with this issue.
The EU Merger Regulation
A merger is an agreement between two or more companies to combine their businesses into
one entity on a permanent basis. Merger transactions have become prevalent in today's business world and are commonly done to enter a new market or gain market share. The goal of
merger laws is to enable competition authorities to regulate market changes due to these transactions. Merger oversight allows the authorities to identify mergers that distort competition in
the market while allowing mergers that provide substantial efficiencies to go ahead. Unlike the
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
BOX 4.11
117
Case Highlight
Google's Anti-Competitive Behaviour in EU
Case Name and Adjudicative Body
Google Search (Shopping), European Commission6B
Facts
In all EU countries, Google's search engine has held a dominant market share that exceeds 90 percent.69 In 2004, Google
entered the EU market with a new product for comparison
shopping called "Froogle;' later renamed "Google Shopping'.'70
At that time there were already a number of established players offering online comparison shopping to EU customers.
Google's comparison-shopping service w as not performing
well, and in 2008 Google changed its marketing strategy by
placing "Google Shopping" at the top of its search results while
demoting its competitors.71 Google's algorithm started preferring its own services while reducing the quality of information
provided to consumers on Google Shopping competitors.
Issue
Does the more favourable positioning and di splay by Google,
in its general search-results pages, of its own comparisonshopping service compared to competing comparison-shopping services infringe Article 102 ofTFEU?
Decision
comparison-shopping services on its Google search-engine results page. This stifled competition and allowed Google's comparison-shopping service to make significant gains in t raffic at
the expense of its rivals and to the detriment of European consumers. In 2017, the Commission fined Google €2.42 billion.
To calculate the fine, the Commission took into consideration
the duration and gravity of the anti-competitive behaviour and
revenue gained by Google at the expense of its competitors.72
Analysis/Application
Google's self-favouring behaviour is enough to establi sh abuse
and a contravention of Article 102 ofTFEU. Google's conduct
was sufficiently capable of causing harm, including driving
competitors out of business, reducing incentives to in novate
and consumer choice, and leading to higher prices. However,
algorithms and their design are complex and often beyond
the understanding of most people.73 Algorithms continuously
change themselves and adapt in the way that thei r designers
cannot explain, with the result that it is uncertain whether
Google's self-favouring bias was actually d esigned to drive
competitors out of the EU market.74 Technological com panies
would be wise to assess how their algorithmic design may impact competition and whether the EU's anti-trust rules would
be triggered.
The Commission found that Google had abused its market power by failing to provide equal treatment to rival
anti-competition rules contained in the TFEU treaties, the current EU competition law regime
is contained in Regulation 139/2004.75 Pursuant to Regulation 139/2004, any merger with an
EU dimension that significantly impedes effective competition in the common market or a
substantial part of it, in particular as a result of the creation or strengthening of a dominant
position, is prohibited. In other words, Regulation 139/2004 sets a three-part test for what is
considered a prohibited merger transaction . The elements of the test are the (1) m erger transaction, (2) EU dimension, and (3) significant impediment of effective competition, in particular,
through strengthening or creation of a dominant position.
A merger is defined as a situation where two or more undertakings on the market combine
into one or where one or more undertakings on a market acquire control over another one.
The second element is jurisdictional, which addresses whether the EU or the member state's
merger rules apply. An EU law can apply only where a merger has an impact beyond the borders
of a national state; this is established by looking at the quantitative effect of the transaction.
When a merger reaches the EU's financial turnover threshold, as set out in Article 1 of the
Regulation, the EU has jurisdiction. If a merger reaches the quantitative threshold, the European
Commission needs to be notified of the details of the transaction. In contrast, where a merger
transaction does not reach the EU threshold but does meet the national thresholds, all relevant
national competition authorities may need to be notified. This means there are still numerous
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mergers that do not need to be notified to the commission or to the national competition authorities, because the companies involved in these mergers are too small.
The third element of the test assesses whether effective competition will be significantly
impeded by the merger. Through economic analysis, the Commission weighs the harmful
effects on competition against the benefits of the merger. One way a merger can be harmful
to competition is by reducing the number of players on the market that compete in the same
industry. A merger can also be detrimental if, through the transaction, one company absorbs
another company and the new entity then is able to control the entire supply-chain process
of a product or service. If the new company starts charging higher prices for the production inputs of competitors or limits, denies access, or raises the cost of access by other nonintegrated competitors, this will be harmful to consumers and potentially stifle development.
However, these transactions can have substantive positive effects, too. For example, the combination of two companies can lead to cost savings. These savings can be translated into lessexpensive products, which benefits consumers. The Commission must evaluate each merger
transaction on its own merits, with a view to balancing the interests of the companies and any
detrimental effects on the market.
Brexit and the EU
"Brexit" is a shorthand term that combines the words "Britain" and "exit" and refers to the process of the United Kingdom leaving the EU. 76 The following section discusses how Brexit works
and how it affects the EU and Canada.
What Is Brexit?
In 2016, by way of referendum, the United Kingdom voted to leave the EU. After the UK triggered Article 50 of the Lisbon Treaty, which sets out how an EU country may voluntarily leave
the union, the European Commission and the UK started the arduous task of negotiating how to
undo decades of integration. In October 2019, the EU and the UK approved a revised withdrawal
agreement and a political declaration on future EU - UK relations. The Withdrawal Agreement
is limited in scope, covering only a 12-month transition period during which the UK and the
EU will negotiate a new trade relationship, how much money the UK owes the EU for leaving,
and what happens to UK citizens living in the EU and EU citizens living in the UK. It also sets
out a method of avoiding the return of a physical Northern Ireland border. The UK Parliament
ratified the Withdrawal Agreement.
The transition period allows the UK and the EU to renegotiate thousands of regulations
that govern trade, investment, security, immigration, and other matters that are currently
imbedded in the EU framework. During the transition period, all EU laws would still apply,
which will allow businesses and governments to adjust to the legislative, economic, and
social changes that the exit will bring once the new legislative and regulatory changes are
implemented.
However, the UK may also depart without a deal at the end of the transition period ending in
December 2020, which would mean leaving without formal arrangements in place for the future
relationship between the EU and the UK and immediate termination of the application of all EU
regulations as they concern the UK.
A no-deal Brexit could lead to significant disruptions:
•
•
•
•
border checks could be reintroduced,
transport and trade between the UK and the EU could be severely affected,
adults may not be able to drive in EU countries without a special driving permit, and
it could cost more money for British residents travelling in the EU to use a cell phone in
EU countries.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
Business Implications of Brexit
There are over 80,000 pages of agreements between the EU and the UK. Untangling and renegotiating these agreements is a costly and uncertain process and affects businesses in countless
ways. This section highlights some business implications of Brexit.
Business thrives when the legislative framework is favourable and stable. Businesses are still
unsure what Brexit will mean for market access, the availability of migrant labour, and product regulation. This uncertainty has caused a reduction in investment and employment growth
because businesses are reluctant to expand.77 The UK's own long-term economic assessment
illustrates a decrease in GDP in the event of a deal or no-deal Brexit scenario.78
Almost half of all the UK's overseas investment comes from the EU, as does a similar proportion of its export revenues. Brexit invariably affects both the long- and short-term business
and investment decisions of UK-based foreign companies. Many companies, such as Panasonic,
Honda, Discovery Channel, Sony, and others, are moving their European headquarters from the
UK to mainland Europe to minimize the potential disruption Brexit may cause to their operations in the EU.79
Upon leaving the EU, the UK would no longer benefit from the single market and would
have to renegotiate new trade and investment agreements with the EU. Should the UK exit the
EU without a transition period, it will trade on the MFN basis under WTO laws. This will mean
millions of tariffs and other duties will apply to UK products entering the EU. Additionally, the
UK, as part of the EU, benefits from the EU's free trade agreements worldwide. Upon leaving
the EU, if the UK wishes to continue trading on a preferential basis with countries like Canada,
Japan, and Chile, it will have to negotiate its own free trade agreements with these partners. UK
businesses will likely lose the advantage afforded by the preferential trading terms of the EU's
existing trade agreements, and UK products will likely be less competitive abroad.
Reasons for Brexit
There are numerous complex reasons behind the UK's decision to leave the EU. The integration
process within the EU has had both positive and negative impacts on people in the EU and the
UK. The positive features are often taken for granted, while the negative aspects are highlighted
and produce a strong, visceral reaction in many EU citizens. For instance, the benefits of open
borders when they travel and of being able to enjoy cheap cell phone services within the EU
are seen as a simple convenience. Others may have seen the market integration and increase in
competition eliminate their jobs and lay the blame at the feet of the EU. The negative aspects of
long- and short-term migration into the UK, Eurozone instability, and inefficiencies due to the
organizational structure of the EU are among the chief reasons cited for supporting Brexit. Many
Brexiteers feel that the UK is better suited to tailor laws and regulations that address modern
problems on their own rather than in a multilateral setting that cedes a lot of their sovereignty
to the EU.
The inability of the EU institutions to address political debate and transparently address the
trade-offs that exist in working together also led to growing discontent in the UK and other EU
member states. Despite economic growth and development and improved security and environmental protection, there is a rise of populist and protectionist trends in the EU. The continued
success of the EU will depend on its institutional ability to change and address the concerns of
the member states.
Other Regional Trade Arrangements
The first years of the 2lst century have witnessed an enormous proliferation of bilateral and
multilateral trading arrangements. This reflects the relative ease of reaching an agreement when
there are a few parties compared to the daunting task of achieving consensus among all the
members of the WTO. The difficulty of consensus is the chief reason that progress in the Doha
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Round of trade talks has been so disappointing. The movement toward bilateral free trade agreements has been much criticized by trade policy analysts as creating a 'spaghetti bowl of agreements' with conflicting provisions that may have the effect of delaying multilateral negotiations
that would eventually achieve freer trade worldwide. Closely related to the phenomenon of
bilateral free trade agreements is the growth of regional free trade agreements. Like Canada,
the United States, and Mexico, which were able to sign a trilateral trade agreement in the face of
disappointing progress in the Uruguay Round, many nations are taking advantage of the geography, culture, and customs they share to reach agreement on regional free trade. The status of
these agreements is continually changing, and any list or description of the current state of these
agreements is bound to be out of date almost immediately. A representative sample of these important arrangements follows.
Canada
Recognizing the importance of trade to Canada's growth and prosperity, the federal government
is actively pursuing new trade relationships worldwide. Canada has 15 free trade agreements in
force as ofJuly 2019 (see table 4.2 for the full list), has 9 agreements in the negotiation stage and
5 agreements in the exploratory stage. so
The CPTPP is the most recent and important agreement concluded and in force. Full discussion of the CPTPP is beyond the scope of this chapter; however, it is worth noting that the
CPTPP closely resembles the structure and benefits of CETA, as it was modelled after the latter.
The CPTPP grants Canadian companies access to a market representing 495 million people and
a combined GDP of $13.5 trillion and eliminates 98 percent of trade barriers.81
The Americas
The list of free trade agreements negotiated by the various countries in Latin America is extensive. The past 25 years have seen considerable trade liberalization and broader economic policy
reform in Latin America. So far, Latin America has approached freer trade through regionalism, characterized by the creation of subregional preferential agreements that remain open to
new members and whose members remain free to pursue other agreements. Numerous bilateral
agreements have also been reached, resulting in a complex and expanding matrix of diverse
trade and economic treaty arrangements. Thus, we presently have, in addition to NAFTA and the
CPTPP, free trade agreements among Colombia, Mexico, and Venezuela, as well as the bilateral
trade agreements signed by Mexico with Chile, Costa Rica, Nicaragua, Uruguay, Peru, and the
Northern Triangle (El Salvador, Guatemala, and Honduras). Outside of Latin America, Mexico
has signed trade agreements with the European Union, Israel, and Japan. A host of other bilateral
trade agreements exist among Latin American countries and between Latin American countries
and non-Latin American countries. Notably, China has signed bilateral trade agreements with
Chile, Costa Rica, and Peru, and Japan has bilateral trade agreements with Chile, Mexico, and
Peru. In addition to its agreement with Mexico, the EU has signed a bilateral trade agreement
with Chile.
In addition, there is the free trade agreement between the Central American countries and
the Dominican Republic, and the bilateral free trade agreements between the Caribbean Community (CARICOM) and Costa Rica, Cuba, and the Dominican Republic.
Latin America also has two customs unions: Mercosur, which includes Argentina, Brazil, Paraguay, Uruguay, and Venezuela; and the Andean Community, which includes Bolivia,
Colombia, Ecuador, and Peru. Additionally, there are a number of other institutions and
subregional economic integration initiatives like the Pacific Alliance, which includes Chile,
Colombia, Mexico, and Peru, with which Canada is currently negotiating a free trade agreement that will allow it to become an associate member to the trade bloc.82 Another is the
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
TABLE 4.2
Canada's Free Trade Agreements as of 2019
Agreement Name
Country Grouping
In Force Since
Com prehensive and Progressive Agreement
for Trans-Pacifi c Partnership (CPTPP)
Austra lia, Brunei Darussalam, Chile, Japan,
Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam
2018-12-30
Canada-Chile Free Trade Agreement
Chile
1997-07-05
Canada-Colombia Free Tra de Agreement
Colombia
2011 -08-15
Canada-Costa Rica Free Trade Agreement
Costa Rica
2002-11-01
Canada-European Free Trade Association
(EFTA) Free Trade Agreement
European Free Trade Associat ion
(EFTA): Iceland, Li echtenstein, Norway,
Switzerland
2009-07-01
Cana da-European Union: Comprehensive
Economic and Trade Ag reement (CETA)
European Union (EU): Austria, Belgium,
Bulgaria, Croat ia, Cyprus, t he Czech
Republic, Denmark, Estonia, Finland, France,
Germa ny, Greece, Hu ngary, Ireland, Italy,
Latvia, Lithuania, Luxembourg, Malta, the
Netherlands, Poland, Portugal, Roman ia,
the Slovak Republic, Slovenia, Spain, Sweden, the United Kingdom
2017-09-21
Canada-Honduras Free Trade Ag reement
Honduras
2014-10-01
Canada-Israel Free Trade Agreement
(CIFTA)
Israel
1997-01-01
Canada-Jordan Free Trad e Ag reement
Jordan
2012-10-01
Canada-Korea Free Trade Agreement
(CKFTA)
Sout h Korea
2015-01-01
North American Free Trade Ag reement
(NAFTA)
North America: Mexico, United States of
America, Canada
1994-01 -01
Canada-Panama Free Trade Agreement
Panama
2013-04-01
Canada-Peru Free Trade Agreement
Peru
2009-08-01
Canada-Ukraine Free Trade Ag reement
(CUFTA)
Ukraine
2017-08-01
Canada-US Free Trade Agreement (CUSFTA)
United St ates of America (superseded by
NAFTA: 1994-01 -01)
1989-01-01
Forum for the Progress of South America (Prosur), created in April 2019, which includes
Argentina, Brazil, Chile, Colombia, Ecuador, Guyana, Paraguay, and Peru, whose goal is to
establish a coordination mechanism that will support democracy and market economy among
the member states.83
The United States is a party to 20 free trade agreements and an influential trade partner. Historically, the US has had a policy of aggressively pursuing ambitious trade agreements. However, in light of the change in administration in 2016, the US withdrew its participation in the
CPTPP and is loath to pursue multilateral trade agreements, opting to negotiate strictly on a
bilateral basis.
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Europe
The EU has been very active in the pursuit of regional and bilateral free trade agreements and,
as of 2019, it has 38 free trade agreements in force with countries as disparate as Egypt, Chile,
Mexico, and South Africa and over 42 provisionally in force agreements with countries like
Kazakhstan, Cameroon, and Madagascar.84 Negotiations are under way with the United States,
the Philippines, New Zealand, Myanmar, Indonesia, China, and others. Negotiations that had
begun with the Gulf Cooperation Council (Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and
the UAE) have been on hold since 2008.8 5
Several Central European countries that are not members of the EU have come together to
create the Central European Free Trade Agreement (CEFTA) 2006,86 which came into force in
2007. Member countries include Albania; Bosnia and Herzegovina; the Republic of Moldova;
Montenegro; Serbia; Macedonia; and UNMIK/Kosovo. Finally, the Eurasian Economic Union
(EEU) is a limited customs union between Belarus, Kazakhstan, the Russian Federation, Kyrgyzstan, and Armenia in effect since 2015. The EEU has harmonized its external customs tariffs,
abolished the internal customs borders, provided for greater labour movement, and transferred
some of the decision-making about tariffs to the Union level.
Asia
The Association of South East Asian Nations
The Association of South East Asian Nations (ASEAN) was established in 1967 with the Bangkok
Declaration. 87 The original members comprised Indonesia, Malaysia, the Philippines, Singapore,
and Thailand. Brunei Darussalam became the sixth member in 1984, and Vietnam the seventh
in 1995. Lao PDR and Myanmar joined in 1997; Cambodia joined in 1999. At the time of formation, the members were reluctant to cede powers to the association, preferring to maintain a
high level of individual sovereignty. For this reason, ASEAN has a flexible and loose structure.
Even with subsequent improvements in the structure, ASEAN remains an intergovernmental
regional organization with no supranational law-making powers. The aims and purposes of the
association are ( 1) to accelerate economic growth, social progress, and cultural development in
the region and (2) to promote regional peace and stability through abiding respect for justice
and the rule oflaw in the relationship among countries in the region and adherence to the principles of the United Nations Charter. Economic cooperation in ASEAN has been slow to develop
because of the dominance of national interests. Increasingly, however, Asian nations are deciding
to cooperate to create freer trade within the region.
ASEAN Plus Three is an initiative to integrate China, Japan, and South Korea into the ASEAN
framework. This was followed by the East Asian Summit, which includes these three countries
as well as India, Australia, New Zealand, the United States, and Russia. The Regional Comprehensive Economic Partnership (RCEP) is a free trade agreement that was being negotiated
at the time of writing between all 10 ASEAN member states and their partners: China, Japan,
South Korea, Australia, New Zealand, and India. The RCEP agreement, when finalized, would
encompass 30 percent of global gross domestic product and 3.5 billion people, overshadowing
the CPTPP. 88
The ASEAN Free Trade Area (AFTA)
In 1992, the leaders of ASEAN agreed to establish an ASEAN free trade area (AFTA) within
15 years of January 1, 1993. The primary instrument for implementing AFTA is the Common
Effective Preferential Tariff Scheme (CEPT). The CEPT requires that, once all countries accept
that a specific good is to be covered under the CEPT, all member countries give the preferential
tariff. Although unprocessed agricultural products were originally excluded from this scheme,
member countries agreed in 1994 to phase such products into the CEPT scheme. All ten ASEAN
member countries are part of AFTA. Additionally, ASEAN has concluded free trade agreements
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Chapter 4 The European Union and Other Regional Trade Arrangements
with China, Korea, Japan, Australia, New Zealand, and India and is currently in the process of
negotiating a free trade agreement with the EU.
The Asia- Pacific Economic Cooperation
The Asia- Pacific Economic Cooperation (APEC) is a loosely confederated group born of the
Asia- Pacific Conference in 1993. APEC had 21 member countries at the time of writing, including
Australia, Brunei Darussalam, Canada, Indonesia, Japan, South Korea, Malaysia, New Zealand, the
Philippines, Singapore, Thailand, the United States, Chinese Taipei, Hong Kong, China, Mexico,
Papua New Guinea, Chile, Peru, Russia, and Vietnam, and operates as a cooperative, multilateral
economic and trade forum with the goal of promoting growth and accelerating regional economic
integration.
The South Asian Association for Regional Cooperation and the South Asian Free
TradeArea
The South Asian Association for Regional Cooperation (SAARC) comprises India, Pakistan,
Bangladesh, Sri Lanka, Nepal, Bhutan, the Maldives, and Afghanistan. The purpose of the organization is to promote economic, social, and cultural cooperation among the member states.
To that end, SAARC negotiated a free trade agreement among its members and established the
South Asian Free Trade Area in 2004. Since it took effect, the member states have progressively
moved toward harmonization of packaging, marking, and labelling requirements and the elimination of tariff and non-tariff barriers to trade.
Africa
While there are associations of countries in Africa, they have tended to have political, rather
than economic, underpinnings. Some of these associations are described below.
The Agadir Treaty
The Agadir Treaty (Agadir) created a free trade area between Egypt, Jordan, Morocco, and Tunisia in 2004; in 2016, Lebanon and Palestine joined the trade area. Agadir dismantles customs;
liberalizes trade, including agricultural products; provides for technical assistance to support
small- and medium-sized firms; and includes rules for government procurement and intellectual property rights, common standards and specifications, and mechanisms to resolve conflicts
between member states. Trade among member states is relatively modest due to their political
and market fragmentation.
The Customs and Economic Union of Central Africa
The Customs and Economic Union of Central Africa, an association of French-speaking African nations that includes Cameroon, the Central African Republic, the Republic of the Congo,
Equatorial Guinea, and Gabon, was established in 1966. Also known by its French name, Union
Douaniere et Economique de l'Afrique Centrale (UDEAC), this group formed a customs union
among its members. UDEAC signed a treaty for the establishment of the Economic and Monetary Community of Central Africa (CEMAC) to promote the entire process of subregional
integration, and it agreed to a monetary union, with the Central African franc as a common
currency. UDEAC was officially superseded by CEMAC in June 1999.
The East African Community
Initiated in 1999 and formerly known as the East African Customs Union, the East African
Community (EAC) is an association of East African countries. Progress on the EAC Customs
Union Protocol has been slow; however, the union "began operations" in January 2005.
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The Economic Community of West African States
Formed in 1975, the Economic Community of West African States (ECOWAS) is an association
of 15 West African countries. Several ECOWAS members have formed a customs union and
apply a common external tariff as well as cooperate on taxation and other economic matters.
The African Continental Free Trade Area (AfCFTA)
On May 30, 2019, the AfCFTA entered into force for the 24 out of 54 African countries that
had ratified the free trade agreement, and trading under the terms of the treaty will start on
July 1, 2020.89 If successful, the AfCFTA will create the largest free trade area since the creation
of the WTO and will bring together 1.2 billion people and achieve a combined gross domestic
product (GDP) of more than $2 trillion.90 In the meantime, three customs unions are in force
in Africa. These are the West African Economic and Monetary Union (WAEMU), the Southern
African Customs Union (SACU), and the Southern African Development Community (SADC),
a regional economic community of 16 states.
The Middle East
In the context of the current global movement toward integration through bilateral and multilateral trade agreements, the Middle East is notable for its absence of activity. Although the
United States and the EU are actively seeking bilateral agreements with various Middle Eastern
countries, there is little initiative emanating from the region itself.
The Council of Arab Economic Unity
The Council of Arab Economic Unity (CAEU) was created in 1964 to implement the Arab
Economic Unity Agreement among the states of the Arab League. Its 18 members are Algeria,
Bahrain, Egypt, Iraq, Jordan, Kuwait, Lebanon, Libya, Morocco, Oman, Palestine, Qatar, Saudi
Arabia, Sudan, Syria, Tunisia, the UAE, and Yemen. The ultimate goal of the CAEU is to achieve
complete economic unity among the member states. In 1997, the Greater Arab Free Trade Area
(GAFTA) came into effect, and all 18 member states of CAEU are a part of it. Yemen and Sudan,
however, have yet to implement it.
The Gulf Cooperation Council (GCC)
Established in 1981, the GCC is a political and economic alliance made up of Saudi Arabia,
Kuwait, the UAE, Qatar, Bahrain, and Oman. 91 The GCC passed an agreement establishing a
customs union among the six countries in 2015, which means that these countries adopt a common customs tariff with external countries and enjoy free trade among themselves.
Australia
The first trade agreement in this region was the Closer Economic Relations Trade Agreement
(CER) between Australia and New Zealand, a WTO -consistent trade agreement that came into
force in 1983. As of writing, Australia has 11 free trade agreements in force, and its trading partners include New Zealand, Singapore, Thailand, the United States, Chile, ASEAN, Japan, China,
South Korea, and Malaysia. Additional trade agreements concluded but not yet in force are with
Hong Kong, Indonesia, Peru, and the Pacific Island countries. Australia is also participating in
negotiations for several multilateral trade agreements, including the following: the RCEP; the
GCC, the Pacific Alliance Free Trade Agreement, and the EU- Australia Trade Agreement. 92
Additionally, the South Pacific Regional Trade and Economic Cooperation Agreement
(SPARTECA), an agreement created by Australia and New Zealand, provides developingcountry members of the Pacific Islands Forum duty-free access to their markets. Member countries include the Cook Islands, Fiji, the Marshall Islands, Micronesia, Nauru, Papua New Guinea,
Samoa, the Solomon Islands, Tonga, Tuvalu, Vanuatu, Kiribati, and Niue. 93
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Chapter 4
The European Union and Other Regional Trade Arrangements
125
CRITICAL ANALYSIS: Business Law
Bicycle Manufacturer Interested in Switching Gears with CETA
A Canadian manufacturer of high-end bicycles, BikesRUs, has a
long-standing relationship with retail purchasers in the US but
wants to expand its sales globally. The company is considering venturing into the European Union, specifically Croatia and
Italy. Additionally, while it has seen an increase in sales in the
US in 2018 and 2019, BikesRUs has noticed a decrease in sales
of its bicycles in the same years domestically. This is a concern
for BikesRUs, as it had strong revenues in Canada in 2016 and
20 17 and has had a loyal customer base. Furthermore, BikesRUs noted a greater presence of French-made bicycles in the
same retai l stores as it sells its products. The prices these bicycles are being sold at are just as competitive as BikesRUs's
product. The CEO of BikesRUs has approached you to provide
advice regarding the possible benefits and drawbacks of the
CETA agreement on his business. Advise the CEO by answering
the following questions.
Critical Analysis Questions
1. Explain one reason, related to CETA, that BikesRUs has
seen a decrease in domestic sales of its product.
2. How can CETA benefit BikesRUs?
3. If BikesRUs decides to export its products, what should it
know about the safety standards in the European
Union?
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Part I Public International Law
CHAPTER SUMMARY
In this chapter, we discussed:
The historical development of the European Union.
• The EU started as a project to establish long-lasting
peace following WWII.
The EU developed over time through the signing of multiple treaties among member states, progressively increasing economic and political integration.
The Treaty of Rome established the common market of
the European Economic Community (EEC).
The MaastrichtTreaty (or the Treaty on European Union)
renamed the EEC to the EU.
• The EU is an economic and monetary union.
Governance of the European Union.
The key bodies of the EU are the European Council, the
Council ofthe European Union, the European Parliament, the European Commission, and the European
Court of Justice.
Law-making in the European Union.
The treaties are the basis or ground rules for all EU
action.
• Regulations, directives, and decisions are derived from
the principles and objectives set out in the treaties.
The EU's and Canada's economic and trade relationship
underCETA.
• CETA creates a free trade area between the EU and
Canada.
CETA regulates trade in goods and services, adjusts intellectual property rights for pha rmaceutical drugs,
establishes an investor-state dispute-settlement system, and regulates government procurement among
other issues.
Certain European Union laws relevant to Canad ian
businesses.
• The EU has adopted common technical standards for all
member states; once a product has been accepted into
one EU country it can circulate freely within all EU
countries.
• The EU also has sanitary and phytosanita ry requirements for food and feed safety and animal, plant, and
public health.
• The most important standards are those relating to
product safety, product liability, technical standardization, packaging, and labelling.
The impact of Brexit on the EU and Canada.
• By leaving the European Union, the UK would lose its
CETA benefits, and another separate agreement would
have to be negotiated between Canada and the UK.
• Trade with the UK will be subject to WTO rules, which
are less favourable for Canadian companies doing business in the UK.
Other regional trade arrangements.
• Canada has 15 free trade agreements in force.
• The world is divided into numerous free trade areas and
customs unions, creating a complicated web of
regulations.
REVIEW QUESTIONS
Note that most of the answ ers for these questions will be
found in the text. Some questions, however, address the
current status of issues, and students should ensure that
their information is up to date by searching current media
sources.
1. Name the present members of the EU as of July 2019.
What countries are at the applicant stage?
2. Briefly describe th e milestones in the development of
the EU from the Treaty of Rome to the present.
4. What is the connection between the Charter and the
status of a constitution for the EU? What is the
present status of a constitution for the EU?
5. Are all countries in the EU members of the Eu ropean
Monetary Union (that is, have they all adopted the
common currency)?
6. Name the major institutions of the EU and briefly
describe their composition and f unction.
7. Why is CETA significant for Canadian businesses?
3. Describe the three pillars of the EU.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
8. What are the rules of origin that goods must meet to
benefit from tariff reductions under CETA?
9. What technical barriers to trade should Canadian
businesses consider when they are exporting to the
European Union?
10. How does the European Union protect intellectual
property rights?
11. What are the three main prohibitions provided by EU
competition law and where is the law relating to
127
these found? What types of activities are prohibited
by this area of EU law?
12. Describe the case in which the findings of the
European Commission affected mergers that had
been agreed to by firms located outside of Europe.
13. Describe the Google Shopping case.
14. What is the difference between an individual
exemption and a block exemption under Article 101?
15. Explain the major concern with the proliferation of
free trade agreements worldwide.
NOTES
1. European Commission, "Countries and Regions" (last
modified 01August2019), online: Europa <http://
ec.europa.eu/trade/ policy/countries-and-regions/
countries/canada/>.
2. Signed 30 October 2016, on line: Government of
Canada <https://www.international.gc.ca/tradecommerce/trade-agreements-accords-commerciaux/
agr-acc/ ceta-aecg/ index.aspx?lang=eng >.
3. Ibid.
4. 11957E/ AFl/CNF (last visited 4 October 2019), on line:
EUR-Lex <https://eur-lex.europa.eu/ legal-content/EN/TX
T/?qid= l 570236643821&uri=CELEX:l1957E/AFl/ CNF>.
5. OJ L 169, 29.6.1987 at 1-28 (last visited 4 October
2019), online: EUR-Lex <http://data.europa.eu/ eli/
treaty/sea/ sign>.
6. OJ C 340, 10.11 .1997 at 115 (last visited 9 October
2019), online: EUR-Lex <http://data.europa.eu/ eli/
treaty/ams/ fna_1/ sign>.
7. OJ C 326, 26.10.2012 at 13- 390 (last visited 4 October
2019), online: EUR-Lex <http://data.europa.eu/ eli/
treaty/teu_2012/ oj >.
8. OJ C 80, 10.3.2001 at 1- 87 (last visited 4 October
2019), online: EUR-Lex <http://data.europa.eu/ eli/
treaty/ nice/ sign>.
9. OJ C 306, 17.12.2007 at 1- 271 (last accessed 4
October 2019), online: EUR-Lex < http://data.eu ropa.
eu/eli/ treaty/ lis/ sign >.
10. OJ C 326, 26.10.2012 at 47-390 (last visited 4 October
2019), online: EUR-Lex <http://data.europa.eu/ eli/
treaty/tfeu_2012/oj >.
11. (18 December 2000), online (pdf): Official Journal of
the European Communities <https://www.europarl
.europa.eu/charter/ pdf/ text_en.pdf>.
12. European Central Bank (ECB) (last modified 13
February 2019), online: EUR-Lex <https://europa.eu/
european-union/ about-eu/ institutions-bodies/
european-central-bank_en>.
13. European Council, "The Role of the European Council
in Nominations and Appointments" (last modified 29
May 2019), online: Europa <https://www.consilium.
europa.eu/ en/european-council/ role-nominationsappointment/>; see also art 13 of the Treaty on
European Union.
14. European Union, "EU Institutions and Bodies in Brief"
(last modified 22 May 2018), online: Europa <https://
europa.eu/ european-union/ about-eu/
institutions-bodies_en>.
15. Supra note 9.
16. European Parliament (last visited 20 May 2019),
online: Europa <https://europa.eu/ european-union/
about-eu/ institutions-bodies/
european-parliament_en >.
17. European Commission, "What Is the Euro Area ?" (last
visited 2 July 2019), online: Europa <https://
ec.europa.eu/ info/ business-economy-euro/ euroarea/ what-euro-area_en >.
18. "2019 Enlargement Package: 'North Macedonia and
Albania Have Delivered on Reforms; Says Mogherini"
(29 May 2019), online: European Union External Action
< https://eeas.eu ropa.eu/ head qua rters/ h eadq ua rtershomepage_en/6340S/ 2019%20En la rgement%20
© [2020) Emond Montgomery Publications. All Rights Reserved.
128
Part I Public International Law
Package:%20%22North%20Macedonia%20and%20
Albania%20have%20delivered%20on%20
reforms%22,%20says%20Mogherini>.
19. The European Council (last modified 30 June 2019).
on line: European Council <https://www.consi lium.
europa.eu/en/european-council/>.
20. Supra note 14.
21. OJ C 326, 26.10.2012 at 13-390 (last visited 4 October
2019), online: EUR-Lex <http://data .europa.eu/eli/
treaty/teu_2012/oj>.
22. Flaminio Costa v ENEL (1964) Case 6/64 <http://curia.
europa.eu/juris/showPdf.jsf?text=&docid=87399&pa
gelndex=O&doclang=en&mode=lst&dir=&occ=first&
part=l &cid=2346058>; lnternationale
Handelsgessellschaft (1970), CJEU 1970 01125.
23. Microsoft v Commission (12 July 2006), COMP/C-3/37.792;
Microsoft v Commission (27 June 2012), T-167/08.
24. European Commission, "One Year on EU-Canada
Trade Agreement Delivers Positive Results" (20
September 2018), online: Europa <http://trade.
ec.eu ropa.eu/doclib/ press/ index.cfm ?id= 1907>.
25. Protocol I: Rules of Origin and Origin Procedures (last
modified 14 July 2017), on line: Government of Canada
<https:// www.international.gc.ca/trade-commerce/
trade-agreements-accords-commerciaux/agr-acc/
ceta-aecg/chapter_summary-resume_chapitre.
aspx?lang=eng#a2_ 1>.
26. Customs and Trade Facilitation (last modified 14 July
2017). on line: Government of Canada <https://www.
international.gc.ca/trade-commerce/ tradeagreements-accords-commerciaux/ agr-acc/cetaaecg/chapter_summary-resume_chapitre.
aspx?lang=eng#a6>.
27. Annex 5-A: Origin Quotas and Alternatives to the
Product-Specific Rules of Origin in Annex 5 (last
modified 3 October 2017), on line: Government of
Canada <https://www.international.gc.ca/ tradecommerce/trade-agreements-accords-com merciaux/
ag r-acc/ceta-aecg/text-texte/
Pl .aspx?lang=eng#5_ 1>.
28. Cross-Border Trade in Services (last modified 14 July
2017), online: Government of Canada <https://www.
international.gc.ca/ trade-commerce/ tradeagreements-accords-commerciaux/ agr-acc/
ceta-aecg/chapter_summary-resume_chapitre.
aspx?la ng=eng#a9>.
29. Investment (last modified 14 July 2017). on line:
Government of Canada < https://www.i nternational.
gc.ca/trade-commerce/trade-agreements-accordscom mercia ux/ag r-acc/ ceta-aecg/ cha pter_summaryres u me_ cha pitre.aspx? Iang=eng#a8>.
30. Government Procurement (last modified 14 July
201 7). on line: Government of Canada <https://www.
international.gc.ca/trade-commerce/ tradeagreements-accords-commerciaux/agr-acc/ cetaaecg/chapter_summary-resume_chapitre.
aspx?lang=eng#a 19>.
31. Text of the Comprehensive Economic and Trade
Agreement-Annex 19 (last modified 3 October
2017), on line: Government of Canada <https://www.
international.gc.ca/trade-commerce/tradeagreements-accords-commerciaux/ agr-acc/ cetaaecg/text-texte/19-A.aspx?lang=eng#b 1>.
32. European Commission, "CETA Explained" (last
modified 21 September 2017), online: Europa <http://
ec.europa.eu/trade/ policy/ in-focus/ ceta/ cetaexplained/ index_en.htm >.
33. Chuck Chiang, "Court Smooths Way for Canadian
Exports to Europe;' Business in Vancouver (6 June
2019), online: <https://biv.com/ article/ 2019/ 06/
court-smooths-way-canadian-exports-europe>.
34. European Commission, "General Product Safety
Directive" (last visited 2 October 2019), online: Europa
< https://eu r-lex.eu ropa.eu/ lega 1-content/ EN/TXT/? u ri
=CELEX:02001L0095-20100101 >.
35. General Product Safety Directive 2001 / 95/ EC, art 3.
36. Ibid, art 2.
37. Ibid.
38. European Commission, "EU Bans Sale of Non-Child
Resistant and Novelty Cigarette Lighters" (11 March
2008), online: Europa <https://europa.eu/ rapid/
press-release_IP-08-425_en.htm>.
39. Ibid.
40. Ibid.
41. European Commission, "Liability of Defective
Products" (last visited 12 October 2019), on line:
Europa <https://ec.europa.eu/ growth/ single-market/
© (2020] Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
goods/ free-movement-sectors/
liability-defective-products_en >.
42. Directive 2006/42/ EC of the European Parliament and
of the Council of 17 May 2006 on Machinery, and
Amending Directive 95/ 16/ EC (last visited 4 October
2019), online: EUR-Lex <http:// data.europa.eu/ eli/
dir/2006/42/2019-07-26>.
43. European Commission, "Mutual Recognition
Agreements" (last visited 4 October 2019), online:
Europa <https://ec.europa.eu/growth/ single-market/
goods/ international-aspects/ mutual-recognitionagreements_en>.
44. European Parliament and Council Directive 94/ 62/ EC
of December 20, 1994, Annex II.
45. Regulation (EC) No 1935/ 2004 of the European
Parliament and of the Council of October 27, 2004,
on Materials and Articles Intended to Come into
Contact with Food.
46. European Commission, "Labelling and Packaging"
(last modified 2 August 2019), online: Europa
< https://trade.ec.eu ropa.eu/ tradehel p/
labelling-and-packaging>.
47. Regulation (EC) No 178/ 2002 of the European
Parliament and of the Council of January 28, 2002.
48. Ibid, art 18.
49. European Commission, Trade Helpdesk, "Sanitary
and Phytosanitary Requirements" (last modified
2 August 2019), online: Europa <https:/ /trade.
ec.europa.eu/tradehelp/ sanitary-and-phytosanitaryrequirements>.
50. Council Directive 2000/ 29/ EC of May 8, 2000, "On
Protective Measures Against the Introduction into
the Community of Organisms Harmful to Plants or
Plant Products and AgainstTheir Spread Within the
Community;' on line: EUR-Lex <http://data.europa.eu/
eli/ dir/ 2000/ 29/ 2018-04-01 >.
51. Ibid.
52. Agreement on Trade-Related Aspects of Intellectual
Property Rights (15 April 1994), Marrakesh Agreement
Establishing the World Trade Organization, Annex 1C,
1869 UNTS 299, 33 ILM 1197 (1994), online: World
Trade Organization <https://www.wto.org/engl ish/
docs_e/ legal_e/ 31 bis_trips_Ol _e.htm>.
129
53. Coordination of Certain Rules Concerning Copyright
and Rights Related to Copyright Applicable to
Satellite Broadcasting and Cable Retransmission,
online: EUR-Lex <http://data.europa.eu/ eli/
dir/ 1993/ 83/ 2019-06-06>.
54. Unitary Patent (last modified 9 June 2017), online:
European Patent Office <https://www.epo.org/ lawpractice/ unitary/ unitary-patent.html>.
55. When Will the Unitary Patent System Start? (last
modified 2 September 2019), online: European Patent
Office <https://www.epo.org/ law-practice/ unitary/
unita ry-patent/ start.htm I>.
56. Directive (EU) 2015/ 2436 of the European Parliament
and of the Council of 16 December 2015 to
Approximate the Laws of the Member States Relating
to Trade Marks, OJ L 336, 23.12.2015 at 1-26, on line:
EUR-Lex <http://data.europa.eu/ eli/ dir/ 2015/ 2436/
oj>; Regulation (Eu) 2017/ 1001 of the European
Parliament and of the Council of 14 June 2017 on the
European Union Trade Mark, on line: Official Journal of
the European Union <https:// eur-lex.europa.eu/ legalcontent/ EN/TXT/ PDF/?u ri=CELEX:32017R 1001 >.
57. European Commission, Report on the EU Customs
Enforcement of Intellectual Property Rights (201 7),
on line (pdf): Europa <https://ec.europa.eu/ taxation_
customs/ sites/ taxation/ files/ report_on_eu_customs
_enforcement_of_ipr_2017_en.pdf>.
58. European Commission, "Intellectual Property
Rights- Facts and Figures" (2018), online: Europa
< https:// ec.eu ropa .eu/taxatio n_customs/ business/
customs-controls/ counterfeit-piracy-other-iprviolations/ ipr-infringements-facts-figures_en>.
59. Ibid.
60. Ibid.
61. Joined cases C 446/ 09 and C 495/09, online: lnfoCuria,
Case-Law of the Court of Justice <http://curia.europa.
eu/juris/ document/ document.jsf?docid= l 15783
&doclang=en>.
62. European Commission, "Competition, Antitrust
Overview" (last modified 21 November 2014), online:
Europa <http:// ec.europa.eu/competition/ antitrust/
overview_en.html>.
63. Ibid.
64. Ibid.
© (2020] Emond Montgomery Publications. All Rights Reserved.
130
Part I Public International Law
65. Art 101-1, TFEU, on line: EUR-Lex <https://eur-lex.europa.
eu/ legal-content/en/ ALU?uri=CELEX:12008E101 >.
66. C-56/ 64, on line: lnfoCuria, Case-Law of the Court of
Justice <http://curia.europa.eu/juris/ liste.
jsf?num=C-56/ 64&1anguage=en>.
67. C-8/ 08, on line: lnfoCuria, Case-Law of the Court of
Justice < http://curia.europa.eu/juris/ 1iste.
jsf?language=en&num=c-8/ 08>.
68. AT.39740 (27 June 2017), online: Europa <http://
ec.europa.eu/ competition/ antitrust/ cases/ dec_
docs/ 39740/ 39740_14996_3.pdf>.
69. European Commission, "Antitrust: Commission Fines
Google €2.42 Billion for Abusing Dominance as
Search Engine by Giving Illegal Advantage to Own
Comparison Shopping Service" (27 June 2017),
online: Europa <http://europa.eu/ rapid/
press-release_IP-17-1784_en.htm>.
70. Supra note 68.
71. Ibid.
72. Ibid.
73. Peter Georg Picht & Gaspare Loderer, "Framing
Algorithms- Competition Law and (Other)
Regulatory Tools" (30 October 2018), Max Planck
Institute for Innovation & Competition Research
Paper Series No 18-24, on line: SSRN <https://ssrn.
com/ abstract=3275198>.
74. European Commission, "Competition: Overview" (21
November 2014), online: Europa <http://ec.europa.
eu/ compet ition/ antitrust/overview_en.html>.
75. The Merger Regulation- Council Regulation (EC) No
139/ 2004 of 20 January 2004 on the Control of
Concentrations Between Undertakings, online: EURLex <https://eur-lex.europa.eu/ legal-content/en/
ALU?uri=CELEX%3A32004R01 39>.
76. European Commission, " Representation in Ireland:
Brexit and Ireland" (last modified 11 October 2019),
online: Europa <https://ec.europa.eu/ ireland/ news/
key-eu-policy-areas/brexit_en>.
77. Nicholas Bloom et al, "Brexit Is Already Affecting UK
Bu sinesses- Here's How" (13 March 201 9), on line:
Harvard Business Review <https:/ / hbr.org/201 9/03/
brexit-is-already-affecting-uk-busi nesses-heres
-how>.
78. EU Exit: Long-Term Economic Analysis (Novem ber
2018), online (pdf): HM Government <https://assets.
publishing.service.gov.uk/government/ uploads/
system/ uploads/ attachment_data/file/ 760484/ 28_
November_EU_Exit_-_Long-term_economic_
analysis_1_.pdf>.
79. Lisa O'Carroll, "Brexit: Netherlands Talking to 250 Firms
About Leaving UK" (9 February 2019), online: <https://
www.theguardian.com/ politics/ 2019/feb/ 09/
brexit-uk-companies-discuss-moving-to-netherlands>.
80. Trade and Investment Agreements (last modified 30
September 2019), on line: Government of Canada
< https://www.internationaI.gc.ca/trade-com merce/
trade-agreements-accords-commerciaux/agr-acc/
i ndex.aspx ?lang=eng>.
81. Overview and Benefits of the CPTPP (last modified 11
February 2019), online: Government of Canada
< https://www.i nternati on al .g c.ca/trade-com merce/
trade-agreements-accords-commerciaux/ag r-acc/
cptpp-ptpgp/ overview-apercu.aspx?lang=eng>.
82. Canada and the Pacific Alliance (last modified 8
August 2019), online: Government of Canada <https://
www.international.gc.ca/ world-monde/
international_relations-relations_internationales/
pacific_alliance-alliance_pacifique/ index.
aspx?lang=eng>.
83. Frances Jenner, "Chile Leaves UNASUR as Alternat ive
PROSUR Gains Traction" (25 Apri l 2019), online: Latin
America Reports <https://latinamericareports.com/
chile-leaves-unasur-creates-prosur/ 1817/>.
84. European Commission, "Negotiations and Agreements"
(last modified 25 July 2019), online: Europa <http://
ec.europa.eu/trade/ policy/countries-and-regions/
negotiations-and-agreements/>.
85. Ibid.
86. Central European Free Trade Ag reement Secret ariat
(last visited 7 October 2019), online: <http:// cefta.i nt/
legal-documents/ >.
87. The Asean Declaration (Bangkok Declaration)
Bangkok (8 August 1967), online: ASEAN <https://
asean.org/the-asean-declaration-bangkok
-declarat ion-bangkok-8-august-1967/>.
88. Eryk Bagshaw, "Australia Leads SecretTrade
Negotiatio ns That Will Sideline US;' Sydney Morning
© (2020] Emond Montgomery Publications. All Rights Reserved.
Chapter 4 The European Union and Other Regional Trade Arrangements
Herald (26 June 2019), on line: <https:// www.smh.
com.au/politics/federal/ australia-leads-secret-tradenegotiations-that-will-sideline-us-20190626-p521 hf.
html>.
131
91. Encyclopaedia Britannica Editors, "Gulf Cooperation
Council" (last modified 15 June 2019), online:
<https://www.britannica .com/topic/
Gulf-Cooperation-Council>.
89. Status of AfCFTA Ratification (7 July 2019), online:
Tralac (Trade Law Centre) <https://www.tralac.org/
resou rces/ infog ra ph ics/ 13 795-status-of-afcftaratification.htm I>.
92. Australia's Free Trade Agreements (FTAs) (last visited 1
July 2019), online: Australian Government <https://
dfat.gov.au/ trade/ agreements/ Pages/ tradeag reements.aspx>.
90. Loes Witschge, "African Continental Free Trade Area:
What You Need to Know;' Al Jazeera 20 March 2018),
online: <https://www.aljazeera.com/ news/2018/03/
african-continental-free-trade-area-afcfta180317191954318.html>.
93. South Pacific Regional Trade and Economic
Cooperation Agreement, on line: UNCTAD Investment
Policy Hub <https://investmentpolicy.unctad.org/
internationa 1-i nvestm ent-ag reements/ g rou pi ngs/ 1I
sparteca-south-pacific-regional-trade-and-economiccooperation-agreement->.
FURTHER READING
Catherine Bernard & Steve Peers, eds, European Union Law
(Oxford: Oxford University Press, 2017).
TC Hartley, The Foundations of European Community Law,
7th ed (Oxford: Oxford University Press, 2010).
WEBSITES
Association of South East Asian Nations (ASEAN and
ASEAN Free Trade Area) : <https://asean.org/>
Australian Department of Foreign Affairs and Trade:
<http://www.dfat.gov.au >
East African Community: <http://www.eac.int>
Economic Community of West African States (ECOWAS):
<http:// www.ecowas.int>
Europa (European Commission): <https://ec.europa.eu/
info/ index_en>
Global Affairs Canada (agreements by country, A-Z; free
trade agreements, foreign investment promotion and
protection agreements, World Trade Organization, and
other trade-related topics): <http://www.international.
gc.ca/ trade-agreements-accords-commerciaux/ index.
aspx>
Organization of the American States (source for all t rade
agreements in the region): <http://www.sice.oas.org>
South Asian Association for Regional Cooperation/ South
Asian Free Trade Area (SAARC/SAFTA): <http://saarcsec.org >
LIST OF CASES
Google Search (Shopping), European Commission, AT.39740
(27 June 2017), online: Europa <http://ec.europa.eu/
competition/ antitrust/cases/ dec_docs/ 39740/ 39740_
14996_3.pdf>.
Koninklijke Philips Electronics NV v Lucheng Meijing
Industrial Company and Others (European Court of
Justice, 2011) and Nokia Corporation v Her Majesty 's
Commissioners of Revenue (European Court of Justice,
2011 ), joined cases C 446/ 09 and C 495/ 09, on line:
lnfoCuria, Case-Law of the Court ofJustice <http://curia.
europa.eu/juris/ document/ document.jsf?docid=
115783&doclang=en>.
T-Mobile Netherlands BV and Others (European Court of
Justice, 2009) C-8/ 08, online: lnfoCuria, Case-Law of the
Court ofJustice <http://curia.europa.eu/juris/ liste.
jsf?language=en&num=c-8/ 08>.
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
CHAPTER 5
Canada's Response to Global
Rules: Domestic Rules for
Imports and Exports
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand
Introduction 133
Domestic Legislation Governing Imports and Exports 133
How to Import: Practical Considerations 140
Canadian Services for the Exporter 156
Chapter Summary 159
Review Questions 159
Notes 159
Websites 161
List of Cases 161
• how Canada incorporates international trade treaties and their provisions
into domestic law
• the practical considerations when importing goods into Canada
• what services are available from the government of Canada and its agencies
to support and assist Canadian exporters
Introduction
We now understand some of the more important provisions of the WTO, NAFTA, and CETA
agreements. As discussed in previous chapters, international agreements require domestic legislation before they can have the force of law in Canada.
The first half of this chapter provides an overview of the most salient Canadian import and
export legislation as it reflects our international commitments and an overview of the regulatory
bodies in charge of administering this legislation. The second half will illustrate the processes of
importing goods.
Domestic Legislation Governing Imports and Exports
Canadian legislation governing imports and exports is influenced by a number of factors, which
include the following:
• protection of the health and safety of Canadian residents;
• maintenance of the economic well-being of Canada;
• compliance with the rules established under various international agreements, including
the WTO, NAFTA, and CETA; and
• compliance with treaty provisions providing for environmental protection.
This section highlights Canadian legislation that all importers and exporters should be
familiar with to be successful traders.
133
© [2020) Emond Montgomery Publications. All Rights Reserved.
134
Part I
Public International Law
The Customs Act: Rules for Imports and Exports
The federal Customs Act 1 is Canada's primary legislation relating to imports and exports of
goods. The Customs Act authorizes the Canada Border Services Agency (CBSA) to regulate
the movement of exports, imports, and people and includes the rules for the collection of
duties and imposition of anti-dumping and countervailing tariffs. "Duties" means tariffs or
taxes imposed on the imported goods pursuant to the Customs Tariff,2 the Excise Tax Act,3
the Excise Act, 4 and the Special Import Measures Act. 5 The Customs Act operates in conjunction with other important acts with respect to the collection of tariffs and duties on imported
goods. The Customs Act is divided into seven major parts and creates a self-reporting legislative scheme regulating imports and exports. Pursuant to the following sections of the Customs
Act, the importer must
s 7. 1: provide true, accurate, and complete information to the CBSA regarding the goods;
s 12: report all imported goods;
s 13: present goods and truthfully answer any questions regarding same;
s 32: account for all goods and pay duties;
s 32.2: correct any incorrect declaration of origin, tariff classification, or value of the
goods.
s 35: mark goods to indicate origin; and
s 35: provide proof of origin of the goods.
These sections inform numerous regulations and documentary requirements for imports, as
illustrated later in this chapter.
The Customs Tariff
The Customs Tariff is the Canadian domestic legislation that provides for implementation of
GATT and our regional trade agreements' obligations. The duties on goods entering Canada are
levied in accordance with the Customs Tariff and its schedule, listing specific tariffs on different
classifications of goods. The Customs Tariff lists the duty obligations for imported goods based
on the tariff classification number assigned to a particular good. The tariff classification number
will be used to determine the rate of duty that will be applied by the CBSA to any particular good
upon entering Canada. The Customs Tariff provides for differing rates of duty on the thousands
of products and their origin as listed in Schedule A to the Customs Tariff The items are listed
with an identifying number and description according to the International Convention on the
Harmonized Commodity Description and Coding System (HS).6
Over 200 countries, including Canada, have adopted this uniform system of customs classification developed by the World Customs Organization (WCO). The WCO is an international
organization concerned with the technical aspects of customs law and administration. The organization is based in Brussels and has a membership of approximately 183 countries.
The WCO developed the HS. This system enables countries to bring tariff rates and trade
statistics into conformity with each other. The HS contains 21 sections divided into 99 chapters,
with 1,241 headings and 5,363 subheadings.
Canada Border Services Agency (CBSA): the Canadian federal agency responsible for providing integrated border services
Harmonized Commodity Description and Coding System (HS): a multilateral systemadopted by many countries to bring
tariff rates and trade statisticsintoconformitywith each other
World Customs Organization (WCO): an independent intergovernmental body whose mission isto enhance theeffectiveness
and efficiency of customs administrations
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
Under the HS, goods are grouped according to their raw material, industrial sector, and
degree of processing. Goods are identified by observable characteristics such as material corn position and not by the importer's intended use of the goods. An importer of goods into Canada
must consult these schedules to determine what duty will apply to her particular item.
Like the Customs Act, the Customs Tariff is divided into several parts; there are nine parts and
several divisions. Apart from the schedules of tariffs, the Customs Tariff deals with a number of
other significant customs issues for the importer, such as
s 16: rules of origin;
ss 17 & 18: rules pertaining to direct shipment and transshipment of goods;
s 19: marking of goods;
s 24: tariff treatment of goods;
s 53: special measures, emergency measures, and safeguards;
ss 83-113: rules with respect to the importation without full payment of duty, including duty
deferral and drawback and duty relief; and
s 115: refund of duty.
Excise Tax Act-Goods and Services Tax
Pursuant to the Excise Tax Act, all goods imported into Canada are subject to a goods and
services tax (GST) of 5 percent. The 5 percent will be applied to the value of the goods,
and the value of the goods will be determined based on the valuation provisions of the
Customs Act.
The Excise Tax Act should not be confused with the similarly named Excise Act, 2001,
which deals with taxation of spirits, wine, beer, tobacco, and cannabis products manufactured in Canada and includes extensive control provisions relating to the distribution of these
commodities.
Special Import Measures Act
In Canada, we have taken the WTO provisions concerning dumping and subsidies and incorporated them into our own legislation, the Special Import Measures Act (SIMA).7 As discussed in
Chapter 2, the two primary remedies pursuant to the SIMA available to Canadian firms wishing
to protect their industry from unfair importing practices are anti-dumping (AD) and countervailing duties (CVD). AD duties are duties imposed by an importing country over and above
the usual import duties when the goods are being dumped into the importing country. Dumping refers to selling an imported good at a price lower than the price at which it is sold in the
exporting country. Countervailing duties are duties imposed by an importing country over and
above the usual import duties when the goods have been subsidized by the country in which
they are produced. The CBSA and the Canadian International Trade Tribunal (CITT) are jointly
responsible for the administration of SIMA.
Canadian Border Services Agency
The CBSA is the federal agency tasked with implementing and ensuring compliance with legislative and regulatory provisions applicable to the movement of goods, people, and capital upon
entry into and exit from Canada. 8 The CBSA administers over 90 acts and regulations, including
Canadian International Trade Tribunal (CITT): the principal decision-making body for Canadian legislation affecting imports
and exports
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the Customs Act, Customs Tariff, Excise Tax, Excise Tax Act, and generally performs the following functions:
1. collecting duties and taxes on imported goods,
2. supporting economic competitiveness of business by administering trade legislation and
preparing foreign trade statistics,
3. protecting society and combatting fraud by detaining and removing people who
may pose a threat to Canada and interdicting illegal goods entering or leaving the
country, and
4. enforcing trade remedies and administering impartial redress mechanisms.
The Canadian International Trade Tribunal (CITTJ
The CITT is the principal decision-making body for Canadian legislation affecting imports and
exports. 9 Located in Ottawa, it has nine members, each appointed for a term of five years. It is an
independent quasi-judicial body with rules and procedures similar to those of a court oflaw but
tempered with more latitude than exists in regular courts. It has the authority to
• conduct inquiries into whether dumped or subsidized imports have caused, or are threatening to cause, material injury to a domestic industry;
• hear appeals of CBSA decisions made under the Customs Act, the Excise Tax Act, and
SIMA;
• conduct inquiries and provide advice on economic, trade, and tariff issues referred by the
governor in council or the minister of finance;
• conduct inquiries into complaints concerning procurement under NAFTA, the Canadian
Free Trade Agreement, and the WTO Agreement on Government Procurement; and
• conduct safeguard inquiries to determine whether increased imports are causing, or
threatening to cause, serious injury to domestic producers.
Export Controls
Although Canada is generally an open market for the import and export of goods and services, it does control the import and export of certain products such as endangered species,
protected cultural artifacts, uranium and nuclear-related material, and certain strategic and
military goods.10 Some regulations are also generated by Canada's bilateral and multilateral
trade agreements negotiated outside the WTO. The result is that numerous federal statutes
regulate the import and export of goods and services. Some of the more salient ones are
discussed below.
The principal legislation providing for export controls is the Export and Import Permits Act
(EIPA), 11 administered by the Trade Controls Bureau (TCB), 12 part of Global Affairs Canada.
Violations of the EIPA are punishable by fines and imprisonment; in some cases, both the corporate exporter and its officers and directors may be prosecuted. The Act is enforced by the
CBSA and the RCMP, who may charge suspected offenders and may detain or seize goods
Canadian Free Trade Agreement {CFTA): aCanadian agreement, in effect since 2017, that isintended toreduce barriersto the
movement of persons, goods, services, and investments withinCanada
Export and Import Permits Act {EIPA): Canadian legislation providing for export controls
Trade Controls Bureau {TCB): the Canadian agency that administers the Export and Import Permits Act
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
suspected of not complying with the requirements. Also, there are two lists that are relevant to
regulating exports: the Export Control List (ECL)'3 and the Area Control List (ACL). 14
The Export Control List
The ECL is a list of goods that are subject to export controls and that require an export permit
prior to exportation. Exporters should always check the TCB's website before entering into serious contractual relationships because the list changes from time to time. At present it includes
the following:
•
•
•
•
•
•
•
•
•
•
some agricultural products-for example, sugar and peanut butter;
textiles and clothing;
military and dual-use goods that may have a strategic purpose;
firearms, ammunition, and explosives;
nuclear energy materials and technology;
missile, chemical, or biological goods for which proliferation is a concern;
softwood lumber, unprocessed logs, pulpwood, and other forest products;
goods of US origin and goods in transit;
goods subject to a UN Security Council embargo or action; and
goods subject to re-export controls by foreign governments.
The Area Control List
The ACL is a list of countries to which the export of any good or technology requires an export
permit. Exports to these countries are restricted on the basis that these states are considered
dangerous or aggressive or that they fail to respect internationally recognized human rights. At
present, only North Korea is on this list. Because the list can be changed by regulation on short
notice, an exporter should check the list periodically, particularly if contemplating trade with a
country that is under a regime with issues of terrorism or human rights violations.
Different Types of Export Permits
There are two types of export permits: an individual export permit (IEP) and a general export
permit (GEP) . The IEP authorizes specific goods to be exported to a specific destination by a
specific exporter. A GEP does not specify the exporter but provides a general authorization for
the export of specific goods to specific destinations. GEPs may also limit exports-for example, the
export of US-originating goods to Cuba, North Korea, Iran, and Syria, and to countries on
the Area Control List. It is important for exporters to comply with these requirements because
criminal penalties may be imposed for failure to comply.
Export Controls Imposed Pursuant to the United Nations Act and Special
Economic Measures Act
Canada imposes export sanctions against particular countries in order to comply with binding UN Security Council resolutions. The scope of each sanction depends on the specific UN
resolution; they do not always have the same requirements. Therefore, it is important to refer
Export Control List {ECL): a list of goods that are subject to export controls
Area Control List {ACL): alist of countries to which aCanadian export of any good or technology requiresan export permit
embargo: a prohibition against importing goods that originate inaspecified country
individual export permit (IEP): apermit for specified goods to be exported to aspecific destination by aspecific exporter
general export permit {GEP): ageneral authority for the export of specified goods to specified destinations
© [2020) Emond Montgomery Publications. All Rights Reserved.
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to the specific wording of the resolution. In addition to the sanctions imposed pursuant to UN
Security Council resolutions, Canada also imposes sanctions in accordance with the Special Economic Measures Act (SEMA). 15 This allows Canada to impose sanctions where the international
community has not been involved. Like the sanctions imposed pursuant to the United Nations
Act, 16 sanctions imposed pursuant to SEMA are country-specific and do not necessarily follow
the same format. SEMA also gives the government authority to seize the assets of specific individuals or of a foreign state and to prevent any dealings between Canadian citizens and that state,
its agencies, residents, or nationals.
At the time of writing, Canada imposes sanctions under both pieces of legislation against
Central African Republic, Democratic Republic of Congo, Eritrea, Iran, Iraq, Lebanon, Libya,
Mali, Myanmar, North Korea, Russia, Somalia, South Sudan, Sudan, Syria, Tunisia, Ukraine,
Venezuela, Yemen, and Zimbabwe as well as against al-Qaida, the Taliban, and other international terrorist organizations. 17
Export Controls and US Legislation
Exporters should be aware that although the US government prohibits trade with Cuba, there
is no such prohibition in Canada. In fact, Canadian law prohibits a Canadian subsidiary of a
US corporation from complying with the extraterritorial application of US law restricting trade
with Cuba. Canada takes the position that extraterritorial application of laws adopted by other
governments is a violation of international law, and Canada's Foreign Extraterritorial Measures
Act18 prohibits a Canadian company from honouring such US legislation.
Import Controls
Canada generally operates an open trading regime with some exceptions. Import permits are
required for certain goods, and the restrictions on the importation of agricultural products
bear specific mention. Aside from that, a number of other regulations impose other regulatory
requirements on imports into Canada.
Import Permits
Import permits are required in a number of areas. Although the details of these areas will change
from time to time, the major ones are
• restricted goods, including weapons and hazardous wastes;
• carbon steel products and specialty steel products;
• clothing and textile products eligible for tariff preference levels established under NAFTA
or another trade agreement;
• wheat products and products of other grains, including barley and malt; and
• some animals and animal food products, including dairy products.
Import Controls on Agricultural Products
Import controls exist for Canadian agricultural goods in the dairy and poultry sectors.
Canada's dairy products, poultry (turkeys, chickens, and hatching chicks), and eggs industries
operate under the Supply Management System, an orderly marketing system that is designed
to match supply with demand. This system gives the Canadian government the ability to control supply from all sources- international as well as domestic. After the Uruguay Round,
Canada converted its existing agricultural quantitative import controls (quotas) to a trade
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
restrictive quantities (TRQs) system. The TRQs determine the tariff at which a specific agri-
cultural product will be imported based on how much of the specific good has already been
imported. Under the TRQs, imports are subject to low rates of duty up to a predetermined
limit-that is, until the import access quantity has been reached. 19 Imports over this limit are
subject to significantly higher "over access commitment" rates of duty.20
Canadian Regulatory Requirements Affecting Imports
Although the CBSA administers and enforces more than ninety acts, regulations, and international agreements that deal with import and export, numerous federal departments and agencies have the authority to issue import permits and certificates and work in conjunction with the
CBSA. For example, the Canadian Food Inspection Agency (CFIA) issues import and export
permits for agricultural products, animals, and animal products, but the importer must still
declare the goods to the CBSA in accordance with the Customs Act. The CFIA administers the
Food and Drugs Act, Health of Animals Act, Plant Protection Act, Safe Food for Canadians Act,
Seeds Act, 21 and other legislation and their respective regulations. For example, it is the CFIA
that issues permits for dog imports, and the importation process can be viewed on their website
<https://www.inspection.gc.ca.>
Additionally, Canada has special packaging and labelling requirements, particularly for prepackaged goods. The relevant legislation is under federal jurisdiction and includes the Consumer Packaging and Labelling Act, the Food and Drugs Act, the Hazardous Products Act, the
Trade-marks Act, the Pest Control Products Act, the Textile Labelling Act, the Customs Tariff,
and the Precious Metals Marking Act.22 Much of this legislation specifies the manner in which
basic information is to be placed on the product container, even down to specifying the lettering size. Information concerning country of origin may also be required, as well as information
identifying the product's Canadian distributor. In addition, because Canada is bilingual, certain
information must be provided in both English and French. If a product is to be sold in Quebec,
the French version must be displayed no less prominently than the English version. Finally, any
non-food items may have to meet standards set by the Standards Council of Canada or Canadian
Standards Association (CSA). See Figure 5.1 for a sample nutrition label.
BOX 5.1
Customs Brokers Assisting Businesses
To deal with the complexity of the regulatory framework, many importers will use the services of
registered customs brokers. Customs brokers are trained professionals who assist the importer and
exporter in navigating the legislative rules for import and exporting in Canada. Customs brokers act
as agents on behalf of the importer and handle all the processes required by the CBSA with respect
to shipments of goods in and out of Canada. They help with clearing shipments through customs;
preparing international invoices, releases, and accounting forms; properly classifying goods; ensuring labelling compliance; obtaining permits when required; and the payment of duties and taxes on
behalf of the importer. They may handle transportation needs as well. The CBSA licenses the customs
brokers and provides a list of Canada-wide registered customs brokers. DHL and FedEx are among the
companies that provide both shipping and customs brokerage services.
trade restrictive quantities (TRQs) system: asystem, imposed by agovernment, that limitstrade by restricting the quantities
of agood that may be imported or exported; thissystemwas implemented by Canadato replace quotas, which became impermissible after the Uruguay Round agreements
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I Public International Law
FIGURE 5.1
Sample Nutrition Label
Fat I Llpides 1 g
Saturated I satures o. l g
+Trans I trans O g
Cholesterol / Cholesterol Omg
Sodium I Sodium 430 mg
Carbohydrate I Glucides 23 g
Bilingual labelling
List of ingredients and allergens
Common name
Net quantity
Country of origin
Nutrition labelling
Date markings and storage
instructions
Sweeteners
Food additives
Fibre I Fibres 6 g
Sugars I Sucres 1 g
Protein I Proteines 9 g
V1tam1n A I Vitamine A
Vitamin C I Vitamine C
Cak::ium I Calcium
Iron / Fer
Name and principal place
of business
Fortification
Irradiated foods
Grades
Legibility and location
Standards of identity
Most controls of exports originate with Global Affairs Canada; however, other governmental
departments may require authorizations for export of nuclear items, hazardous wastes, endangered species, and cultural property. Current examples include Canadian Heritage and Multiculturalism, Health Canada, Agriculture and Agri-Food Canada, Natural Resources Canada,
Canada Post, Environment and Climate Change Canada, and Fisheries and Oceans Canada.
How to Import: Practical Considerations
Despite the availability of customs brokerages, it is important to understand the most salient
customs issues that will be faced by all commercial goods importers, irrespective of the product
they are bringing into Canada. Canada's primary import requirements23 can be broken down
into six sections, namely
1. identifying the goods and determining the correct tariff classification number for the goods,
2. determining the country of origin of the goods and identifying the correct tariff
treatment,
3. determining if GST /HST /PST applies,
4. determining the value of the goods,
5. determining whether labelling and marking requirements apply, and
6. determining whether products standards apply.
The discussion that follows will review in detail each of the six steps with reference to relevant
legislative sections and case examples.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
Identifying the Goods and Tariff Classification
Before importing, it is critical to collect all relevant information regarding the goods to be
imported. This will include descriptive literature like sales brochures, purchase orders, product
composition information, a description of manufacturing processes, a list of parts if applicable,
and, whenever possible, product samples. This information assists in determining whether the
goods are permitted to be imported into Canada and, if so, the correct tariff classification number of the product. For example, certain goods are not allowed to be imported into Canada at
all. The list of prohibited goods includes child pornography and hate propaganda as well as less
obvious items such as used mattresses and some used automobiles. Other goods require import
permits, certificates, or inspections or are subject to other import controls. An importer needs
to determine whether or not the goods to be imported are subject to regulations, restrictions,
permits, or other requirements. The CBSA issues reference lists of some of the most commonly
imported commodities that may require permits and/or certificates. Identifying the goods at
the outset and consulting with relevant Canadian agencies is essential to successfully importing
goods into Canada.
Once it is clear that the goods are not banned in Canada, it is necessary to determine the
goad's tariff classification number. The goad's description will help identify the appropriate tariff
classification number, which in turn will determine the rate of duty that will be applied. After
reviewing all the product information, the importer will look at the applicable chapter, heading,
subheading and tariff item in the Customs Tariff As mentioned above, most trading nations use
the HS as the basis for classification of products to standardize product classification worldwide
and facilitate trade. The HS is a nomenclature within which goods are codified numerically
based on the category and subcategory of a particular commodity.
It is necessary to refer to the Customs Tariff to determine the ten-digit tariff classification number and the applicable rate of duty. The first six digits are identical across all
states using the HS for that particular good. The first four digits correspond to the relevant
heading number, while the fifth and sixth digits identify the subheadings. Canada added
additional four digits to the tariff classification number for determining duty rates and for
statistical purposes.
For example, an importer is interested in bringing certified organic virgin olive oil in clear
glass bottles of 1.5 liters each from Spain for retail sale. The first place to look is at each chapter's
descriptions in the Customs Tariff Chapter 15 is called "Animal or vegetable fats and oils and
their cleavage products; prepared edible fats; animal or vegetable waxes:' Based on the product
description of virgin olive oil, it is clear that it is likely to be categorized within this chapter. The
next step is to accurately determine the correct heading and subheading within Chapter 15. This
is best illustrated by looking at the Tariff Item and Description of Goods columns in an excerpt
from the Customs Tariff (see Figure 5.2).
The first four digits of the ten-digit code refer to the chapter and the heading; the following
four digits refer to the subheading to allow for further identification. With reference to the example above, the complete tariff classification number for the Spanish certified organic olive oil
is 1509.10.00.11. This is what it means:
15
09
10
00
is the chapter number;
is the heading for olive oil and its fractions;
refers to the olive oil subheading;
digits seven and eight are used by the CBSA for product/duty differentiation
domestically; and
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part I
FIGURE 5.2
Public International Law
Excerpt from Chapt er 15 of the Customs Tariff
15 - 3
CUSTOMS TARIFF - SCHEDULE
issl
'I
Unitof l
Meas.
MFN
Tariff
KGM
Free
1508.10.00 00 -Crude oil
KGM
4.5%
CCCT, LDCT, GPT, UST,
MT, CT, CRT, IT, PT,
COLT, JT, PAT, HNT,
KRT, CEUT, UAT,
CPTPT: Free
1508.90.00 00 -Other
KGM
9.5%
CCCT, LDCT, UST, MT,
CT, CRT, IT, PT, COLT,
JT, PAT, HNT, KRT,
CEUT, UAT,
CPTPT: Free
GPT: 5%
Free
CCCT, LDCT, GPT, UST,
MT, CIAT, CT, CRT, IT,
PT, COLT, JT, PAT, HNT,
KRT, CEUT, UAT,
CPTPT: Free
I
Tariff
Item
Description of Goods
1507.90.00 00 -Other
15.08
I
Applicable
I Preferential Tariffs
I
CCCT. LDCT, GPT, UST,
MT, CIAT, CT, CRT, IT,
PT, COLT, JT, PAT, HNT,
KRT, CEUT, UAT,
CPTPT: Free
Ground-nut oil and its fractions, wh ether or not refined, but not
chemically modified.
15.09
Olive oil and its fractions, whether or not refined, but not chem ically
modified.
1509.10.00
-Virgin
- - - - -In containers of a capacity less than 18 kg:
11 - - - - - -Certified organic -----------------------------------------------·····---------------······-12 - - - - - -Not certified organic __ ___ _____ ___ ___ ____ _
20 - - - - -In container sizes of 18 kg or more
KGM
KGM
KGM
Source: © Canada Border Services Agency, 2019.
11 refers to whether the virgin olive oil is certified organic or not, and these last two digits
will be used for statistical purposes.
The first six digits will be the same for the same type of product from all countries that have
adopted the HS system.
As illustrated, without thorough product descriptions it would be impossible to identify the
correct classification. Identification can become even more challenging for manufactured products that consist of many parts; an importer will have to use additional tools for correct classification. Several of these interpretive tools are discussed below.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
General Rules for the Interpretation of the Harmonized System (GIRs)
The HS is governed by The International Convention on the Harmonized Commodity Description and Coding System, which Canada ratified and incorporated into the Customs Tariff Section 10 of the Customs Tariff directs that classification of imported goods shall be determined in
accordance with the General Rules for the Interpretation of the Harmonized System (GIRs).24
The GIRs consist of six interpretive rules. Rules 1 to 4 are related and must be applied in
sequence. Rules 5 and 6 stand on their own to be applied as needed. The GIRs read, in part, as
follows:
1.
The titles of Sections, Chapters and sub-Chapters are provided for ease of reference only; for
legal purposes, classification shall be determined according to the terms of the headings and
any relative Section or Chapter Notes.
That is to say, Rule 1 states that the words in the section and chapter titles are to be used as
guidelines only, while the headings and any relevant chapter or section notes are the principal
consideration for HS classification. Most products are classified with reference to this rule alone,
without the need to proceed to Rules 2-6, which read in part
2.
(a) Any reference in a heading to an article shall be taken to include a reference to that
article incomplete or unfinished, provided that, as presented, the incomplete or unfinished article has the essential character of the complete or finished article. It shall also be
taken to include a reference to that article complete or finished (or failing to be classified
as complete or finished by virtue of this Rule), presented unassembled or
disassembled.
(b) ... The classification of goods consisting of more than one material or substance shall be
according to the principles of Rule 3.
To rephrase, Rule 2 means that unfinished, incomplete, unassembled, or disassembled goods
can be classified under the same heading as the same goods of a finished state, as long as they
have the essential character of the complete or finished good. For example, a bicycle missing its
seat would be classified the same as if it were a complete bicycle.
Legally, a product cannot be classified under two headings; however, a product's composition
may suggest that it should be classified under different headings. Rule 2(b) states that if a product's classification may fall under two or more headings because it is composed of a combination
or mixture of substances or materials, then it is necessary to refer to Rule 3 to choose between
the alternate headings.
3.
When by application of Rule 2 (b) or for any other reason, goods are, prima facie, classifiable
under two or more headings, classification shall be effected as follows:
(a) The heading which provides the most specific description shall be preferred to headings
providing a more general description. However, when two or more headings each refer
to part only of the materials or substances contained in mixed or composite goods or to
part only of the items in a set put up for retail sale, those headings are to be regarded as
equally specific in relation to those goods, even if one of them gives a more complete or
precise description of the goods.
In other words, Rule 3(a) states that the more specific description of the product will drive the
selection of the correct heading. This means that a heading that names the actual product should
be used in preference to one that only names a category to which the product could belong. For
example, ginger tea could be classified as either ginger or tea. Ginger is the flavour of the tea,
while tea is the more specific description of the product and it should be classified as such for
tariff purposes.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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(b) Mixtures, composite goods consisting of different materials or made up of different components, and goods put up in sets for retail sale, which cannot be classified by reference
to Rule 3 (a), shall be classified as if they consisted of the material or component which
gives them their essential character, insofar as this criterion is applicable.
For example, a 3-in-l magnetic phone holder is considered to be a composite good
because it consists of an adhesive pad, a magnet, an iron base, and steel plates. To determine
the appropriate classification, it is necessary to refer to Rule 3(b), which says, in part, that a
good that is made up of different components that cannot be classified by reference to Rule
3(a) shall be classified based on the product's essential character. Since the phone holder is
incapable of performing its function without the magnet, it is the magnet that provides the
essential character to the good, and the classification will be based on the magnet: namely,
8505.11.00.00.
(c) When goods cannot be classified by reference to Rule 3 (a) or 3 (b), they shall be classified under the heading which occurs last in numerical order among those which equally
merit consideration.
When the essential character of the product cannot be determined under 3(a) or 3(b), the
product should be classified under the heading that occurs last in numerical order.
4.
Goods which cannot be classified in accordance with the above Rules shall be classified
under the heading appropriate to the goods to which they are most akin.
This rule is often used as a rule of last resort and applies in particular to brand new items that
do not have their own subset yet.
Rule 5 specifically deals with goods in cases. Cases can be classified with the products they
contain. For instance, camera cases, musical-instrument cases, gun cases, necklace cases, and
similar containers, specially shaped or fitted to contain a specific product, suitable for long-term
use and presented with the articles for which they are intended, have to be classified based on
the products inside the case. However, where the case gives the product its essential character, it
would be the case that would have to be classified.
Rule 6 states that once a proper heading has been selected, the importer will need to follow
the same process for the subheading determination as well.
The World Customs Organization's Explanatory Notes to the HS
Additionally, section 11 of the Customs Tariff states that in determining correct classification,
regard shall be given to the WCO's Explanatory Notes to the Harmonized Commodity Description and Coding System (Explanatory Notes). The official interpretation of the HS is given in the
Explanatory Notes. The Explanatory Notes provide guidelines with respect to different product
classifications that have been finalized by the Harmonized System Committee and adopted by
the WCO Council. The Explanatory Notes assist the importer in determining the right tariff
classification. They constitute the official interpretation of the HS at an international level and
are critical to the correct and consistent classification of goods worldwide.
CBSA's Advance Rulings
The Customs Tariff, the GIRs, and the compendium of Explanatory Notes may be difficult to
navigate at times, in particular when the product is brand new. To address this issue and to
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5
Canada's Response to Global Rules: Domestic Rules for Imports and Exports
145
ensure a good is properly classified before shipment, pursuant to section 43 of the Customs Act,
an importer can request the CBSA provide a binding written decision with respect to tariff classification, value, or origin of a particular good. An importer needs to submit an advance ruling
request at least 120 days before the planned day of the importation of goods to allow the CBSA
to process the request in time. For an example, see Box 5.2 for an extract from an advance ruling
issued by the CBSA for a laser tag poncho to an importer. 25
CBSA Memoranda, Guides, and Custom Notices
The CBSA publishes a number of resources for importers and exporters. The Customs Notices
are used to inform importers and exporters about proposed changes to customs programs and
procedures, and the D-Memoranda are used to inform users about legislation, regulations, policies, and procedures the CBSA uses to administer customs programs. The D-Memoranda,
although not legally binding, provide a solid indication of how the CBSA will interpret the
tariff classification of different goods. The CBSA also publishes useful guides and brochures
that importers and exporters would be wise to consult before deciding to import or export a
particular product.
BOX 5.2
Tariff Classification Advance Ruling: Laser Tag Game Poncho
The following is an example of a CBSA advance ruling. The
full version can be viewed at:
https://www.cbsa-asfc.gc.ca/import/ar-da/2016/2016006170-eng.html.
This is in response to your request for an advance ruling on the
tariff classification of Laser Tag Game Poncho. This product is
manufactured in Vietnam . ...
Product Description
The Laser Tag Game Poncho is made from 500Dx500D Cordura
PD Nylon with a 20TTPU C6 DWR backing, Poly filament webbing
with POM Plastic buckles, a PVC piping on the outside trim, EVA
BV 35F foam padding on the inside and Flame Retardant CPA184,
100% Polyester lining for the inside of the battery pocket only.
Analysis and Justification
The Laser Tag Game Poncho is to be worn by players engaged in
a game of laser-tag, played in an indoor arena. The poncho is fitted, post importation, with the necessary game electronics and
tools; hence its design and the sole purpose- indoor laser tag
gaming. The poncho is not worn for adornment purposes and
does not have any decorative aspect to it. As such, it is not considered to be an article of apparel nor is it a clothing accessory.
Legal Note 3 to Chapter 95 states that"Subject to Note l, parts
and accessories which are suitable for use solely or principally with
articles of this Chapter are to be classified with those articles:'
This is further reinstated by World Customs Organization's
(WCO) Explanatory Notes to Chapter 9S which read, in part, that
"This Chapter covers toys of all kinds whether designed for the
amusement of children or adults. It also includes equipment for
indoor or outdoor games, appliances and apparatus for sports,
gymnastics or athletics, certain requisites for fishing, hunting or
shooting, and roundabouts and other fairground amusements.
Each of the headings of this Chapter also covers identifiable
parts and accessories of articles of this Chapter which are suitable for use solely or principally therewith, and provided they
are not articles excluded by Note 1 to this Chapter. The articles
of this Chapter may, in general, be made of any material . . ."
The Laser Tag Game Poncho, as an accessory or part to
a laser tag game/ gaming system, is classified under tariff
item 9504.90.00.
Decision
Section 10 of the Customs Tariff directs that classification of
imported goods shall be determined in accordance with the
General Rules for the Interpretation of the Harmonized System.
Section 11 of the Customs Tariff states that in interp reting the
headings and subheadings, regard shall be had to the World
Customs Organization's (WCO) Explanatory Notes to the Harmonized Commodity Description and Coding System....
The Laser Tag Game Poncho as described/ presented is classified under classification number 9504.90.00.19 in accordance
with General Interpretative Rule 1 & 6, Canadian Rule 1, and by
virtue of Legal Note 3 to Chapter 95, and General Explanatory
Notes to Chapter 95.
© [2020) Emond Montgomery Publications. All Rights Reserved.
146
Part I
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Example of Laser Tag Game Poncho.
SOURCE: Text excerpts from Canada Border Services Agency, "Laser Tag Game Poncho" (2018), online:
<https://www.cbsa-asfc.gc.ca/import/ar-da/2016/2016-006170-eng.html>. © Canada Border Services Agency, 2019.
Canadian International Trade Tribunal ( CITT) and Federal Court of Appeal Decisions
Like the CBSA, the CITT plays an important role in administering and enforcing international
trade agreements and domestic legislation concerned with trade. As a quasi-judicial body, it can
hear issues and render decisions with respect to five key issues: Anti-Dumping Injury Inquiries,
Procurement Inquiries, Customs and Excise Appeals, Economic and Tariff Inquiries, and Safeguard Inquiries. The reports and decisions that the CITT publishes can assist importers not only
with their tariff classification but with respect to imports generally.
Decisions made by the CBSA with respect to tariff classification may be appealed to the CITT,
and CITT decisions may be further appealed to the Federal Court of Appeal (FCA). Decisions
from the CITT and the judgments from the FCA can have significant precedential value for an
importer facing similar issues to the ones in the decisions and judgments.
Consequences for Misclassification of Goods
Failure to properly identify the correct tariff classification number can be costly. The importer may
• pay a rate of customs duty that is significantly higher than the customs duty that would
be applied if correct tariff classification was determined;
• pay outstanding duty or tax on customs entry of the products;
• pay arrears plus interest;
• face additional monetary penalties for violation of the tariff classification rules;
• have the goods delayed and/or seized; and
• in rare cases, face criminal charges.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5
Canada's Response to Global Rules: Domestic Rules for Imports and Exports
147
The difficulty of properly classifying goods is illustrated in the 2016 Supreme Court case
Canada (Attorney General) v Igloo Vikski Inc (see Box 5.3).
Rules of Origin of Goods
Rules of origin are the rules that govern the assignment of nationality to goods being imported.
It is critical to correctly identify the origin of the goods since duties, quotas, import controls, and
other customs requirements applied by the CBSA to the goods are based not only on the tariff
classification, but also on the origin of the product.
BOX 5.3
Case Highlight
Igloo Vikski's Hockey Gloves
Case Name and Tribunal
Canada (Attorney General) v Igloo Vikski Inc, Supreme Court of
Canada26
Facts
Igloo Vikski Inc. (Igloo) imported six models of ice hockey goalie
gloves, comprising three models of "blockers" (designed to be
worn on the same hand used by the goalie to hold his hockey
stick) and three models of "catchers" (intended to be worn on
the goalie's other hand). Externally, the gloves are composed of
various types of textiles and plastics bound together by stitching.
While the inner padding of the blockers consists mainly of plastic, the inner padding of the catchers is composed of both plastic
and textiles. The CBSA classified the goods under heading No.
62.16 of the schedule to the Customs Tariff as "gloves, mittens and
mitts;' and Igloo appealed the classification to CITI. CITI, agreeing with the CBSA's original classification, argued that the hockey
gloves should be classified under the "gloves, mittens and mitts"
heading rather than under heading No. 39.26 as "other articles
of plastics;' as claimed by Igloo. Igloo requested the gloves be
classified as "other articles of plastics" due to a more favourable
duty rate.
CITT relied solely on GIR Rules 1 and 2 to determine the
appropriate tariff classification. Igloo argued that the classification must be resolved using GIR Rule 3(b), since in Igloo's
interpretation, Rules 1 and 2 were not determinative of the
classification issue. Using Rules 1 and 2(b) together along with
the Explanatory Notes, the CITT concluded that despite the mix
of textiles with plastics, the goalie gloves retained their main
character, that of gloves. For CITI, Rules 1 and 2, together with
the Explanatory Notes, were sufficient to reach this conclusion.
GIR Rule 3(b) becomes relevant only if Rules 1 and 2 together
with the Explanatory Notes do not provide an adequate classification rationale. Igloo argued that the hockey gloves can be
classified as articles of plastics and gloves simultaneously and
that to resolve this issue, the product needs to be classified by
the main material that gives the product its essential character. Igloo's position was that the plastic in the gloves gave the
gloves their essential character and so should be classified as
"other articles of plastics:'
Issue
What is the appropriate tariff classification for Igloo's hockey
gloves?
Decision
The Supreme Court weighed in on the interpretive issue,
agreeing with CITI's interpretation and stating that to properly
classify goods, regard must be had to the GIR rules.
Analysis/Application
The GIR rules are to be followed in a hierarchical manner, where
subsequent rules need to be interpreted with reference to the
first. Additionally, the interpreter must move from one rule to
the next only if the previous rule was inadequate. The Supreme
Court was also unequivocal that significant deference should
be afforded to the CBSA and the CITT, since these are the bodies that are tasked with interpreting highly technical domestic
and international legislation, which is not normally seen before
the courts. This was the first time in history that the Supreme
Court was tasked with deciding on tariff classification. This case
serves as a cautionary tale for those importers considering
challenging the CBSA or CITT rulings.
As the case illustrates, tariff classification can become complicated and importers would be wise to be well versed in the
rules, use additional interpretive tools, stay up to date on WCO
Explanatory Notes, continuously learn, and consider applying
for advance rul ings. Additionally, it suggest s that, at t imes, it
may be worthwhile to cha llenge the CBSA and CITT rulings in
an effort to reduce tariffs imposed on imported products.
rules of origin: the rules that govern the assignment of nationality to goods being imported
© [2020) Emond Montgomery Publications. All Rights Reserved.
148
Part I
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The general rule of origin under the Customs Tariff provides that a good originates in a
country if the whole of the value of the good is produced in that country. This is simple enough
when it comes to fruits, vegetables, beef, lumber, minerals, or other similar products that were
wholly harvested, born, or raised or extracted in one country. However, this general rule is subject to numerous other regulations under the Customs Tariff because many imported items are
composite products whose components are manufactured in various countries and assembled
and finished in others; some countries are Canada's preferential trading partners under certain
trade agreements while others are trading partners solely under the WTO agreements. The result
is myriad complicated regulations used for determining origin. These, of course, affect the documentation required for proof of origin.
Depending on the country of origin, the tariff will fall into one of two categories: preferential
and non-preferential. These two categories can be seen in the Customs Tariff example of olive oil
in Figure 5.2, in the two columns on the right-hand side entitled "MFN Tariff" and ''Applicable
Preferential Tariffs:'
MFNTariff
As discussed in Chapter 2, the MFN tariff is extended to all WTO members and is based on the
MFN clause in Article I of GATT. The rules of origin that govern the MFN tariff treatment are
set out in the regulation to the Customs Tariff called the Most-Favoured-Nation Tariff Rules of
Origin Regulations (MFN Regulations). 27 The MFN Regulations include a list of countries and
territories that are MFN beneficiaries.
Section 1 of the MFN Regulations specifies what an importer needs to show in order to qualify
for the MFN tariff treatment:
Goods originate in a country that is a beneficiary of the Most-Favoured-Nation Tariff if
(a) not less than 50 per cent of the cost of production of the goods is incurred by the industry
of one or more countries that are beneficiaries of the Most-Favoured-Nation Tariff, or by the
industry of Canada; and
(b) the goods were finished in a country that is a beneficiary of the Most-Favoured-Nation Tariff
in the form in which they are imported into Canada.
In other words, the goods need to come from a country that is on the MFN list of beneficiaries, and the goods have to be wholly made or produced there or have at least 50 percent of the
cost of production incurred in a beneficiary country or in Canada. The goods must be finished
in an MFN beneficiary country in the form in which they will be imported into Canada.
Cost of production may include
(a) materials,
(b) labour, and
(c) factory overhead.
Unless a preferential tariff applies, the default tariff treatment for qualifying goods originating
from WTO member countries will be the MFN treatment.
Preferential Tariff
Canada has concluded numerous free trade agreements with other countries. Pursuant to these
agreements, Canada has agreed to impose more favourable, often lower, tariff rates than the
MFN rates for goods coming from some trading partners. The NAFTA and CETA rules of origin
are discussed in Chapters 3 and 4 respectively. Recall that, under Article XXIV of GATT, WTO
members are allowed to deviate from the MFN obligations and enter into customs unions and
free trade agreements that afford better treatment of goods for members of the regional trade
agreements than for all other WTO members.
The Customs Tariff includes a list of applicable preferential tariffs, which have reduced rates of
duty for goods based on Canada's trade agreements. Current agreements are described in Table 5.1.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
TABLE 5.1
149
Applicable Preferential Tariffs in the Customs Tariff (as of June 2019)
Abbreviation
appearing in Customs
Tariff Schedule
Tariff Treatment
Agreement/ Arrangement
AUT
Australia Tariff
Most goods imported into Canada from Australia are subject to the
MFN tariff, although there are some preferential tariff rates (AUT) under
the Canada-Australia Tariff Agreement (CANATA) 1973
CCCT
Commonwealth Caribbean
Countries Tariff
Unilateral preferential treatment afforded by Canada to Caribbean
countries under CARIBCAN, an econom ic and trade development assistance program
CEUT
Canada-Euro pean Union Tariff
Canada-European Union Comprehensive Economic and Trade Agreement
CIAT
Canada-Israel Agreement Tariff
Canada-Israel Free Trade Agreement
COLT
Colombia Tariff
Canada-Colombia Free Trade Agreement
CRT
Costa Rica Tariff
Canada-Costa Rica Free Trade Ag reement
CT
Chi le Tariff
Canada-Chile Free Trade Agreement
GPT
General Preferential Tariff
WTO Agreement-General System of Preferences
HNT
Honduras Tariff
Canada-Honduras Free Trade Agreement
IT
Iceland Tariff
Canada-European Free Trade Association (EFTA) Free Trade Agreement
JT
Jordan Tariff
Canada-Jordan Free Trade Agreement
KRT
Korea Tariff
Canada-Korea Free Trade Agreement
LDCT
Least Developed Country Tariff
WTO Agreement-General System of Preferences
MFN
Most Favoured Nation Tariff
WTO Agreement
MT
Mexico Tariff
North American Free Trade Agreement/Canada-United States-Mexico
Ag reement
MUST
Mexico-United Stat es Tariff
North American Free Trade Agreement/Canada-United States-Mexico
Agreement
NT
Norway Tariff
Canada-European Free Trade Association (EFTA) Free Trade Agreement
NZT
New Zealand Tariff
Based on close commonwealth trading relationship. No FTA in place.
Rules of o rigin specified in the Australia Tariff and New Zealand Tariff
Rules of Origin Regulations
PT
Peru Tariff
Canada-Peru Free Trade Agreement
CPTPT
Australia, Brunei Darussalam,
Chi le, Japan, Malaysia, Mexico,
New Zealand, Peru, Singapore,
Vietnam
Comprehensive and Prog ressive Agreement for Trans-Pacific
Partnership (CPTPP)
PAT
Panam a Tariff
Canada-Panama Free Tra de Ag reement
SLT
Switzerland- Lichtenstein Tariff
Canada-European Free Trade Association (EFTA) Free Trade Agreement
UAT
Ukraine Tariff
Canada-Ukraine Free Trade Ag reement
UST
United States Tariff
North American Free Trade Agreement/Canada-United States-Mexico
Ag reement
© [2020) Emond Montgomery Publications. All Rights Reserved.
150
Part I
Public International Law
Each trade agreement has specific rules-of-origin requirements that a country must comply
with to benefit from a preferential duty rate.
For example, the Canada-European Union Comprehensive Economic and Trade Agreement
(CETA) essentially eliminates the customs duties on all imports from the European Union with
the exception of a few agricultural goods. Entitlement to the CEUT tariff treatment is determined in accordance with the rules of origin set out in CETA's "Protocol on rules of origin and
origin procedures:'2s
Proof of Origin
Pursuant to section 35.1 of the Customs Act, proof of origin must be furnished for all imported
goods. The importer, to benefit from the preferential tariff, must submit proof of origin for the
specific trade agreement at the time of importation. Proof of origin may be in the form of a
commercial invoice, a Form A, certificate of origin, an exporter's statement of origin, or any
other documentation that indicates the country of origin of the goods.29 Proof of origin is like a
passport for the importer's goods, allowing her to benefit from certain of its features.
For example, to use the Canada-Costa Rica Free Trade Agreement and benefit from the CRT
preferential tariff, an accurately prepared certificate of origin is required (see Figure 5.3).
To summarize, to determine the rate of customs duty that will be applied to imported goods,
the goods must be
1. classified according to the classification provisions of the Customs Tariff, the GIRs, legal
notes, explanatory notes, advance rulings, and other supplementary materials; then
2. once the correct tariff classification number is determined, the importer must identify
the country of origin of the goods; then
3. using the tariff classification number and the country of origin, the importer will identify the applicable duty rate by referring to the Customs TariffSchedule and the appropriate acronym and finding the tariff rate identified by a percentage or, if it's duty-free, by
the word "free:'
Determining the Value of the Goods Being Imported
While customs duty rates are determined based on the tariff classification and the origin of
the goods, the duties and taxes are calculated based on the value of the goods. For example,
you import wine from Country Y to Canada and, based on the tariff classification and product
origin, the MFN rate of duty is 10 percent. If the value of one bottle of wine is $15, you will be
paying $1.50 in duties ($15 X 10% ad valorem = $1.50). There are valuation rules to establish
that the bottle of wine is in fact $15. Understanding the valuation methods is important for all
importers to not only ensure compliance but also to arrange import transactions in such a way
as to declare the lowest legally acceptable value for the imported goods and therefore pay the
lowest legally acceptable duty.
Dutiable Value of the Goods
Canada's valuation provisions in the Customs Act are based on the Agreement on Implementation of Article VII of the General Agreement on Tariffs and Trade 1994 (Valuation Agreement),
which forms part of the WTO Agreement. By virtue of being a WTO member, Canada is bound
by the Valuation Agreement, and it has incorporated it into domestic law in the form of the
Customs Act's sections 47 -53 and Valuation for Duty Regulations30 and Direct Shipment of Goods
Regulations.31 The Valuation Agreement establishes a single system for valuation of imported
goods that is fair, uniform, and neutral. The Valuation Agreement reflects the need for valuations
to be based on the actual price of the goods, as this provides greater predictability, stability, and
© [2020) Emond Montgomery Publications. All Rights Reserved.
151
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
FIGURE 5.3
l+I
Certificate of Origin
Canada Border
Services Agency
Restore
Agence des services
frontaliers du Canada
Help
8
Protected
when completed
CERTIFICATE OF ORIGIN
Canada-Costa Rica Free T rade Agreement ,,.._i_n.•tru
_ ctl
_ o.n.•_ . .
Please p ri nt o r type
1. Exporte~s name and address:
2. Blanket period :
Telephone:
Fax:
Doy
From:
Free zone regime
E-Mail:
Yes
I
I
No
I
~onth I
Year
I
I
I
I To:
I
Doy
I
Month
I
I
I
Year
I
I
I
I
Tax identification number:
4 . Importer's name and address:
3 . Producer's name and address:
Telephone:
Fax:
Telephone :
E-Mail:
Free zone regime
Yes
No
Tax identification number:
Fax:
E-Mail:
Tax identification number:
5.
Description of good(s)
6. HS Tariff
classification no.
7 . Preference 8.
criterion
9.
Producer
10.
RCV
Other
11. Observations:
I certify that:
- The information in this document is true and accurate and I assume the responsibil ity for proving such representations. I understand that I am liable for any
false statements or material omissions made on or in connection w ith this document.
- I agree to maintain, and present upon request, documentation necessary to support this Certifica te , and to inform , in writing, a ll persons to whom the
Certificate was given of any changes that would affect the accuracy or validity of this Certificate.
- The goods originate in the territo ry of one or both Parties, and comply with the origin requirements specified for those good s in the Canada - Costa Rica Free
Trade Agreement, and unless specifically exempted in Article IV. 11 or Annex IV. 1, have not undergone any further production or any other operation outside
the territories of the Parties.
This Certificate consists of
12. Authorized signature:
oaaes, includina all attachments.
Company:
Name:
Date
~
Title :
Day
I
I
I
Month
I
I
T elephone:
Year
I
I
I
I
8 246 E (16)
IFax
BSF317 E
Source: CBSA, onlin e (pdf): <https:/ / www.cbsa-asfc.gc.ca/publications/ fo rms-formulaires/ b246-eng.pdf>.
© Canada Border Services Agency, 201 9.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Canada
152
Part I
Public International Law
transparency for trade worldwide. A uniform system evens the playing field for the importers
internationally. Since most rates of duty are ad valorem, the customs value is essential to confirm
the duty to be paid on an imported good.
The Valuation Agreement precludes the use of arbitrary or fictitious values and attempts to
use actual transaction values as the basis for customs valuation whenever possible.
The transaction pricing system Canada has adopted provides for six methods of determining
the value for duty: transaction value, transaction value of identical goods, transaction value of
similar goods, deductive value, computed value, and residual value.
Transaction Value
The transaction value method is the primary valuation method. It is used to value approximately 75 percent of all imports. The transaction value is the price actually paid or payable for
the goods-that is, the invoice price. Thus, it is not suitable for use in non-arm's-length transactions, because pricing may be dictated by the intercorporate relationship rather than the market. In other words, the transaction value must reflect the price at which a foreign vendor would
sell a product to an unrelated purchaser in Canada. Nor is this method suitable for goods on
consignment or under lease. There is also provision for adjustments to this value to account for
costs incurred by the importer but not included in the invoice, such as royalties, licensing fees,
packing costs, and commissions. For example, pursuant to section 48(S)(a)(ii), packing costs are
to be included in the transaction cost.
Each valuation method has its own unique requirements. Its principal requirements, which stem
from the wording of section 48 of the Customs Act, are discussed below. Section 48 reads in part
48 (1) Subject to subsections (6) and (7), the value for duty of goods is the transaction value of the
goods if the goods are sold for export to Canada to a purchaser in Canada and the price paid or payable for the goods can be determined and if
(a) there are no restrictions respecting the disposition or use of the goods by the purchaser
thereof. ..
(b) the sale of the goods by the vendor to the purchaser or the price paid or payable for the
goods is not subject to some condition or consideration, with respect to the goods, in respect
of which a value cannot be determined;
(c) ... ; and
(d) the purchaser and the vendor of the goods are not related to each other at the time the goods
are sold for export or, where the purchaser and the vendor are related to each other at that
time,
(i) their relationship did not influence the price paid or payable for the goods, or
(ii) the importer of the goods demonstrates that the transaction value of the goods meets
the requirement set out in subsection (3) ....
Determination of transaction value
(4) The transaction value of goods shall be determined by ascertaining the price paid or payable
for the goods when the goods are sold for export to Canada and adjusting the price paid or payable in accordance with subsection (5). 32
First, pursuant to section 48(1), an importer needs to determine if the goods were imported
to Canada as a result of a sale for export to Canada. Generally, when a purchaser who is
located in Canada contracts for the purchase of goods with a foreign vendor and the goods
are then shipped to Canada to the purchaser, this transaction is a sale for export to Canada in
non-arm's-length transaction: atransaction in which the parties are not independent from each other; for example, related
companies are not at arm's length and may arrange transfer pricing that does not refiect market forces
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5
Canada's Response to Global Rules: Domestic Rules for Imports and Exports
153
accordance with the Customs Act. Second, the goods must be imported as the result of a sale
agreement between the purchaser in Canada and a vendor. A sale requires a transfer of ownership of goods for a monetary amount. Here are some examples of situations that would not be
considered a sale for export to Canada:
•
•
•
•
•
goods imported on consignment,
leased goods,
barter transactions,
trade-ins, and
goods invoiced at no charge.
This may seem straightforward; however, the questions concerning whether a transaction is
in fact a sale for export, whether someone is for the purpose of the legislation a Canadian purchaser, and who the vendor is may get very complicated.
For example, a purchaser located in Canada (Purchaser A) enters into a contract with a foreign
vendor (Vendor B) for the purchase of goods. Vendor B then orders the goods from a foreign supplier (Vendor C). Vendor C ships the goods to Purchaser A directly. In this example, the sale for
export to Canada is between Vendor A and Vendor B, and the CBSA will only look at their contract
and at what Purchaser A paid to Vendor B-not the sale between Vendor Band Vendor C. Only
the transaction that causes the international transfer of the goods to Canada qualifies for the transaction value method of determining customs duty, since the goods need to arrive from abroad and
it is the person in Canada who needs to set off the chain of events. This issue of who the purchaser
and vendor are came up in the Jockey Canada case, discussed in Box 5.4.
BOX 5.4
Case Highlight
Jockey Canada
Case Name and Tribunal
Issues
Jockey Canada Company v CBSA (Canadian International Trade
Tribunal, 2013) 33
Is the parent company or the foreign supplier the vendor? If the
parent company is found to be the vendor, can the transaction
value be used for the purpose of determining the dutiable
value of the goods, or will it be considered a non-arm's-length
transaction?
Facts
Jockey Canada Company (JCC) is a subsidiary of Jockey International Inc. (Jll). JCC imported goods from non-related Asian
companies and related Caribbean companies by providing sales
forecasts to Jll, who issued purchase orders to the suppliers in
the name of JCC. The goods are shipped to JCC with the invoice.
On some of the invoices, JCC is shown as a consignee rather than
a buyer. In all cases, JCC assumed the risk and title to the goods
at the time of export, and JCC was the importer and paid duty
and GST to customs. However, JCC did not pay the suppliers
directly for the goods; they were paid by Jll. JCC paid Jll for the
goods purchased-an amount equal to the Canadian wholesale
price less 35 percent, which was the transfer price stipulated in
the sales and distribution agreement between Jll and JCC.
JCC claimed that the value for duty should have been based
on the amount on the foreign suppliers' invoices, but the CBSA
determined that it should be based on the amount that was
paid by JCC to Jll pursuant to their sales and distribution agreement. JCC appealed this decision to the CITT.
Decision
The goods were purchased from Jll by JCC, and the wholesale
value less 35 percent was an acceptable transaction value that
was not affected by the relationship between Jll and JCC.
Analysis/Application
JCC paid the purchase price of the goods to Jll. There was no
evidence that JCC had bought the goods or paid anyone else
for the goods other than Jll. As to whether the transaction
value could be used, the CITT found that the transfer price established between JCC and Jll was not affected by the relationship between the parties. The price was based on a method
recommended by the OECD and satisfied the Canada Revenue
Agency's arm's-length principle.
© [2020) Emond Montgomery Publications. All Rights Reserved.
154
Part I Public International Law
To qualify as a "purchaser in Canada" an importer needs to be (1) a resident, (2) a person who
is not a resident in Canada but who has a p ermanent establishment in Canada, or (3) a person
who neither is a resident in Canada nor has a permanent establishment in Canada but w ho
imports goods for which the value for duty is being determined.
Once the purchaser-in-Canada and sale-for-export aspects are confirmed, the next step is
to determine the price paid or payable by the importer. Subsection 45(1) of the Customs Act
defines price paid or payable as the aggregate of all payments made or to be made, directly or
indirectly, in respect of the goods by the purchaser to or for th e benefit of the vendor. Defining
price paid or payable this way ensures that the sum of all payments a purchaser makes to the
vendor is included in the transaction value, even when the payments are not included in the
price shown on the commercial invoice or in the contract for the imported goods.
Factors the importer may have to consider in determining the price paid or payable include
• the invoice price,
• storage expenses,
• credits for earlier transactions,
• warranty payments,
• settlement of a debt on behalf of the vendor,
• price escalation clauses, and
• export duties and taxes.
The issue of wh eth er research and development costs should be added to the dutiable value
came up in the Skechers Canada case (see Box 5.5) .
BOX 5.5
Case Highlight
Skechers USA Canada Inc.
Case Name and Tribunal
Skechers USA Canada Inc v Canada (Border Services Agency)
2015 FCA 5834
Facts
5kechers appealed CITT's decision regarding the dutiable value
of footwear imported into Canada between 2005 and 2011 to
the Federal Court of Appeal. Skechers USA designs the footwear, and the shoes are manufactured offshore by a third party.
Skechers Canada purchased the footwear from Skechers USA,
and the purchase price incl uded the cost of manufacturing by
the third parties, transportation cost to the United States, warehousing, and an arm's-length profit. After conducting an audit,
the CBSA determined that the dutiable value of the goods
must also include research and development (R&D) costs, because extensive market R&D is key to ensuring that Skechers
keeps up with fashion trends. This research and development
work includes the following: analyzing fashion, lifestyle, music,
television, fashion, sports, and media trends; consulting with
customers; and developing and refining prototypes. Skechers
argued that these payments are not "in respect" of the goods
but rather are in respect of certain "intangibles" and that they
should not be included in the purchase price.
Issues
Must the dutiable value of the goods include research and development costs? Are R&D payments made "in respect of" the
imported footwear?
Decision
R&D payments are indeed "in respect of" the shoes and must
be included in the dutiable value of the shoes. Skechers' appeal
was dismissed.
Analysis/Application
The phrase "in respect of" is broad and will be factually specific
in each case. Skechers did not discharge its burden of demonstrating that the payments were not "in respect of" the shoes.
Despite t he company's claim that the research and development was done with an eye to developing the brand, the Federal Court of Appeal agreed with CITT's decision. CITT found
that it was indeed done for the specific purpose of developing
the footwear itself. The CITT also found that the shape, texture,
and colour of the shoes were the result of the R&D and design
process.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
These are the three requirements that must be met before the transaction value method can
be used: (1) there must be a sale for export, (2) there must be a purchaser in Canada, and (3) the
price paid or payable must be ascertainable. These principal requirements for using the transaction value method to appraise the value of goods illustrate the complexity of the valuation
processes generally.
The transaction value method is the most important valuation method and must be applied
first. Only if the customs value cannot be determined on the basis of the transaction value will
one of the subsequent methods be used, namely
•
•
•
•
•
the transaction value of identical goods,
the transaction value of similar goods,
the deductive value method,
the computed value method, and
the residual value-fall-back method.
The above valuation methods must be used in hierarchical order.
Transaction Value of Identical Goods
When the transaction value method is not suitable, the first alternative is to use the transaction
value of identical goods. The sales used as a comparative base must be export sales and not sales
in the domestic market of the country of export. For this method, the CBSA will use information
about the customs value of identical or similar imported goods by the same or other vendors.
Transaction Value of Similar Goods
Where there are no transactions involving identical goods, the transaction value of similar goods
is used.
Deductive Value
The deductive value is obtained by starting with the resale price in Canada and working backward to an export price for the good, relying solely on information available in this country.
This method bases the value of the goods on the first resale price of the product in Canada with
certain deductions for profits, administrative costs, duties, taxes, and expenses incurred.
Computed Value
The computed value takes the costs of producing the goods and allows an amount for profit and
for general expenses such as overhead. This method requires the foreign manufacturer to provide information on the production costs of the goods.
Residual Value
When it is not possible to value goods under any of the above methods, the method that is most
suitable in the circumstances is flexibly applied, but only on the basis of information available in
Canada. This is the goad's residual value.
Determining if GST Is Payable
Once the value of the goods is established, the importer can calculate the ad valorem tax on
the product and then assess whether GST or other taxes are payable on the imported goods.
The majority of imported goods will be taxable at a rate of 5 percent pursuant to the Excise Tax
Act. There are, however, some exceptions. For example, certain importations such as prescription drugs, medical and assistive devices, basic groceries, and agriculture and fishing goods are
non-taxable.
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To properly estimate how much duty and taxes will be payable, the importer needs to obtain
the value for duty in Canadian dollars and the customs duty rate. The GST will be payable on the
amount of the value for tax purposes as illustrated below:
$100.00 (value for duty) X 5% (customs duty rate) = $5.00 (customs duty).
$100.00 (value for duty) + $5 (customs duty) = $105 (value for tax).
$105 X 5% (GST) = $5.25 (GST).
Total of customs duty and GST payable (in Canadian dollars) is $5 + $5.25 = $10.25.
Determining Whether Labelling and Marking Requirements Apply
There is a host of laws governing labelling and marking requirements. Importers should not
confuse the requirement for country of origin marking with labelling requirements of other
government departments. The Customs Act and the Customs Tariff Act require that certain goods
be clearly marked with the country of origin. Usually, the foreign exporter or producer applies
the country of origin marking. However, the final responsibility lies with the Canadian importer
for ensuring that imported goods comply with marking requirements at the time they import
the goods.
While the CBSA enforces the Customs Tariff Act provision regarding the country of origin
markings, Agriculture and Agri-Food Canada, Industry Canada, and other government bodies
oversee the correct labelling of products.
Determining Whether Products Standards Apply
Importers must do their due diligence with respect to product standards as well. For example,
imported commercial and household appliances and electronic goods require certification by
the Canadian Standards Association (CSA). Standards are designed to protect the public by
addressing or preventing dangers to health and safety. The CSA oversees standards that relate
to hygiene, sizing, electricity, electronics, technical specification, construction, and other areas.
Imports Summary
Some of the most critical steps for successful imports are product identification, classification,
adherence with rules of origin, valuation, and compliance with other relevant legislation. The
more knowledgeable the importer is with respect to all customs laws and regulations, the better
he can strategize to expedite the process, reduce risks, and minimize the duties and taxes payable.
Canadian Services for the Exporter
An exporter of Canadian goods would have to review the relevant laws and regulations of the
target market and follow a process for exporting products from Canada that is similar to the one
an importer would have to follow when bringing goods into Canada.
Recognizing the difficulty a Canadian exporter may face in navigating international treaties
and foreign laws, the government of Canada offers a number of services to those interested in
expanding their businesses internationally.
The Canadian Trade Commissioner Service
The Canadian Trade Commissioner Service (TCS) works with provincial and municipal governments, industry associations, educational institutions, and the private sector to provide support
to Canadian exporters. There are TCS officers in Canadian embassies and consulates all over the
world, and they provide core services that include the following:
• assessments of potential prospects in the target market;
• searches for qualified contacts in the target market;
• information on foreign organizations, customers, and competitors;
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Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
• foreign visit information, including information on hotels, business support services,
translators, and local transportation;
• face-to-face briefings with Canadian exporters in the target destination to discuss an
exporter's needs; and
• troubleshooting assistance (but officers do not act as brokers, agents, or legal counsel for
a Canadian exporter).
Export Development Canada
Export Development Canada (EDC) is a Canadian Crown corporation created under the Export
Development Act whose purpose is to provide trade-finance services to support Canadian
exporters and investors. It is estimated that 90 percent of EDC's customers are smaller business enterprises. EDC provides a number of products and services, some of which are accounts
receivable insurance, single buyer insurance, contract frustration insurance, performance security insurance, political risk insurance, and other products. EDC also provides financing in
the form of its export guarantee program, foreign buyer financing, foreign investment financing,
supplier financing, structured and project financing, and domestic financing.
Accounts Receivable Insurance
Accounts receivable insurance is available to Canadian companies of any size operating in
Canada in any sector of the economy. It covers up to 90 percent oflosses for all accounts receivable. Risks that may be insured against include buyer bankruptcy or default, buyer rejection of
goods shipped, cancellation of contract by the buyer, war or insurrection in the buyer's country,
government cancellation of import or export permits, and foreign-exchange-control problems
preventing buyer payment. The insurance premiums vary with the degree of risk, the destination, and the length of the credit term.
Single Buyer Insurance
Single buyer insurance is accounts receivable coverage, providing protection for up to 180 days,
for losses that arise from export sales to a single US or foreign customer and that are a consequence of one of the following factors: buyer bankruptcy or default, payment delays arising from
blocked funds or transfer difficulties, war or insurrection in the buyer's country, or government
cancellation of import or export permits.
Contract Frustration Insurance
Contract frustration insurance covers up to 90 percent of an exporter's losses if they result from
the following: buyer bankruptcy or default, contract cancellation, payment delays arising from
blocked funds or transfer difficulties, war or insurrection in the buyer's country, or government
cancellation of import or export permits.
Performance Security Insurance
Performance security insurance covers up to 95 percent of an exporter's losses if a foreign buyer
makes a wrongful call on an irrevocable letter of credit or letter of guarantee.
Political Risk Insurance
Political risk insurance protects an exporter's overseas assets-such as equipment, warehouses,
and manufacturing operations-from the political actions of a sovereign state and is not limited
Export Development Canada (EDC): a Canadian Crown corporationthat provides trade-finance services to support Canadian
exportersand investors
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to specific transactions. Examples of political risks that may be covered are breach of contract,
non-payment by a sovereign contracting party, expropriation or repossession of physical assets,
political violence or terrorism, currency-conversion problems, or the inability to transfer hard
currency.
Canadian provinces also aid exporters. For example, Alberta Economic Development and
Trade
•
•
•
•
•
•
provides international market intelligence to export-ready Alberta companies;
showcases Alberta's technologies, products, and services;
facilitates networking events and programs and contact introductions in priority markets;
promotes Alberta's investment opportunities to targeted companies in priority markets;
helps Alberta companies access foreign markets; and
leads Alberta's participation in domestic and international trade negotiations.
CRITICAL ANALYSIS: Business Law and Ethics
The Collapse of Rana Plaza in Bangladesh
In April 2013, the deadliest garment factory accident in history occurred in Dhaka, Bangladesh, when Rana Plaza, an eightstorey building housing a factory, a bank, and apartments,
collapsed, killing 1, 132 people and injuring 2,S00. 35 More than
half the workers were women, and, because the building had
nursery facilities, many children were also victims. The cause of
the collapse was found to be a failure to follow building codes
in construction. The top four floors of the building were constructed without permits.36
Bangladesh has one of the largest garment industries in
the world37 and is the second largest exporter of apparel after
China,38 in large part because of the extremely low cost of
labour there. Many of the clothes that were being produced
in the factory were made for Western retailers, among whom
was Canada's Joe Fresh label, carried by Loblaws and Joe Fresh
stores. Western retailers are interested in seeking production
facilities in jurisdictions with low wages largely as a result of
demand from Western consumers, who have become accustomed to low-cost trendy clothing from retailers like Wal mart,
Target, American Eagle, and H&M and do not concern themselves with the conditions in which these products are produced.39 Many of these jurisdictions either do not have robust
workplace safety regulations or fail to enforce them w here they
do exist.
Following the collapse of the factory, public outcry, and
damage to the collective image of the garment industry, approximately 200 apparel brands and retailers, including Lob laws,
and trade unions entered into a legally binding agreement,
Accord on Fire and Building Safety in Bangladesh (Accord).40 The
Accord is designed to improve health and safety conditions in
the Bangladeshi garment industry. Each signatory brand name
and retailer joining the Accord must disclose the list of their
Bangladeshi factories; ensure their factories participate in the
Accord inspections and remediation and workplace programs;
negotiate commercial terms with suppliers that ensure it is financially feasible for the factories to maintain safe workplaces;
and provide funding for the activities of the programs, with
each company contributing its equitable share of the funding
up to a maximum contribution of $SOO,OOO per year.
The Accord impacts over 2.S million employees in
Bangladesh. Since its signing, engineers have inspected more
than 2,000 factories and identified over 1S0,000 fire, electrical,
and structural hazards. Some 8S percent of the safety hazards
identified during initial inspections across all Accord factories have been fixed, 1SO Accord factories have completed the
safety remediation, and 8S7 Accord factories have completed
more than 90 percent of the remediation.
The Accord secretariat and its signatories suggest that only
changes to domestic laws and their enforcement by Bangladeshi authorities will ultimately solve the issue of unsafe factories. However, until that is possible the Accord, together
with Bangladeshi authorities, will mitigate future catastrophes
through continued inspections, remediations, safety committee training programmes, and complaints mechanisms.41
Critical Analysis Questions
1. You have recently launched a small clothing retail
business in Vancouver, importing clothing from
overseas, and you are keen to build a reputation as an
ethical trader. Your main concern is ethical sourcing.
What can you do to ensure your business scores high on
ethics?
2. What is the role of business in ensuring health and
safety standards in jurisdictions that either do not have
robust workplace safety regulations or fail to enforce
them where they do exist?
3. How can the Canadian government and businesses work
together to improve ethical standards for importers?
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
159
CHAPTER SUMMARY
In this chapter, we discussed:
How Canada incorporates international trade treaties
and their provisions into domestic law.
WTO and regional trade agreements impose rules on
Canada's export and import regimes.
• In Canada, the major federal government legislation relating to export and import rules is found in
- the Export and Import Permits Act,
-
the Canada Border Services Agency Act,
the Customs Act,
the Customs Tariff,
the Special Import Measures Act (SIMA),
the Excise Tax Act, and
the Excise Act.
The practical considerations when importing goods into
Canada.
The Customs Tariff lists tariff items according to the
Harmonized Commodity Description and Coding
System (HS).
Rules of origin govern the assignment of nationality to
goods being imported; tariff rates are prescribed according to the nationality assigned.
Canada's transaction pricing system has six methods of
determining the value for duty.
What services are available from the government of
Canada and its agencies to support and assist Canadian
exporters.
• The Canadian Trade Commissioner Service works to support Canadian exporters.
Export Development Canada is a Canadian Crown corporation that provides trade-finance services to support
Canadian exporters.
• Tariff classification is a critical step in successfully importing products.
REVIEW QUESTIONS
1. In what circumstances do you need a permit to
export goods from Canada? How would you ensure
that your information on permit requirements is
current?
2. What is the difference between the export control list
and the area control list?
3. What is the difference between an individual export
permit and a general export permit?
4. Describe the process by which the CBSA determines
what duties apply to goods being imported into
Canada.
5. What types of goods are subject to restrictions or
limitations when being imported into Canada?
6. What is a tariff classification?
7. Why is the correct tariff classification so critical?
8. Classification in the Harmonized Tariff System is
governed by what interpretive rules?
9. Why is proper country of origin identification
significant?
10. Describe two services provided by the Canadian
government to assist Canadian exporters.
NOTES
1. RSC 1985, c 1 (2d Supp).
2. SC 1997, c 36.
3. RSC 1985, c E-15.
4. RSC 1985, c E-14.
5. RSC 1985, c S-15.
6. Harmonized System (23 August 2012), online: World
Customs Organization <http://www.wcoomd.org/ en/
topics/nomenclature/ overview.as px>.
7. RSC 1985, c S-15.
8. (Last visited 3 May 2019), on line: Government of
Canada <https://www.cbsa-asfc.gc.ca/ menu-eng.
html>.
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160
Part I Public International Law
9. (1 February 2017), on line: Government of Canada
<https://www.citt-tcce.gc.ca/ en/ about-the-tribunal/
what-we-do.html >.
10. Export and Import Permits Act (EIPA), RSC 1985, c E-19.
11. Ibid.
Services Agency <https://www.cbsa-asfc.gc.ca/
import/ ar-da/ 2016/2016-006170-eng.html>.
26. (2016] 2 SCR 80.
27. SOR/ 98-33.
28. Text of the Comprehensive Economic and Trade
12. Formerly the Export and Import Controls Bureau
(EICB). Trade Controls Bureau (last modified 6
February 2014), on line: Global Affairs Canada
< https://www.international.gc.ca/ controls-co ntroles/
about-a_propos/tid.aspx?lang=eng>.
Agreement-Protocol on rules of origin and origin
procedures (3 October 2017), on line: Government of
Canada <https://www.international.gc.ca/ tradecommerce/ trade-agreements-accords-commerciaux/
agr-acc/ceta-aecg/text-texte/ Pl .aspx?lang=eng>.
29. "Memorandum Dl 1-4-2: Proof of Origin of Imported
13. SOR/ 89-202.
Goods" (6 June 2017), on line: Canada Border Services
Agency <https://www.cbsa-asfc.gc.ca/ pu blications/
dm-md/ dl l /dl l-4-2-eng.html>.
14. SOR/ 81-543.
15. SC1992,c17.
16. RSC 1985, c U-2.
30. SOR/ 86-792.
17. "Current Sanctions Imposed by Canada" (14 June
31 . SOR/ 86-876.
2019), online: Government of Canada <https://www.
international.gc.ca/ world-monde/ international_
relations-relations_internationales/ sanctions/currentactuelles.aspx?lang=eng>.
18. RSC 1985, c F-29.
19. "Tariff Rate Quotas: Agricultural Products;' on line:
Global Affairs Canada <https://www.international.
gc.ca/controls-controles/ prod/ agri/tarif.
aspx?lang=eng >.
20. Ibid.
21. RSC 1985, c F-27; SC 1990, c 21; SC 1990, c 22; SC
2012, c 24; RSC 1985, c S-8.
22. RSC 1985, c C-38; RSC 1985, c F-27; RSC 1985, c H-3;
RSC 1985, c T-13; SC 2002, c 28; RSC 1985, c T-1 O; SC
1997, c 36; RSC 1985, c P-19.
23. "Importing commercial goods into Canada: 1.
Preparing to import" (4 July 2018), online:
Government of Canada <https://cbsa-asfc.gc.ca/
import/guide-eng.html>.
24. CBSA (2018), online: <https://www.cbsa-asfc.gc.ca/
trade-corn merce/ ta riff-ta rif/ 2018/ htm l/ ru les-reg leseng .htm I>.© Canada Border Services Agency, 2019.
25. "Tariff Classification Advance Ruling: Laser Tag Game
Poncho" (24 April 2018), on line: Canada Border
32. Supra note 1 (emphasis added).
33. Jockey Canada Company, on line: Canadian
International Trade Tribunal <https://decisions.citttcce.gc.ca/ citt-tcce/ c/ en/ item/ 352004/ index.
do?q=jockey+canada>.
34. 2015 FCA 58.
35. Daniel Schwartz, "Rana Plaza Compensation Would
Cost Reta ilers Little;' CBC News (25 October 2013),
online: <http://www.cbc.ca/ news/world/ rana-plazacompensation -would-cost-retailers-little-1.2224749>.
36. Globalization 101, A Project of SUNY Levin Institute,
"Manufacturing: After the Bangladesh Factory
Collapse" (22 July 2013), online: <http://www.
globalization 101.org/ manufacturing-after
-the-bangladesh-factory-collapse>.
37. BBC News, "Bangladesh Building Collapse Death Toll
over 800" (8 May 2013), on line: <http://www.bbc.
com/ news/ world-asia-22450419>.
38. Dean Nelson, "Bangladesh Building Collapse Kills at
Least 82 in Dhaka;' The Telegraph (24 April 2013),
online: <http://www.telegraph.co.uk/news/
worldnews/ asia/ bangladesh/ 10014778/ Bangladeshbui lding-col lapse-kills-at-least-82-i n-Dhaka.htm I>.
39. Ibid.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 5 Canada's Response to Global Rules: Domestic Rules for Imports and Exports
40. (2018), online: <https:// bangladeshaccord.org/
about>
41. Accord on Fire and Building Safety in Bangladesh,
News Release, "Accord Continuation Beyond May
161
2018" (26 October 2017, online: <https://bangladesh
accord.org/ resources/ press-and-media/ 2017/ 10/ 26/
accord-continuation-beyond-may-2018>.
WEBSITES
Canadian Association of Importers and Exporters: <http://
www.iecanada.com>
Canadian Food Inspection Agency Automated Import
Reference System (AIRS): <http://www.inspection.ge.
ca/ plants/ imports/ airs/ eng/ 1300127512994/ 13001276
27409v>
Global Affairs Canada: <http://www.international.gc.ca/
international/ index.aspx?lang=eng>
Canada Border Services Agency: <https://cbsa-asfc.gc.ca/
menu-eng.html>
Export Development Canada: <https://www.edc.ca/>
Trade Commissioner Service: <https://www.
tradecommissioner.gc.ca/ trade_commissionersdelegues_commerciaux/index.aspx?lang=eng>
LIST OF CASES
Canada (Attorney General) v Igloo Vikski Inc, 2016 SCC 38
Skechers USA Canada Inc v Canada (Border Services Agency),
2015 FCA 58
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
PART II
Private International Law
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
CHAPTER 6
Negotiation of International Contracts
(Part 1): Pre-Contractual Instruments
and Sale of Goods Contracts
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand:
• pre-contractual obligations
• the basic principles of sale-of-goods law
• the importance of the Convention on the International Sale of Goods (CISG)
Introduction 165
Pre-Contractual Legal Obligations 166
Sale-of-Goods Law 168
Convention on Contracts for the International Saleof Goods 169
AComparative Look at Sale-of-Goods Law 172
Drafting International Sale-of-Goods Contracts-Common Clauses
and Practical Considerations 180
Chapter Summary 198
Review Questions 198
Notes 199
Further Reading 199
• the differences between the Convention on the International Sale of Goods,
Canadian sale-of-goods law, and the Uniform Commercial Code
• how to draft a basic international sale-of-goods contract
Websites 199
List of Cases 199
Introduction
Contracts are fundamental to all that we do in business because they set out the rights and
obligations of business parties. In contract, the parties are able, to a large extent, to define and
control the rights and obligations of each party. It is therefore critical that a business person
understands the legal principles of contract when pursuing strategies, managing risk, and maximizing profits in domestic and international transactions. However, international contracts are
more complex and have greater risks than domestic contracts, so additional issues need to be
considered when negotiating and concluding international transactions.
By identifying the risk areas in advance, using advantageous legal terms, and understanding
the legal tools available to prepare a well-drafted contract, businesses can establish positive international relationships and mitigate the potential adverse effects in international transactions.
contract: alegally binding agreement between two or moreparties for aparticular purpose
165
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Part II
Private Internat ional Law
This chapter explores the risks involved with negotiating contracts internationally and then
focuses on legal regimes governing contracts for the international sale of goods. Readers without previous knowledge of Canadian contract law would be wise to review the foundational
principles first.
Pre-Contractual Legal Obligations
International business agreements cover numerous types of transactions. These include sale of
goods, sale of services, agency, licensing, distribution, joint venture, assignment of intellectual
property, and other agreements. Irrespective of the type of agreement, one of the main concerns
that will impact the negotiation, the pre-contractual documents, and the contract itself will be
the legal regime that governs.
Legal Obligations During Negotiations
The first step of any commercial transaction is negotiation. Legal duties may arise in negotiations even before anything is signed and finalized between the parties. This largely depends on
the jurisdiction the negotiation is subject to. For example, in Canada, the duty of good faith-a
principal of law that states that one party must have regard for the interests of the other partyextends only to the performance of the contract. In the common law tradition, which applies
generally to the domestic law of Canada, the United States, the United Kingdom, Australia,
New Zealand, Ireland, Singapore, and other countries that have a history of colonial ties with
the United Kingdom, the parties to a negotiation are presumed to be looking after their own
interests only. In Quebec and other civil law jurisdictions, the duty of good faith has long been
codified, and the obligation to act in good faith is present during (1) the negotiation period of
the contract, (2) the pre-contractual period, (3) the term of the contract (and its performance),
and (4) following the term of the contract.
What this means in practice is best illustrated through the example discussed in Box 6.1.
In civil law jurisdictions like Germany, Finland, Portugal, and other countries, pre-contractual liability can also arise when negotiations are broken off in bad faith. In other words, the duty
of good faith extends also to the obligation to not terminate negotiations for reasons not related
to their progress. As long as one of the parties is under the legitimate expectation that the negotiations would continue with the purpose of concluding a contract, the other party cannot walk
away from the negotiations due to reasons unrelated to the potential contract. In the example in
Box 6. 1, if the buyer terminated the negotiations with the seller because his close relative died,
he could be held liable for any incurred negotiation expenses that may have arisen, such as real
estate agent fees and the seller's lawyer consultation fees, since he is terminating the negotiation
for reasons unrelated to the prospective contract.
Every country around the world has its own unique legal system and with nuances regarding
the above interpretation of the good-faith obligation, but other obligations may exist as well. As
such, it is incumbent on the business person to undertake his own due diligence to learn what
legal obligations exist before negotiating and to be aware of the potential risks involved in negotiating with businesses in any particular jurisdiction.
common law: theAnglo-American lega l system based on precedent, or"judge-made"law, found in Canada, the United States, the
United Kingdom, Australia, New Zealand, Ireland, Singapore, and other countries colonized by common law countries
civil law: thecode-based legal system originating intheJustinian codeof the Roman Empire, found inall of continental Europe,
Central and SouthAmerica, parts of Asia, theMiddleEast, andAfrican countries colonized by code-based countries
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6
BOX 6.1
Negotiation of International Contracts (Part 1): Pre-Contractual In struments and Sale of Goods Contracts
167
Disclosure of Information During Negotiations in Common Law Tradition
Versus Civil Law Tradition
A mechanic-shop owner is interested in selling one of her locations that has been out of commission for some time, since it
no longer conforms with hazardous-waste regulations and has
other compliance issues. She starts negotiations with a prospective buyer, whom she knows would like to purchase the location to operate his own car-repair shop even though he has
not made any express mention of this intention to her during
the negotiations. The seller does not tell the prospective buyer
that the location is not suitable for a functioning car-repair
shop, and the buyer never asks. The parties eventually enter
into an agreement for the sale of the garage, and no mention is
made in the contract of the buyer's intention to use the building for starting a car-repair shop or of the circumstance that
the building is unfit for that purpose.
The question that arises here is whether the seller has
breached a duty of good faith toward the buyer by failing to
disclose the lack of fitness of the garage, or whether it is the
buyer who has the duty of due diligence to ask about the
status of the building. In the common law tradition, the principle of " buyer bew are" applies. The onus is on the buyer to
inquire about the property, and the seller has no obligation
to disclose the information without being asked about it. In
Quebec, Italy, Germany, Norway, and some other civi l law jurisdictions, the seller would have had an obligation to take into
consideration the interests of the buyer, and she wou ld have
had to disclose the pertinent information since she was aware
of the buyer's intentions and likely understood that it might
have a material significance for the buyer's evaluation of the
prospective contract.
Pre-Contractual Documents
Depending on the nature, complexity, and risks involved in the negotiation, parties will often
wish to set out the basic terms of their proposed agreement in a pre-contractual document.
These pre-contractual documents have a variety of different names: "letter of intent;' "term
sheet;' "memorandum of understanding;' and "comfort instrument." A pre-contractual document can also take the form of an email message that summarizes the discussions. They all
have the purpose of sketching out the principal terms of the prospective transaction the parties arrived at during their discussions. The terms included in the preliminary document will
be repeated and expanded on in the final agreement, and the final agreem ent will replace the
preliminary document. It is called a pre-contractual document because, in most cases, it is not
legally binding, or it is a hybrid document, which means that only some provisions of the precontractual document will be legally binding.
A pre-contractual document is often necessary to provide a solid basis for drafting the final
contract, since a comprehensive agreement may take several months to finalize. Also, a precontractual instrument is often necessary to persuade a third party to enter into a separate
transaction that depends on the transaction being negotiated (financing, for example). This
instrument serves to set out the intentions of the parties and, although not legally binding, can
provide a strong business incentive for the parties to proceed with finalizing the agreement.
Failure to abide by the pre-contractual instrument's terms can be detrimental to the reputation
of the business, albeit not legally ruinous.
pre-contractual document: a preliminary document setting out the intentions between two or moreparties for a particular
purpose
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Part II
Private Internat ional Law
What will be considered legally binding and what will not depends on the substance of the
document and not the name of the document. When interpreting these instruments, courts look
to the intentions of the parties as evidenced in the terms of the entire document and not solely to
the title.
The best way to avoid any ambiguity as to whether a document is legally binding is to specifically include a provision to that effect and employ language that connotes one or another intention. Table 6.1 lists examples oflegally and non-legally binding language and clauses.
TABLE 6.1
Examples of Legally and Non-Legally Binding Language and Clauses
Sample language
May; Likely; Intend; Expect; Should; Participants;
Potential; Will
Agree; Grant; Bind; Lease; Undertake; Shall; Parties; Concluded; Upon Acceptance; It is agreed;
After/ Before this ... takes effect
Memorandum of Understanding; Term Sheet; Letter
of Intent; Agreement to Agree
"Contract;'"Agreement;'"Protocol"
Will usually not include a list of remedies or damages
fo r breach
Will usually include a list of remedies or damages for
breach
Can include different lang uages of the document
Reference to one language being the only authentic
language of the contract
Sample clauses
"Definitive agreement will be d rafted by counsel to
the Investors. This term sheet is intended by the parties to be non-binding:'
"In consideration of the mutua l covenants contained
in this Agreement and other good and valuable consideration, the parties agree as fo llows ..."
"This term sheet is intended solely as a basis for further discussion and is not int ended to be and does
not constitute a legally binding obligation:'
"The Seller represents and warrants that th is Agreement constitutes a valid and binding obligation of
the Seller enforceable against it in accordance with
the terms ..."
Sale-of-Goods Law
The legal regime that governs the contract will greatly affect the rights and obligations of the
parties should a dispute arise. When the parties to a contract are both located in the same jurisdiction, the parties have the certainty of knowing that the legal rules that govern the contract are
those of the familiar "home" jurisdiction, unless they decide to provide specifically for another
law to apply. When the contracting parties are located in different jurisdictions, there will be a
conflict between the laws of the two jurisdictions, and this creates uncertainty. If the parties fail
to make a "choice of law;' the courts may have to determine what jurisdiction's laws apply. This
is an expensive extra step and will result in additional legal costs and delay if a dispute develops
between the parties.
This issue of determining which law to use for an international contract has been a concern
for businesses for so long that, in order to reduce the uncertainty and the costs, numerous uniform and model laws have been created. Draft contracts are offered by international organizations, and there is a variety of case law interpreting the conflict-of-laws rules.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
Since the majority of international transactions deal with the purchase and sale of goods,
this section describes the legal regimes that govern these types of agreements domestically and
internationally. This will help explain some of the vast differences between common law and civil
law, as well as uniform rules for contracts and the need to carefully select the law that will apply
to the sale-of-goods contract to avoid a conflict-of-laws dispute.
Canada's Domestic Sale-of-Goods Legislation
Each province in Canada has passed legislation that governs local sale of goods transactions. For
example, the Sale of Goods Act1 of Newfoundland codifies the rules of commercial sales in the
province. The provincial sale of goods legislation is not exhaustive and does not cover all possible situations. Sale-of-goods acts codify some of the common law rules that have been used in
Canada for many years. The Canadian sale of goods law is a subset of general contract law, and,
as a result, if the legislation is silent with respect to a specific legal matter, the common law will
be used to fill the legal gaps. The purpose of the sale-of-goods legislation and the common law
is to incorporate default provisions to the sale-of-goods contract that the parties left out. Parties
are free to override the operation of domestic or international laws by including different terms
in their agreements.
If the parties to a sale-of-goods contract are in the same province, the provincial sale-ofgoods legislation will likely apply. However, if one of the parties is located in Canada and the
other is abroad, the law that will govern the sales contract becomes an issue.
Convention on Contracts for the International Sale of Goods
An import or export transaction is simply a contract for the sale of goods. For simplicity, we
will refer to these transactions as export transactions, although one party's export transaction
is another party's import transaction. As with domestic transactions, parties may often exclude
numerous terms from their agreements, and conflicts will arise as to which law will inform the
missing terms. To avoid the issue of conflicts oflaws in international sale-of-goods transactions,
the Convention on Contracts for the International Sale of Goods (CISG, or Convention)2 was
developed.
The CISG, one of the most important conventions for businesses dealing with export transactions, was adopted in 1988. The Convention was sponsored by the United Nations Commission on International Trade Law (UNCITRAL), which is the core legal body at the UN
concerned with law reform. The CISG has now achieved widespread acceptance and use around
the world, particularly in Europe and Asia. Its rules apply to all contracts for the sale of goods
involving parties that have their places of business in different contracting states. As of 2019,
some 90 countries have ratified the CISG. These states are referred to as "contracting states;' and
the CISG is becoming an international standard for international sales contracts. See Box 6.2 for
a list of contracting states. Note the absences of the UK and India, the only major trading nations
that have not adopted the CISG.
CISG Incorporation in Canadian Law
Because the sale of goods falls within provincial jurisdiction in Canada, it was necessary for
each province to incorporate the Convention into its own legislation. Each province has passed
Convention on Contracts for the International Sale of Goods (CISG): aconvention that providesfor auniform law of sales in
international sale-of-goods transactions; it came into force in 1988 and has achieved widespread acceptance in civil and common
law countries
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BOX 6.2
List of CISG Signatories, 2019
The CISG is t he uniform international sales law of countries that account for more than three-quarters of all world trade:
Colombia
Congo
Costa Rica
Cyprus
Czech Republ ic
Denmark
Dominican Republic
Ecuador
Egypt
El Salvador
Estonia
Fiji
Finland
France
Gabon
Georgia
Germany
Greece
Guinea
Guyana
Honduras
Hungary
Iceland
Iraq
Croatia
Cuba
Israel
Italy
Alban ia
Argentina
Armenia
Aust ralia
Austria
Azerba ijan
Bahrain
Belarus
Belgium
Benin
Bosnia-Herzegovina
Brazil
Bu lgaria
Bu rundi
Cameroon
Canada
Chile
China (PRC)
Japan
Kyrgyzstan
Latvia
Lebanon
Lesotho
Liberia
Lithuania
Luxembourg
Madagascar
Mauritania
Mexico
Mongolia
Montenegro
Netherlands
New Zealand
North Macedonia
Norway
Paraguay
Peru
Poland
Republic of Korea
(South Korea)
Romania
Russian Federation
Saint Vincent and the
Grenadines
San Marino
Serbia
Singapore
Slovakia
Slovenia
Spain
State of Palestine
Sweden
Switzerland
Syria
Turkey
Uganda
Ukraine
United States
Uruguay
Uzbekistan
Vietnam
Zambia
Republic of Moldova
a provincial statute that incorporates the CISG- for example, the International Sale of Goods
Act (Newfoundland and Labrador). 3 The Convention came into force in Canada in May 1992
and now applies uniformly to international sales contracts made by businesses in all parts of
Canada, provided that the other contracting party is also located in a country that has ratified
the CISG.
The Purpose of the C/SG
The purpose of the CISG is to create a modern, fair, and uniform regime that provides greater
certainty in negotiating commercial sales contracts and reduces transaction costs. It represents
genuine progress in harmonizing the common law and the civil law rules relating to contracts
for the international sale of goods. The Convention is intended to
1. define a "default law;' which will apply where parties have failed to designate any other
law applicable to the agreement;
2. provide a sales-law regime for developing countries and for countries with regulated
economies that lack private sales laws of their own; and
3. balance the interests of the buyer and the seller and avoid some of the rigidities and
anomalies that have developed in many national laws.
Application of the CISG
The CISG is structured in four main parts. Part I deals with the application of the Convention,
Part II specifies the rules regarding formation of the contract, Part III deals with the sale of goods,
and Part IV discusses provisions regarding coming into force, acceptance, and ratifications.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
The CISG applies to all contracts for the sale of goods when the parties have their places of
business in different contracting states. It will automatically apply unless the parties "opt;' or
contract, out of it. The CISG applies only to commercial sales of goods and does not apply to
household or domestic goods; goods sold by auction; or sales of securities, electricity, or aircraft.
The Convention applies to true sales and not to leases. Additionally, if the contract is predominantly one for services, the CISG should not apply.
Another complication is determining the "place of business:' A party may have more than
one place of business, but the place that is appropriate for CISG purposes is the one that has the
closest relationship to the contract and its performance.
Automatic Application of the CISG
Pursuant to article l(l)(a) of the CISG, the Convention automatically applies to all contracts for
the sale of goods where the parties have their places of business in different contracting states.
This is the most common way that the CISG rules will govern the sales contract-that is, by
automatic application, or "default:'
Indirect Application of the CISG
Under article l(l)(b), the CISG applies to contracts between parties whose places of business are
in different states and where one party is located in a state that is a contracting state to the CISG
and one is not. However, the CISG will apply when the rules of private international law lead to the
application of the law of a contracting state. This usually occurs if a court were to decide that the
proper law to govern the contract is of the state that is a contracting state to the CISG, because
the contract has its closest and most real and substantial connection to the contracting state.
Parties' Choice
Parties to a contract can choose to use the CISG where there is no automatic application and
irrespective of whether either party is located in a contracting state.
Opting Out of the C/SG
Parties may specifically opt out of the CISG. They may wish to do so if they have an established
and successful relationship based on a contract that is founded on the common law or on other
uniform rules such as the US Uniform Commercial Code (UCC); they may see no reason to
change the contractual basis of the relationship. The UCC unifies commercial law across the 50
states of the US. Like the CISG, the UCC is meant to provide predictability for doing business
in the US. Much of Canada's trade is with the US, so it is no surprise, then, that despite Canada
and the US being contracting parties to the CISG, businesses often choose to use the UCC as the
governing law for their contract instead. Similarly, if the parties have no established relationship,
but each is accustomed to similar contracts based on a system of law familiar to both, they may
wish to stay with the system that is familiar to both.
Parties may also opt out of the CISG on the advice of their lawyers. The CISG has achieved
widespread use and acceptance in Europe and Asia, but lawyers in Canada, the US, the UK,
Australia, and other common law jurisdictions have been reluctant to adopt the CISG, so opting
out of the Convention is common in these countries. The lawyers in these countries have been
slow to familiarize themselves with the CISG provisions, and the consequence is that the courts
in these countries are not as comfortable with these rules. As contracts for the sale of goods with
Uniform Commercial Code (UCC): a set of suggested laws relating to commercial transactions inthe United States, periodically
reviewed by the American Law Institute and the National Conference of Commissioners on Uniform State Laws; the code has been
adopted, at least in part, in all SOUSstates
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non-common law countries increases as a result of growth in trade with Europe and Asia, it is
likely that the use of CISG rules will increase as well.
Types of Transactions Covered by the C/SG
The CISG was drafted specifically for contracts for the international sale of goods. In this respect, it can be compared to our domestic sale of goods acts in that it codifies principles that are
already familiar to many negotiating parties. The CISG governs
• the formation of the contract of sale, and
• the rights and obligations of the seller and the buyer.
However, some aspects of the international sale of goods are not covered by the CISG,
including
•
•
•
•
the validity of the contract;
issues such as fraud, minority, or other problems of capacity;
title to the goods; or
product liability.
Any matters that are not covered by the Convention will be resolved in accordance with
domestic laws. This means that the CISG, as a governing law, needs to be supplemented by reference to another legal regime for the resolution of unanswered issues or by way of additional
contractual provisions.
A Comparative Look at Sale-of-Goods Law
A comparison of the sale-of-goods provisions of the Canadian common law, the CISG, and the
UCC is provided here to enhance general knowledge and provide an overview. It is not a substitute
for specialized legal advice concerning these provisions. Expert and specific legal advice should
be sought and taken when negotiating any significant contract for the international sale of goods.
Has a Valid Contract Been Formed?
One of the most important considerations for an international negotiator is to ensure that a
valid, enforceable contract has been formed. A number of rules that relate to contract validity
have evolved in various countries and must be considered when assessing the terms of a contract. The most important of these- offer, consideration, revocation, and acceptance- are examined below.
Offer
(a) The Common Law
Many negotiations do not result in a completed contract. It is very important to be able to ascertain with certainty whether a party has made an offer or merely a quotation or invitation to do
business. The first contract between the parties will often take the form of an advertisement, a
catalogue entry complete with description and price, or simply a letter of inquiry. It is natural for
a party to regard a quotation or an advertisement as an offer; however, under the common law,
such activities are viewed as mere invitations to do business, and it is the buyer who must make
an offer based on the information contained in the advertisement or quotation. It is important
that the information contained in an advertisement or quotation be correct because it may well
form the foundation of the contract. If it's incorrect, it could result in an unprofitable contract
or a misrepresentation for which the party in error could later be found to be liable for damages.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6
BOX 6.3
Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
Oral International Sale Contracts
Sam Small, the owner of Apex Ltd of Edmonton, attended the Trade Show for Road Construction
Equipment in Stockholm, Sweden. Apex manufactures heavy articulated trucks and shipped four of
these to Stockholm for display at the show. Sam decided that it made no sense to ship the trucks back
to Edmonton after the show, so he would try to sell them while still at the show. On the final day of
the show, he held a small cocktail party and there, accompanied by two of his senior sales people, he
stated to the assembled crowd that his firm would sell the trucks for $400,000 each, immediate cash
payment, and collection of the trucks from the Stockholm Exhibition Centre for shipment by the buyer
within five days of the end of the show. He stated that he would accept the first four offers on those
terms. Representatives of four firms immediately stepped up and made offers on the terms outlined.
The firms were from Minnesota, Australia, and Great Britain. Small and his staff accepted each of the
four offers, shaking hands with the representatives of the four foreign firms to "seal the deal:'
If problems arise under any of these contracts, and Apex wishes to enforce them in court, where
will Apex stand? What law will apply to each of these contracts, and are the contracts enforceable?
Some quotations may contain all the elements of an offer and may be considered by the courts
as such. This is the exception rather than the rule. The test used by the courts in these cases
concerns the intention of the person submitting the quotation. There must be evidence of a clear
intention that the quotation was meant as an offer.
(b) The CISG
Article 14 of the CISG provides that a proposal addressed to one or more specific persons is an
offer if it is sufficiently definite and indicates the intention of the offerer to be bound. A proposal
is sufficiently definite if it indicates the goods and expressly or impliedly fixes, or makes provision for determining, their quantity and price.
Although the provisions of the three systems are similar, the CISG is the most flexible as it
does not demand any provisions for the terms of delivery in a valid offer.
(c) The UCC
The UCC provides that an offer should contain all the essential elements of a contract and is
a statement intended by the offerer to result in a binding contract if accepted unaltered by the
offeree. The essential elements of an offer are usually the following:
1. a clear description of the goods;
2. a statement of the purchase price and terms of payment;
3. a list of all details of delivery, including details concerning packing, invoicing, transpor-
tation, and insurance.
Consideration
(a) The Common Law
In common law, consideration is the idea that a contract must be characterized by a mutual
exchange of value between two parties. The reciprocal promises do not have to be equal in value,
because the courts do not consider whether the consideration is adequate or whether the parties
made a good bargain; it is enough that consideration is present.
consideration: the common law contractual principle that requires that, to be enforceable, a contract must be characterized by a
mutual exchange of value between two parties
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(b) The CISG
Civil law countries do not have a requirement that a contract be supported by consideration.
Likewise, the CISG (which is more similar to civil law than to common law) does not require
consideration to support a valid contract.
(c) The UCC
The UCC requires consideration to support a contract, just as the Canadian common law provinces do.
Revocation of an Offer
(a) The Common Law
Pursuant to common law, an offer can be revoked at any time before it is accepted, as long as the
revocation is communicated to the offeree. This is true even in cases in which the offeror has
stated that the offer will remain open for a specific period of time. Under the common law, there
are two special circumstances in which a commitment to leave an offer open for a specified time
will be legally binding. The first is where the offer is made under seal; the second is where the
offeree pays (thereby creating consideration) for the privilege of the certainty of what is then an
option agreement.
(b) The CISG
The CISG generally regards a firm offer to be binding for the period specified. The CISG, reflecting the civil law view, states in article 16(2) that a firm offer will be binding and cannot be
revoked if it indicates, by stating a fixed time for acceptance or by some other statement, that it
is irrevocable or that it was reasonable for the offeree to rely on the offer being irrevocable. Such
promise of irrevocability does not have to be signed or in writing or supported by consideration.
(c) The UCC
The UCC takes a middle course on the issue of revocation. It provides in section 2-2054 that a firm
offer for the purchase or sale of goods- an offer stated to be effective for a limited period, and
given by a merchant in a signed writing-can be enforced by an offeree who has relied on the offer.
Consider the scenario described in Box 6.4, which illustrates the difficulties that can arise
when a Canadian firm assumes it can revoke an offer with no legal ramifications.
BOX 6.4
Manitoba Firm Reneges on Offer
On February 1, a Manitoba seller sent a Michigan buyer a signed offer to sell 5,000 carpets for
Cdn$1,000 each. A complete description of the goods, together with all relevant payment and delivery terms, was included with the offer. The letter stated that t he offer was binding and irrevocable until
February 28 of the same year. On February 14, the Manitoba seller sent another letter to the Michigan
buyer stating "Ignore our letter of February 1. We have miscalculated and we withdraw our offer:' On
reading this, the Michigan buyer decided that the price must have been a good one and advised the
Manitoba seller in writing on Febru ary 15, "We accept your offer of February 1:·
1. What legal regime applies to this transaction?
2. Is there a cont ract? Why?
3. Would the answer be different ifthe buyer were in the UK rather than Michigan?
revocation: acancellationor nullification of something, likean offer or of rights previously granted
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
Requirements for a Valid Acceptance
Generally, a contract is formed and the parties are bound by its provisions once the offer to buy
or sell the goods is accepted. This concept is common to all legal systems.
(a) The Common Law
In common law, there must be an offer and an unequivocal acceptance of the offer to form a
binding contract. If the acceptance alters the original offer in any way, it is considered a counteroffer and must be accepted by the original offerer before a contract is formed. This is referred to
as the "mirror image" rule, which means that the acceptance must be an exact "reflection'' of the
offer. A counter-offer operates to terminate the original offer.
(b) TheCISG
The CISG takes a more practical approach than the common law does to the issue of acceptance. The Convention, at article 19, states that an acceptance containing new terms that do not
materially alter the terms of the offer constitutes a valid acceptance unless the offerer promptly
objects to the change. If the acceptance contains additional or different terms that materially alter the terms of the offer, it will not be effective and will be considered a counter-offer.
The CISG clarifies this provision by listing the elements that are considered to materially alter
the contract: price, payment, quality, and quantity of good; place and time of delivery; extent of the
parties' liability to each other; and settlement of disputes.
(c) The UCC
The strict approach taken by the common law has been modified in the American UCC, which
states that an acceptance containing minor additional or different terms will be valid, but the
minor additional or different terms will not become a part of the contract. Terms that "materially alter" the offer are not considered "minor terms" under this rule. This rule is helpful in the
common situation in which parties negotiate with each other on the basis of their own standard
form, which may contain provisions in the small print that even the parties are unaware of. If
this rule did not exist, a confirmation in response to, say, a purchase order on a form differing
slightly from the original offer would result in no contract. The UCC thus attempts to uphold the
intention of the parties that there be a binding contract in spite of small discrepancies between
the standard forms of the parties.
The Battle of the Forms
Providing for a common set of terms and conditions that apply to most transactions in which a
firm engages is a good business practice. Buyers and sellers may each wish to have the advantage
of familiar and tested provisions, and using a standard form contract designed to protect your
firm may be an effective way to impose terms upon other parties with whom you do business.
As a result, it is common practice for the seller to send the buyer an offer on a form that incorporates the seller's general conditions. Often, the buyer will attempt to accept the offer on a form
that incorporates the buyer's general conditions. It is unlikely that the sets of conditions will be
identical. The outcome is sometimes referred to as the "battle of the forms:' These impasses can
often be avoided by the offerer sending with the offer a confirmation slip that must be signed
and returned by the offeree.
If the offeree does not use the offerer's confirmation slip but accepts on its own form containing its own terms and conditions, a strict application of the mirror image rule would result in no
binding contract under the common law. This, however, may not be the intention of the parties,
each of which believes an enforceable contract was established. In these situations, there is an
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advantage in the more flexible rules of the CISG, because this system allows for minor variations
between offer and acceptance.
Requirement of Writing
(a) The Common Law and the UCC
The sale-of-goods laws in Canada, the UK, the US, and many other countries require that commercial contracts for the sale of goods having any significant value be in writing to be enforceable
in court. This is also a requirement in Muslim countries; the Quran requires that commercial
contracts be in writing. These rules have been established for reasons of convenience and certainty of contract.
(b) The CISG
Civil law jurisdictions generally do not require contracts to be in writing, and the CISG follows
this tradition; it states in article 8 that a contract of sale need not be evidenced by writing and is
not subject to any specific requirement as to form but m ay be proven by any means, including
witnesses. The best business practice is to have the contract made in writing whether or not it is
a legal requirement.
The Question of Missing Terms
(a) The Common Law
Under the common law, an agreement to agree is not a binding contract. However, there are
situations in which the parties wish to be bound to a contract but certain details have not been
settled. The approach of the common law courts is to refer to the intention of the parties and
to examine the reason for the absence of the missing term. The more important the missing
term, the less likely it is that the parties have a completed contract. The court will also take into
account the reason for the missing term. Perhaps certain information was not available at the
time of negotiations but is ascertainable at the time of performance. In such a case, if the con tract provides for an established or agreed-upon method of providing the missing term, there
may well be a binding contract. This is possible even if the missing term concerns a significant
issue, such as price. It is not uncommon for the parties to rely on some external market factors
to determine price.
(b) The CISG
The CISG states that an offer is sufficiently definite if it indicates the goods and expressly or
impliedly fixes or makes provision for determining quantity and price. The CISG goes even further and provides that where a contract has been validly concluded but does not impliedly fix or
make provision for price, the parties, in the absence of any express indication to the contrary, are
considered to have made reference to the price generally charged in comparable circumstances
in the trade concerned.
(c) The UCC
The UCC provides that, in appropriate circumstances, if price is not specified, then a "reasonable
price" will be presumed.
Acceptance and Rejection of Goods
(a) The Common Law
Under the common law, a buyer who is dissatisfied with the goods must indicate her intention to
reject them within a reasonable time. In the absence of specific terms, the rejecting buyer is not
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6
BOX 6.5
Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
Danes Reject Canadian Herb Shipment
A Danish company ordered a quantity of Canadian herbs from an exporter in PEI. When the herbs arrived
in Copenhagen, they were found to be mildewed and were unusable. Because the Danish company had
already paid for the herbs by letter of credit, it did not bother to advise the PEI company of the unacceptability of the shipment but instead contacted the insurance company, which contacted a lawyer, who proceeded to sue the PEI company for breach of contract. The PEI company first became aware of the problem
when documents were served on it in Charlottetown 18 months after the herbs had been shipped.
1. What is the legal position of the PEI company?
2. What should the Danish company have done in the circumstances?
obliged to return the goods to the seller, but the buyer becomes a bailee of the goods and must
take reasonable care of them. Normally, the buyer's right to reject the goods is reserved until the
goods arrive and the buyer has an opportunity to inspect them.
(b) The CISG
Under the CISG, inspection of the goods and notice of any breach of contract are required. The
CISG provides that the buyer must examine the goods within as short a period as is practicable.
The buyer must then give notice of lack of conformity within a reasonable time after the lack of
conformity has been discovered or ought to have been discovered (no more than two years).5
(c) The UCC
Under the UCC, as with the CISG, inspection of the goods and notice of any breach of contract
are required.
Implied Warranties
(a) Provincial Sale of Goods Law
The law with respect to implied warranties in Canada is determined by the sale-of-goods legislation in each province. These implied warranties are that
• the seller has the right to convey title to the goods to the buyer;
• the goods supplied will correspond to the description given by the buyer when ordered;
• the goods supplied for a particular purpose will satisfy the purpose where the buyer has
made known the purpose and has relied on the seller's skill and judgment in meeting
those needs;
• the goods purchased by description will be of merchantable quality in order to meet the
usual or general use of such goods; and
• if the sale is based on a sample, the goods will be of the same quality as the sample and
free of any hidden defects.
(b) The CISG
The provisions of the CISG are similar to those of Canada's domestic sale-of-goods legislation.
Pursuant to section 35 of the CISG, the goods
• are fit for the purposes for which goods of the same description would ordinarily be used,
• are fit for any particular purpose expressly or impliedly made known to the seller at the
time the contract was made,
• possess the qualities of goods that the seller has held out to the buyer as a sample or
model, and
• are contained or packaged in the manner usual for such goods.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Any provision of the Convention may be modified, and there is specific mention of exclusion
in article 35(2): "except where the parties have agreed otherwise:' There is thus no requirement or
limitation governing how clearly any exclusion must be expressed to be effective under the Convention. Traders must be vigilant when signing contracts in which the applicable law is that of the
CISG. It is important to remember here, however, that the Convention does not apply to questions
of product liability (liability to third parties for damages due to substandard or defective goods).
The application of CISG implied warranties is discussed in Box 6.6.
(c) The UCC
The UCC differs from the CISG in providing that any exclusion or modification of warranties
must be specific and conspicuous to be effective. Case law in Canada and the UK also establishes
this principle.
Timelines for Delivery
(a) The Common Law and the UCC
The common law system (including that of the United States) generally regards time of delivery
as a condition of the contract. Therefore, the innocent party has the right to treat the contract as
repudiated once a reasonable time for delivery has expired.
BOX 6.6
Case Highlight
US Company Pays Millions for Breach of Warranties
Case Name and Court
Pattison Outdoor Advertising Limited Partnership v Zon LED LCC
(British Columbia Supreme Court, 2018)6
Facts
Pattison Outdoor Advertising Limited Partnership (Pattison) is a
Canadian advertising company that has thousands of outdoor
billboards across the country. It contracted with Zon LED LCC
(Zon), a US company, for the purchase of retrofitted LED lighting fixtures. The sales agreement between Pattison and Zon
consisted of numerous purchase orders and a written document titled "Pattison Special Limited Warranty " ("Limited Warranty") (collectively, the "Sales Agreement"). Pursuant to the
Sales Agreement, Pattison ordered and installed 8,222 lighting fi xtures for a total sum of US$4,901 ,893.49 between 2010
and 2013. The lighting fixtures started to fail rapidly, and Zon
attempted to fix the defects while providing alternate stock
to Pattison to replace the faulty lighting units. After months
of trying to address the issues, Pattison hired its own expert
to determine the causes of the failures. The expert identified
numerous fundamental defects with the design of the fixtures
and concluded that they were unfit for their intended purpose
of illuminating outdoor billboards. In October 2014, after becoming aware of the fatal defects, Pattison notified Zon that
it considered the defects to be a fundamental breach of the
Sales Agreement and sued for a refund of the purchase price
of the lighting fixtures. Zon, among other things, argued that
its liability should be limited by the Limited Warranty, which
would reduce the amount of damages for the defective units
to US$75 per unit.
Issues
1. Does the implied warranty of fitness for purpose, pursuant to the International Sale of Goods Act,7 which incorporates the CISG in BC, apply to the Sales Agreement?
2. If the warranty of fitness for purpose was an implied
term of the Sales Agreement, did Pattison establish a
fundamental breach of the Sales Agreement and was it
entitled to recover the fu ll purchase price?
Analysis/Applicati on
The Sales Agreement did not have a choice of law provision.
Since both the United States and Canada are contracting parties
to the CISG, and the Sales Agreement did not exclude the CISG,
the implied warranties stated in article 35 of the Convention
automatically applied to the Sales Agreement. The Limited Warranty also did not explicitly oust the application of statutory warranties. Under the common law, the intention to oust statutory
warranties in an exclusion clause has to be made explicit in the
contract. The fitness for purpose was a term of sufficient importance to Pattison, and its breach, based on the evidence presented
at trial, constituted a fundamental breach under the CISG and
gave Pattison the right to treat the contract as terminated. Pattison recouped the full amount of the purchase price from Zon.
condition: a provision in a contract of such significance to the parties that a breach of that provision will cause the contract to
become terminated
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
(b) The CISG
Although the provisions employed by civil law countries vary, a feature of many specifies
that if a delivery is delayed, the buyer must demand delivery and allow the seller a reasonable
time for performance, even though the seller has delayed delivery in an apparent breach of
the contract. The contract cannot be treated as repudiated until the additional time given for
delivery has expired. This concept is variously referred to as mise en demeure, delai de grace,
or Nachfrist.
This approach is also taken in the CISG, which provides for a Nachfrist notice. Such
notice allows either party to fix an additional period of time for the other to perform and
thus covers a situation of failure of delivery or one in which unacceptable goods have been
delivered. During the extended period of time, the granting party may not resort to any
remedy for breach of contract. If the notified party fails to perform within the additional
period given, the granting party may treat the contract as repudiated, whether the breach
was important (that is, involved the breach of a condition) or not. A further provision of the
Convention encourages flexibility and the maintenance of the contractual relationship even
in the face of difficulties. This provision allows the seller to make good its promise to deliver
goods even after the specified delivery date if it can be done without causing the buyer unreasonable inconvenience. If a seller requests from the buyer an extension of time for delivery, the buyer is obliged to respond within a reasonable time or the seller may perform within
the additional requested time.
Frustration of Contract
All legal systems recognize that sometimes the commercial object the parties had in mind when
the contract was concluded may be defeated by circumstances completely beyond the control
of the parties. Such events may be an excuse for non-performance of the contract in certain circumstances. Each legal system has different rules governing when non-performance is excused
and accepted without the non-performing party being held liable for it.
(a) The Common Law
English and Canadian law include the concept of frustration of contract. Frustration occurs
when, after the conclusion of the contract, a fundamentally different situation unexpectedly
develops that makes performance of the contract under its original terms impossible. It is not
sufficient for this development to merely render the performance of the contract more difficult
or expensive. Only if the change is of such magnitude that it creates a fundamentally different
situation will it qualify as a frustrating event. Difficult questions arise, because frustration may
often be a matter of degree, particularly when the facts involve dramatically increased costs or
delays in delivery. Much clearer are situations that involve the destruction of the subject matter
of the contract, or the outbreak of war, or change of government policy involving the ability to
import or export goods.
Self-induced problems will never qualify as frustration. For example, the failure of one party
to apply in a timely fashion for necessary export or import authorization would not qualify as
frustration.
The effect of frustration is that the contract is terminated, leaving both parties free from any
further obligation under it.
Nachfrist notice: aconcept rooted in German, Austrian, and Swiss law, it is a rule in the CISGthat applies in certain breach-ofcontract situationsandallows theinnocent party tofixan additional periodof time for thebreaching party to perform its obligations
under the contract
© [2020) Emond Montgomery Publications. All Rights Reserved.
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(b) The CISG
The CISG provides that a party is not liable for a failure to perform any of its obligations if
• the failure was due to an impediment that was unavoidable or beyond the party's control,
• the impediment was not reasonably foreseeable at the time the contract was concluded, and
• notice was given to the other party of the impediment and its effect on the contract.
(c) The UCC
Under the UCC, "commercial impracticability" is recognized as a valid excuse for non-performance of the contract. This concept has been explained as follows: "a thing is impossible in legal
contemplation when it is not practicable; and a thing is impracticable when it can only be done
at an excessive and unreasonable cost:'s This doctrine is rarely used because of the difficulty in
determining how much extra cost is unreasonable. For the majority of cases, inflation and even
dramatic fluctuations in market prices are events that should be anticipated by the parties and
do not permit a claim of commercial impracticability.
The American courts also recognize the common law concept of frustration. These courts
may accept the excuse of frustration in the following circumstances:
1. Impossibility. Performance of the contract has been rendered physically or legally
impossible.
2. Frustration ofpurpose. The underlying purposes of the contract no longer exist.
3. Commercial impracticability. A change in the surrounding circumstances has rendered
the contract commercially or financially impracticable.
However, the whole concept is not well received in American courts, and judges have
favoured the more practical approach of keeping the contractual relationship alive.
A comparison table of the sale-of-goods provisions of Canadian law, the CISG, and the UCC
of the United States is provided here as an overview (see Table 6.2).
Businesses need to carefully evaluate which law will govern their contract and will often use
the services of lawyers and other advisors to assist with this task. Familiarity with international
uniform rules and domestic law is critical in strategically deciding on this issue, since certain
laws offer advantages that others do not.
Readers should be aware that the CISG and the UCC are just two examples of uniform laws;
other uniform and model laws exist. It is important to research the foreign business and the laws
that they are used to before commencing negotiations.
Drafting International Sale-of-Goods Contracts-Common Clauses
and Practical Considerations
Explicit terms in a contract will always trump implied terms, and courts will respect the parties'
rights to set out their commercial relationship the way they see fit. To avoid ambiguities and
ensure that no implied terms are incorporated by the courts or arbitrators, it is best to include
specific terms into the contract. Because goods are being transported over long distances and
across national boundaries, the list of essential terms will likely be longer.
Box 6.7 explores the basic logical structure and provisions of an international sale- and purchase-of-goods agreement that address some of the challenges businesses may face when undertaking an export transaction. This can also serve as a useful checklist when drafting a sale and
purchase agreement.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Cont racts (Part 1): Pre-Contractual Instruments and Sa le of Goods Contracts
181
TABLE 6.2 A Comparison of the Sale of Goods Provisions of the Canadian Law, the CISG, and the UCC of
the United States
Content of offer
Addressed to one or more specific persons, must reflect an intention to
be bound; must have definite terms for goods; the quantity or price may
be omitted if a provision is made for t heir determination; although the
provisions of the three systems are similar, the CISG is the most flexible
because it does not demand any provisions for the terms of delivery in a
valid offer
Price, date of delivery, or payment
terms do not have to be included
in the offer and can be determined at the time of delivery
Writing requirement for
contract enforcement
Under most Canadian provincial
sale-of-goods legislation, generally required; in Alberta, contracts
worth under Cdn$50 do not need
to be in writ ing
Not required
Required if contract for US$500
or more
Revocat ion of offer
Revocable unless consideration
given
Offer made is irrevocable even
thoug h the other party has given
no consideration
Offer is irrevocable w ithout consideration if the offer is to buy
or sell goods, is in writing and
signed, and specifies that it will
not be revoked for either a specified time or, if it does not specify
a time, for a reasonable t ime
Accept ance of offer
When communicated by the
offeree, in accordance w ith t he
terms of t he offer and contract
law rules; mirror image rule
applies
Statement, when it is received by
the offeror; acceptance containing mi nor additional or different
terms will be valid unless rej ected
by offeror
Statement, w hen it is sent by the
offeree; minor additions or delet ions to offer are permitted unless
rej ected by offeror
Counter-offer
Any changes to the terms
of the offer will constitute a
counter-offer
Any changes to the material terms in the price, quality, quantity,
delivery, payment, liabi lity, dispute resolution, etc., will constitute a
counter-offer
Ora l Variat ions of written
contracts
No evidence admitted that adds
new terms or contradicts written
terms
All relevant evidence permitted
when it demonstrates intention
of parties
No evidence admitted that adds
new terms or contrad icts w ritten
terms
Performance of contract
Duty of the seller to deliver the
goods and of the buyer to accept
and pay for them in accordance
with the terms of the contract
Seller must deliver goods, t ransfer
documents, and transfer property
in the goods; buyer must accept
and pay for goods
Seller must deliver goods; buyer
must accept and pay for the
goods
Examination and notice
Reasonable opportunity to
examine the goods to ascertain
whether they are in conformity
w ith the contract; if not previously examined, then accept ance
of the goods does not occur until
goods are examined and conformity is ascert ained.
Buyer must examine the goods
within as short a period as is
practicable; buyer must then
give notice of lack of conformity
within a reasonable t ime after
the lack of conform ity has been
discovered o r oug ht to have been
discovered
Examination may happen after
delivery and before the goods
are paid for; if a delivery does
not meet established st andard s
and the value is decreased as a
result, it can be rej ected; if the
goods are not rejected within a
reasonable amount of time they
are considered to be accepted;
this can be revoked if a defect is
later discovered that substantially
impairs value
(con tinued)
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
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Legal Issue
Provincial Sale-of-Goods
Legislation and Canadian
Common Law
CISG
ucc
Conditions and warranties
Terms are either conditions or
warranties; breach of a condition
allows one party to terminate
contract, but breach of warranty
does not
No distinction between terms; goods must conform to the terms in the
contract (quantity, quality, descriptions); if they do not conform, sel ler
can remedy b reach
Frustration
A party must show that there
has been a change of such magnitude that it creates a situation
fundament ally different from the
one on w hich the contract was
based; upon a finding of frustra tion of contract under the cornmon law, both parties are freed
from their obligations
A party is not liable for a failure
to perform any of its obligations
if it was due to an impediment
that was unavoidable or beyond
the party's control, the impediment was not reasonably foreseeable at the time the contract
was concluded, and notice was
given to the other party of the
impediment and its effect on the
contract
Commercial impracticability recognized under UCC; extreme and
unreasonable d ifficulty, expense,
injury, or loss can be used as an
excuse for non-performance and
also depends on the degree to
which the event in question could
have been anticipated by t he
parties at the time the contract
was executed
Extrinsic evidence
As a general rule, all prior oral
negotiations are deemed to be
merged in a written agreement,
and the terms of such agreement
cannot be contrad icted, altered,
added to, or varied by extrinsic
evidence to the contract
When a court is to determine
the intention of the parties to a
contract, due considerat ion may
be given to all relevant ci rcumst ances, including the negotiations leading up to the contract
Evidence of any prior agreement
or of a contemporaneous oral
agreement may not contradict
but may be used to explain or
supplement the final agreement
Specific performance as a
remedy for breach
Subject to the court's discretion
to award specific performance,
and subject to individual provisions of each of the provincial
sale-of-goods laws
CISG permits this remedy, but it
will be limited to cases in countries
where specific performance would
be allowed by the domest ic law
Subj ect to the court's discretion
to award w here goods are unique
or in "other p roper circumstances"
where monetary damages are
inappropriate
Buyer can sue for breach of
Buyer can sue if sel ler fails to
deliver or delivers substandard
goods; seller can sue buyer for
failure to pay o r accept delivery
Buyer can sue if seller fails to
deliver or delivers substandard
goods
If the contract has been fund amentally breached, but each
party must give t he other reasonable time to remedy th e breach
first
Buyer can reject goods and caneel the contract if the breach goes
to the whole of the contract
Damages
warranty or non-delivery; seller
can sue buyer for failure to pay o r
accept delivery
Avoidance/termination of
contract
Buyer can reject goods and avoid
contract if a condition is breached,
in accordance with contract law
rules
Duty to mitigate
The innocent party has a duty to m itigate their damages
wa rranty: a clausein a contract that is lessimportant than acondition; breach of warranty entitles the innocent party to cla im
damagesonly
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual In struments and Sale of Goods Contracts
BOX 6.7
D
D
D
D
D
D
D
D
D
D
D
D
D
D
Structure and Provisions of a Basic International
Sale- and Purchase-of-Goods Agreement
Date and title of the agreement.
Identification of the parties to the agreement.
Description of the goods (quantity, quality).
Packing of the goods.
Transfer of ownership of the goods and liability.
Delivery, inspection, customs and duties, and insurance (lncoterms).
Price.
Date and method of payment.
Documents and invoices.
Representations and warranties.
Termination of contract.
Dispute settlement and choice of law.
Miscellaneous.
Signature block.
It is important to address the essential terms at the negotiation stage of an international sales
transaction because the likelihood of problems increases with the longer distances involved and
different business practices and laws of each country. These problems m ay be exacerbated by
communication issues, especially if there is a language barrier. It is also more likely that the parties to an international transaction have never interacted through previous dealings and may not
be aware of the other's reputation in the local business community, and this too may contribute
to a lack of trust, which may further compound any problems that do arise. The significance
of these risks becomes even greater when you consider the difficulties of enforcing your rights
against a contracting party in another jurisdiction.
Identification of the Parties to the Agreement
It is important to set out who the parties to the agreement are, as this may impact the performance of the contract later. It should be clearly stated if th e parties are corporate entities,
partnerships, sole proprietorships, or other forms of business organization. When dealing with
an individual, it is important to understand whether that individual represents himself as a
proprietor or a partner or if the individual is an authorized representative of the corporation.
The identification section, usually called a preamble, may also provide the registered addresses
of the businesses and the names of the individuals responsible for the contract. An example of a
preamble of a contract is shown in Box 6.8.
BOX 6.8
Sample Preamble
International Sale and Purchase Agreement
72356 ABC Ltd
Edmonton, Alberta, Canada "Seller"
- and XYZSA
Guadalajara, Jalisco, Mexico "Buyer"
Hereinafter: "the Parties"
DATED AS OF September __, 20XX
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Any words that are defined in the agreement will be capitalized to indicate to the reader that
the particular word has a special meaning within the text. So, the words "seller" and "buyer" are
capitalized and will indicate to the reader that the words are referring to 12356 ABC Ltd and
XYZ SA without having to write out the full corporate names each time.
Identification of the Goods of the Agreement
Depending on which law governs the contract, failure to properly define and identify the goods
of the agreement can be detrimental to its enforceability. The details necessary to define and
specify the goods that are the object of the sale should include quality, description, certificates,
country of origin, packaging requirements, and other details. The goods can be described directly in the contract or by reference to a catalogue or model number, or advertisement or schedules attached to the contract. Once the goods are defined, the word "goods" should be capitalized
throughout the entire contract if referring to the goods being purchased.
Packing
It is normally the duty of the seller to pack the goods in a manner that will ensure their safe arrival
in good condition unless the parties have agreed otherwise in the sales contract. Failure to pack the
goods properly may be considered a breach of condition and may entitle the buyer to reject the
goods. Under the common law, the packing of goods often forms part of the description of the goods.
The type of packing chosen will depend on a number of factors. The way goods are packed
will affect the freight charges applicable. If the goods are being shipped by sea, packing will vary
depending on whether the goods are being shipped on deck or stored in the hold of the ship.
The shipment of goods overseas is a complex matter requiring specialized knowledge not only
of packing requirements but also of insurance contracts and of the transportation industry. For
this reason, the services of freight forwarders may be required. (Freight forwarders are discussed
in Chapter 7.)
Finally, there are special requirements for the packing and labelling of dangerous goods in
transit. These regulations vary for sea, rail, air, and road, and the services of a transportation
specialist are recommended.
Transfer of Ownership of the Goods
Export transactions involve two separate transfers or conveyances. The first is the transfer of
title or proof of ownership; the second is the transfer of physical possession of the goods. The
timing when title transfers from the vendor to the buyer will be determined by the governing
law of the contract or by a term the parties agree to in the contract. The timing of the transfer of
ownership or title is critical, as it determines when the buyer may lose the opportunity to reject
the goods and when the seller can sue for unpaid purchase price. In addition, there should be a
provision that, if the buyer sells the goods, such sale is made only as agent for the seller and the
buyer will be a trustee of the proceeds of the sale for the benefit of the seller. An example of a
simple transfer-of-ownership clause is shown in Box 6.9.
BOX 6.9
Sample Transfer-of-Ownership Clause
The Seller must deliver to the Buyer the Goods specified in Article_ of this contract free from
any right or claim of a third person. The property in the Goods shall not pass to the Buyer until
the Seller has received payment in full of the price of the Goods.
breach of condition: a common law concept referri ng to a breach ofanimportant or material termof a contract
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
Delivery of the Goods: International Commercial Terms
Because of the greater complexity of an export transaction, sale contracts used for these transactions may incorporate terms not frequently used in domestic trade. These trade terms are a
type of shorthand that have evolved from universally accepted practices and are used in international commerce and have, to some extent, simplified and standardized transactions for the
international sale of goods. Use of these trade terms goes a long way toward helping the parties
sort out some of the issues raised in an export transaction.
International Commercial Terms, or lncoterms for short, are standard terms developed by
the International Chamber of Commerce and represent the most successful initiative to promote
certainty and predictability in international transactions. They are widely used around the world
and sometimes in domestic transactions as well. An Incoterm is a provision, designated by three
letters, that encompasses a list of delivery obligations to be performed by either the seller or the
buyer. Incoterms establish the basic transport and delivery terms, specifying the method and
place of delivery of the goods. They also indicate what is included in the calculation of the purchase price. They help the parties avoid costly misunderstandings by clarifying the tasks, costs,
and risks involved in the delivery of the goods from the seller to the buyer-for example, who
will be responsible for paying for insurance, security inspections, customs permits, and other
costs associated with transporting goods internationally.
The Incoterms were first drawn up in 1936 and have been periodically amended, with the
latest set agreed upon in 2019. The purpose of the terms is to provide a set of international rules
for the interpretation of the most commonly used trade terms. Use of the terms is optional,
and the contract must specify that they apply. This is achieved by simple reference to one of the
trade terms and expressly stating that it should be interpreted according to Incoterms (for example, "CIF Hong Kong Incoterms 2020"). This will result in the detail of the chosen term being
included in the contract and binding on the parties.
The Scope of lncoterms
Inco terms deal exclusively with the obligations of buyers and sellers and stipulate which party
bears the risk of loss during transit.
Incoterms cover
• the seller's obligation to place goods at the disposal of the buyer or deliver them to a carrier or to a specified destination;
• the distribution of risk to the parties at the various stages of production, carriage, and
delivery;
• who bears the obligation for export and import permits and customs clearances; and
• the buyer's obligation to take delivery and acknowledge that the seller's obligations are
fulfilled.
Incoterms do not cover
• transfer of ownership and property,
• breach of contract and consequences of such breach, or
• exemption from liability.
Real care must be taken in choosing the appropriate Incoterm, and for this reason the parties
should check the current version of the Incoterms to ensure absolute certainty as to the tasks,
lncoterms: developed by the International Chamber of Commerce in 1936, these are internationally accepted com mercial terms
clarifying the tasks, costs, and risks involved in thedelivery of goods from sellersto buyers in international sales contracts
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
Privat e Internat ional Law
costs, and risks assumed by each party. Equal care must be taken to ensure that the entire sales
contract is consistent with the obligations imposed by the Incoterm chosen.
Incoterms 2020
Incoterms 2020 came into effect in January 2020. Any contracts made before this date using
Incoterms 2010 or the older versions remain valid and subject to those earlier provisions. One
of the main goals of the revised Incoterms is to simplify them with terms that are supported with
examples to aid understanding.
An Overview of lncoterms 2020
Because trade terms carry rights and obligations, international business persons should not rely
on their memory in choosing the correct Incoterm for a contract. The appropriate set of rules
should always be consulted before a final commitment on price is given. A brief overview of the
11 Incoterms is shown in Figure 6. 1 and in the discussion that follows.
FIGURE 6.1
lncoterms®2020
lncc>terms®
TRANSPORT OBLIGATIONS,
COSTS AND RISKS
2020
Blue indicates seller's
Gold indicates buyer's
Green indicates mixed or shared
by the International
Chamber of Commerce (ICC)
RULES FOR SEA AND INLAND WATERWAY TRANSPORT
RULES FOR ANY MODE OR MODES OF TRANSPORT
EXW
Ex Works
FCA
Frff C•rrler
m
m
Seller
••
.._
.._
•
=•m
..
C•rrlage P•ld To
CIP
Cilrrlage and Insurance Paid To
OAP
oeuveredat Place
DPU
Oellvered at Place Unloaded
DDP
O.liv•red Duty P•ld
m
m
..._
.._
..._
~
..._
~
.._
~
FOB
•
-
"""' -
...
..- .
oom
R1Sl(l
=-
=-
•••-
...-r
=d
...
...
...
-
·~·
,..{
...
--
=-
~
8
CIF
Coit, ln1uti1nceand Freight
-
~
8
-
ANCI
-
~
-
-~
=-
ICC ....-·~..
CKAHBER
OIFCOHHERCE
ni.world buslneM ~don
~
.....
-
Cosl•nd Frfighl
-
• •SKI
==-
CFR
-
~
8
~
. .51(5
Cotll
8
•m
=-
Buyer
Seller
FAS
l'ree Ak>ngsldeShlp
-
A,)
~151($
CPT
Buyer
~
Source: International Chamber of Commerce. " lncoterms~"
is a trademark of the International Chamber of Commerce
(ICC). Text published by arrangement with the International
Chamber of Commerce (ICC) from: lncoterms~ 2020 Wallchart
ICC Publication N°803E - ISBN 978-92-842-01S4-1© 2020 International Chamber of Commerce (ICC), Paris. Available on
2go.iccwbo.org .
=-
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
The terms, divided into two groups, are
A. Rules for any mode of transport (port or destination must be specified). These are used where
there is no maritime transport at all or where the maritime transport is used for only a part of
the carriage.
1. EXW: Ex Works
This term represents the minimum obligation for the seller. The seller pays for export
packing, marking, and labelling, and the buyer bears all costs and risks involved in taking the goods from the seller's premises. Delivery occurs when the goods are placed at
the disposal of the buyer at the seller's premises. This term is often used in domestic
trade and by novice international traders.
2. FCA: Free Carrier
The seller is responsible for export packing, marking, and labelling and for export clearance. The buyer then assumes all responsibility for shipping and insurance after export
clearance. FCA, the most commonly used Incoterm, is employed in an estimated 40
percent of all international trade transactions carried out since it is versatile and allows
the delivery of goods to different places such as the seller's address, a land transport
terminal, a port, or an airport.
3. CPT: Carriage Paid To
This term obliges the seller to pay packing, export clearance, and freight charges for
transporting the goods to the named destination.
4. CIP: Carriage and Insurance Paid To
This term can be used for any kind of shipment. It includes insurance as well as cost and
freight. The seller arranges for the goods to be delivered to the named port of destination and is responsible for all costs until the goods have been delivered to that named
port of destination.
5. DPP: Delivered at Place Paid
This term should be used when the goods are delivered at any place other than a transport terminal (for example, at the buyer's address), and the seller assumes the payment
of the customs duties.
6. DTP: Delivered at Terminal Paid
This term is used when the goods are delivered to a terminal (for example, a port, an
airport, or a transport centre) in the buyer's country, and the seller assumes the payment
of customs duties.
7. DAP: Delivered at Place
This term replaced DAF, DES, and DDU. Here, the seller bears all the costs (other
than import clearance costs) and risks involved in bringing the goods to the named
destination.
8. DPU: Delivered at Place Unloaded
This term can be used for any mode of transport and m ay be used where more than
one mode of transport is employed. The seller delivers when the goods are placed at
the buyer's disposal at a named place of destination where the goods can be unloaded.
The seller has the obligation to clear the goods for export but no obligation to clear the
goods for import, pay any import duty, or carry out any import customs formalities.
This term should be appropriate for container shipments.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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B. Terms for carriage by sea or inland waterway. These rules are for transport where the port of
delivery and the place to which the goods are carried are both ports.
9. FOB: Free On Board Vessel
This is one of the most commonly used and misused terms. It is frequently used to
describe inland movement of cargo, although it is designed to refer to ocean or inland
waterway transportation of goods. Delivery occurs when the seller releases the goods
to the buyer's forwarder, which is the point at which the buyer's responsibility for insurance and transport begins.
10. CFR: Cost and Freight
Here, the seller must get the goods from her door to the port of destination. The buyer is
responsible for insurance from the port of origin to the buyer's door, although the seller
is responsible for transportation.
11. CIF: Cost, Insurance, and Freight
This term is similar to CFR except that the seller insures the goods. CIF contracts, while
popular because the seller pays costs, insurance, and freight, may complicate verifying
freight and insurance charges and may result in a higher price to the buyer/importer.
Choice of Terms
Choosing the most appropriate Incoterm for the transaction requires the parties to consider
factors such as the following:
• the type of the goods (for example, containerized goods, manufactured goods, and bulk
goods or commodities);
• the means of transport (maritime, non-maritime, or multimodal);
• the conditions of payment and the documentary requirements imposed by these conditions; and
• the capacity of and the efficiency with which the seller or the buyer can perform the
obligation to deliver the contracted goods-in other words, who can perform the tasks
associated with the delivery more cheaply.
The parties involved will probably be guided by other criteria in their choice of trade terms
as well. These may include market factors, access to reliable transport and insurance, and government involvement.
Market Factors
In a highly competitive market, the seller may wish to offer prices to the buyer that are comparable to prices offered in the buyer's domestic market. Because additional costs and risks accepted
by the seller are always reflected in the price, the seller would undertake to deliver the goods
using terms such as "DPP." At a minimum, the seller would be obliged to arrange and pay for
transportation by using such terms as "CFR" or "CIE'
Access to Reliable Transport and Insurance
An exporter of large and regular volumes of goods will usually be in a position to obtain better
terms from carriers and insurers than the "occasional" importer can obtain. It m ay be comparatively simple to arrange the transport in the country of exportation, and the risk of something
going wrong is minimal. Under normal conditions of trade between countries with well-organized container ports and peaceful labour conditions, the risk of political disturbances, congestion in the ports, strikes, or interruptions of trade may be minimal. In such cases, the seller
may elect to assume the risk during transport and to choose a term in which its responsibilities
extend to the arrival of the goods at the destination (a "D" or "arrival" contract). The "D" terms
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
are becoming increasingly common. As more countries develop sophisticated infrastructures
and reliable and transparent rules, sellers have become more willing to undertake an obligation
in the country of the importer. On the other hand, a seller who thinks that such risks may be
difficult to ascertain and therefore difficult to include in the calculation of the price might prefer
to have the buyer assume the risks during international transport and use "F" terms.
Governmental Involvement
Directly or indirectly, government authorities may guide or even instruct parties in their country
to sell on CIF terms and to buy on FOB terms. There are two main reasons for this:
• Trade terms constitute an important tool for directing the flow of goods to national shipping lines or other national carriers.
• It is possible to save foreign currency. A seller who has undertaken to pay for carriage
and insurance will include these costs in his price for the goods and thereby obtain more
foreign currency. On the other hand, a buyer who has assumed these costs will pay less
for the goods and may sometimes be able to pay for transportation and insurance services
in domestic currency.
Once the appropriate trade term has been chosen, there are other matters that need to be
considered by the parties.
Price
Depending on the types of goods being sold, certain industry practices may dictate how the
price will be expressed in the contract. (The price might be expressed as per unit, average, bulk,
formula, or market price). The price will also reflect the Incoterm selected. For example, if the
seller is responsible for shipping and clearing customs and insurance, she can charge a premium,
and the price for the goods will likely be higher than if the buyer shared the responsibilities.
It is important to indicate what currency will be used to pay for the purchase. Export transactions are sensitive to fluctuations in the exchange rate of different currencies. A price agreed
with a seller on one day could rise or fall if the exchange rate changes. Often, sellers prefer to use
the American dollar, the euro, or the Chinese yen, as these are considered more stable currencies; however, this could make the deal less attractive to the buyer. The currency and price of the
goods agreed upon will depend on the bargaining power of each of the parties and the market
conditions at the time of the negotiation.
Date and Method of Payment
There are a number of different ways the purchase price can be paid. Over the years, standardized
methods of payment in international trade have been developed, the most common of which are
open account, the letter of credit (discussed in detail in Chapter 7), and cash in advance. Table 6.3
summarizes the risk, pros, cons, and recommended uses for each of these payment methods.
Open Account
The seller sends the goods together with all requisite documents to the buyer, and the goods are
shipped and delivered before payment is due. The payment will be due in 30, 60, or 90 days after
delivery. In using this payment method, the seller should be confident that the buyer will accept
shipment and pay at the agreed time and that the importing country is commercially and politically secure. This method of payment is often used between parties that have a long-standing
relationship and trust each other or in situations when the seller is in a very competitive market
and needs to make the payment terms more attractive to set himself apart from others.
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TABLE 6.3
Privat e Internat ional Law
Common Methods of Payment in International Trade
Risk
Open Account
Letter of Credit
Cash in Advance
Maximum risk to the seller
Risk is shared between exporter
and importer
Minimum risk to seller
Payment made after sh ipment
Payment before shipment
Minimum risk to buyer
Pros
Increases competit iveness fo r
seller
Helps establish and maintain a
successful t rade relationship
Cons
Significant exposure to t he risk of
non-payment
Add itional costs associated with
risk-mit igation measures
Recommended use
Low-risk trading relationships or
markets
Competitive markets to win
customers
Seller's product is not unique
Maximum risk to buyer
A variety of payment, financing,
and risk mitigation opt ions
available
Heavy administrative wo rk
Relatively expensive transaction
costs
Higher-risk situations or new or
less-established trade relationships w hen the exporter is satisfied wit h the creditworthiness of
buyer's bank
May lose customers t o competitors
over payment terms
Buyer wit h poor credit history
Buyer in high political/ commercial
risk country
Appro priat e for small export
transactions
Seller's product is unique or in
high demand
Letter of Credit
A letter of credit is one of the most secure methods available to international traders. A letter of
credit is a written commitment by a bank on behalf of the buyer that payment will be made to
the seller as long as the terms and conditions of the sales agreement have been met as verified
through the presentation of all required documents. The presentation of documents is considered a condition of the sales contract, and significant delay in presenting these documents may
entitle the buyer to rescind the contract. The buyer pays her bank a fee to provide this service. A
letter of credit also protects the buyer, since no payment obligation arises until the goods have
been shipped or delivered as promised.
Cash in Advance
As the term suggests, with this payment method the seller will receive the money in advance of
making the shipment to the buyer. Usually, the full or a significant partial payment will be transferred via credit card, bank or wire transfer, or escrow service before ownership of the goods is
transferred.
It is also wise to include a provision for price escalation based on increased prices of raw materials, components, or labour and a provision stating that any amounts owing to the seller shall
bear interest at a specified rate (which is usually tied to bank prime).
Documents
In many international sales contracts, the buyer's goal is often to obtain the right to resell the
goods while they are in transit; the original buyer never takes possession of the goods but sells
them to subsequent purchasers. For this reason, you will sometimes encounter the expression
"sale of documents;' which means the original buyer/importer never takes possession of the
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
goods but "sells" the appropriate documents so that the subsequent buyer can claim the goods.
The most common documents required for this are the following:
• the bill of lading or other transport document, depending on the type of transport used;
• the insurance policy or certificate of insurance, a document that is issued by the insurance
company or underwriter, is dated on or before the date of shipment, and is effective on
that date;
• the commercial invoice, the accounting document by which the seller charges the goods
to the buyer and which normally includes the date, the names and addresses of the buyer
and seller, the order number, the quantity and description of the goods and their weight,
the number of packages, the terms of delivery, and the payment and shipment details.
Invoices
Correct invoicing is essential in an international sales transaction. It affects not only the obligations between the buyer and seller but also, in most cases, financing arrangements made through
the parties' bankers and the duties paid to customs. Invoices must also contain detailed instructions to ensure that they conform to import and customs regulations in the buyer's country. The
prudent buyer will often request a pro forma or "sample" invoice in order to be sure the invoice
meets all import and customs regulations. The requirements of foreign countries vary greatly as
to what must be included in invoices.
In addition to the details mentioned above, invoices may include shipping particulars as well.
If this is the case, care must be taken that these details correspond with the actual shipping
documents.
The invoice price must be stated exactly in accordance with the sales contract. In some cases,
regulatory agencies in the buyer's country may require more detail, such as the cost price and
further charges specified.
In a transaction in which payment is to be made by letter of credit, the commercial invoice
is an essential document in the transaction. If the details in the invoice presented by the seller
do not correspond exactly to the details in the financing instructions, the bank will reject the
documents and refuse to pay the seller. In addition, the details in the invoice must correspond
exactly with the general description of the goods in the other documents tendered to the bank.
Request for Phony Invoices
It is not uncommon in international transactions for the buyer to ask the seller to provide an
invoice that does not accurately reflect the true bargain between the parties. This is often an
attempt by the buyer to circumvent import duty or currency-exchange-control regulations in
her own country, which are tied directly to the contract price. The wise seller will resist all such
requests because they are frequently based on an improper-if not illegal-motive. Under the
common law, a contract in which the parties have agreed to a false invoice may not be enforceable. It is the policy of common law courts to refuse to assist a party who has entered into a contract having an illegal purpose. For this reason, a seller who agrees to provide a false invoice for
the benefit of a buyer who then defaults on his obligations under the contract may find himself
without any legal recourse against the defaulting buyer.
Inspection Certificate
A certificate of inspection states only that goods have been inspected and found to be in good
condition. If more is expected of the inspection certificate, this must be clearly stated in the saleof-goods contract as well as in the contract with the inspection organization.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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BOX 6.1 O Sample Timelines-for-Delivery Clause
If the Seller fails to deliver the Goods at the agreed time, the Buyer shall fix to the Seller an additional period of time of(specify the length) for performance ofdelivery. If the Seller fails to deliver
the Goods at the expiration of the additional period, the Buyer may declare this contract avoided
in accordance with Article
of this contract.
Pre-shipment inspection is very important in international trade. If goods are inspected
before they are delivered to the carrier and are found not to conform to the contract, costly shipping charges and transnational legal disputes can be avoided.
Disputes as to whether any loss or damage occurred before or after shipping can also be
avoided, thereby clarifying responsibility between the seller and the insurer. Some countries go
so far as to insist on pre-shipment inspection of any imported goods entering their jurisdiction.
Others will not grant import licences unless an inspection organization has issued a clean preshipment certificate as well as a statement that the price charged is comparable to prices charged
by other suppliers for similar goods. A requirement such as this creates an opportunity for thirdparty interference in an agreement in which the parties have already agreed on the price of the
goods. For this reason, a seller should be reluctant to agree to a pre-shipment certificate verifying
price. If such a certificate is agreed to, the sales contract should provide clearly for the rights of
the parties in the event that the certificate verifying price is not obtained.
It is important to incorporate a provision within the sale-of-goods contract listing all of the
necessary documents that the seller and buyer will need to present to each other. A sample partial clause would read
The Seller shall make available to the Buyer (o r shall present to the bank specified by the Buyer) the
following documents: ...
Timelines for Delivery
As discussed above, the rules with respect to the timeliness of the delivery depend on the law
that will apply to the contract. To avoid any issues with the conflict of laws, it is best to include
a provision that clearly specifies if time is of the essence or not. An example of a timelines-fordelivery clause is given in Box 6.10.
Lack of Conformity of the Goods
Under the common law, a buyer who is dissatisfied with the goods must indicate her intention
to reject them within a reasonable time.
The goods are usually deemed to be delivered, and title to the goods is transferred, when the
bill of lading or other transport document is delivered to the buyer or the buyer's agent. When
property in the goods passes with the delivery of the bill of lading, it is a conditional property right only and is subject to the goods reverting to the seller if he does not conform to the
contract.
To avoid the issue of determining what right to inspect the buyer has, it is best to include a
provision regarding issues of conformity and inspection in the agreement. This would read, in
part, like the clause provided in Box 6.11.
Termination of Contract (aka Avoidance of Contract)
Parties to a contract can decide in what circumstances a breach of a particular contract provision will allow one or the other party to treat the contract as ended and those instances where
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual In struments and Sale of Goods Contracts
BOX 6.11
Sample Lack-of-Conformity Clause
The Buyer shall examine the Goods, or cause them to be examined within as short a period as
is practicable in the circumstances. The Buyer shall notify the Seller of any lack of conformity of
the Goods, specifying the nature of the lack of conformity, within _ days after the Buyer has
discovered or ought to have discovered the lack of conformity. In any event, the Buyer loses the
right to rely on a lack of conformity if she fails to notify the Seller thereof at the latest within a
period of one year from the date on which the Goods were actually handed over to the Buyer.
Where the Buyer has given due notice of non-conformity to the Seller, the Buyer may at his
option
(a) require the Seller to deliver any missing quantity of the Goods, without any additional expense to the Buyer;
(b) require the Seller to replace the Goods with conforming goods, without any additional expense to the Buyer;
(c) require the Seller to repair the Goods, without any additional expense to the Buyer;
(d) reduce the price in the same proportion as the value that the Goods actually delivered had at the time of the delivery bears to the value that conforming goods would have
had at that time; or
(e) declare this contract avoided in accordance with Article_ of this contract.
The Buyer shall in any event be entitled to claim damages.
the breach will require the aggrieved party to provide additional time to the other to rectify the
breach. For instance, the port of shipment and the port of destination are often considered very
significant; the breach of either of these terms will constitute a fundamental breach or breach of a
condition (depending on the law governing the contract) and entitle the buyer to refuse to accept
the documents tendered and terminate the agreement. An example of a clause that conforms
with CISG is provided in Box 6.12.
BOX 6.12
Sample Termination Clause
There is a breach of contract where a party fails to perform any of its obligations under this
contract, including defective, partial or late performance.
The Parties agree that the following is to be considered as a fundamental breach of contract:
(a) non-conforming Goods cannot be used or resold with reasonable effort; or
(b) non-conformity of the Goods resulted from added substances the addition of
which is illegal both in the country of the Seller and the Buyer; or
(c) the Goods are defective and cannot be repaired.
In a case of a breach of contract according to paragraph _of this Article, the aggrieved
party shall, by notice to the other party, fix an additional period of time of2 weeks for performance. During the additional period of time the aggrieved party may withhold performance of its
own reciprocal obligations and may claim damages, but may not declare this contract avoided.
If the other party fails to perform its obligation within the additional period of time, the aggrieved party may declare this contract avoided.
In case of a fundamental breach of contract according to paragraph _ of this Article, the
aggrieved party may declare this contract avoided without fixing an additional period of time
for performance to the other party.
aggrieved party: the partytoa contract whoalleges damages due to the other party's failure to fulfil Ia contractual obligation
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Force Majeure: Excuse for Non-Performance
It is not always easy for the parties to know if the contract has been frustrated. Because of this
uncertainty as to when or whether the parties can be released from their contractual obligations
when unforeseen circumstances interfere with the anticipated performance of the contract, it is
advisable for the parties to anticipate problems that may arise and make provision in the contract
for their respective rights and obligations in the event of interfering or catastrophic events. These
clauses are referred to as "force majeure" clauses.
The term "force majeure" has a specific meaning in law, referring to events beyond the control
of the parties. Catastrophic events such as war, blockades, fire, acts of governments, the failure
to obtain import or export licences, acts of God, terrorist acts, transportation failures, strikes,
or labour slowdowns are the kinds of events that a force majeure clause provides for and may
specifically spell out.
Drafting a force majeure clause is not a task for amateurs. It should be undertaken only by
experienced legal advisers who can draft a suitable clause for your particular needs. This clause
may then be used in your general form of contract, which does away with the need to reconsider the details for every new situation. Care should always be taken, however, when your firm
deviates from the usual type of transaction for which the clause was drafted. In such a case, the
force majeure clause should be carefully reviewed to ensure that it will cover any additional risks
presented by the new situation.
In practice, most force majeure clauses do not end a contract or excuse the parties entirely
from their rights or obligations under the contract but merely suspend their rights or obligations
for the duration of the force majeure. A popular and practical form of the force majeure clause
provides for two stages: the first is for a defined period-say, 30 days- during which the obligations under the contract are suspended, and the second stage entitles each party to cancel the
contract if the precipitating event continues after the initial period.
Because force majeure clauses need to be tailored to the specific needs of particular types of
trade, it is common for various trading associations to develop clauses suitable for the needs of
their particular trades. A sample extract of a clause is provided in Box 6.13.
Consider the hypothetical case described in Box 6.14, which illustrates the difficulty of determining whether there is a breach of contract or frustration of contract in the absence of a force
majeure clause.
BOX 6.13
Sample Force Majeure Clause
"Force majeure" means war, emergency, act of terrorism, accident, fire, earthquake, flood,
storm, industrial strike, or other impediment which the affected party proves was beyond its
control and that it could not reasonably be expected to have taken the impediment into account at the time of the conclusion of this contract or to have avoided or overcome it or its
consequences.
A party affected by force majeure shall not be deemed to be in breach of this contract, or otherwise be liable to the other, by reason of any delay in performance, or the
non-performance, of any of its obligations under this contract to the extent that the delay
or non-performance is due to any force majeure of which it has notified the other party in
accordance with Article _ . The time for performance of that obligation shall be extended
accordingly, subject to Article _ .
force majeure: an event that eithercould not be anticipated or which, if anticipated, could not beovercome; aforce majeure clause
inacontract protects the parties from liability in the event of such an occurrence
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6
BOX 6.14
Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
Export Plans Foiled by Failure to Obtain Import Licence
A Sri Lankan company, Chalpal Textiles, made a contract with a British Columbian manufacturer of
textiles, BC Textiles Ltd, to buy a large number of used textile-finishing machines. Under the terms
of the contract, Chai pal agreed to use its best efforts to obtain the necessary import licence for the
equipment. One month after the contract was made but the week before Chai pal filed its application
for the import licence, the Sri Lankan government decided to limit import licences for used equipment
in an attempt to encourage its nationals to buy only "state of the art" equipment. Chalpal notified BC
Textiles of the difficulty and advised it that, although it had made every reasonable attempt to obtain
an import licence, the freeze on licences for used equipment appeared to be in effect for the foreseeable future.
BC Textiles wishes to sue for breach of contract, and Chai pal claims frustration of contract. Assuming that BC law applies, what will be the outcome? Would the outcome be any different under the
CISG?
A force majeure clause that itemized failure to obtain the necessary import licence would have
settled the issue. These facts raise another potential difficulty between the parties: the issue of the
level of effort one party might reasonably expect of the other in meeting an obligation.
Dispute Settlement and Choice of Law
It is important for the parties to anticipate any conflicts that may arise under a contract and discuss how they will settle them at the time the contract is negotiated. This is when the goodwill
of the parties is at its height, and anticipating and discu ssing probable issues can go a long way
to addressing them before they become a problem . It is also of utmost impo rtance to include a
choice-of-law clause and an arbitration-of-disputes clause in the contract.
Parties would be wise to include a provision in the agreement setting out whether the m atter
will be litigated in a court or resolved through arbitration. Additionally, parties need to determine where the matter will be heard, which law will apply, and whether the decision of the
adjudicator will be final. This is important in domestic agreements and even more so in international agreements.
Arbitration tends to be the most popular method for resolving disputes internationally, as
it is private and normally quicker than the court process. Alternative dispute resolution will be
discussed further in Chapter 10; however, Box 6.15 provides an example of choice-of-law and
dispute-resolution clauses, confirming parties' choice to apply the CISG to the contract and
selecting the venue for the arbitration proceedings.
BOX 6.15
Sample Dispute Settlement Clause
Questions relating to this contract that are not settled by the provisions contained in the
contract itself shall be governed by the United Nations Convention on Contracts for the International Sale of Goods (Vienna Sales Convention of 1980, hereafter referred to as "CISG"). Questions not covered by the CISG shall be governed by applicable national law of the country where
the Seller has her place of business.
Any dispute, controversy or claim arising out of or relating to this contract, including its conclusion, interpretation, performance, breach, termination or invalidity, shall be finally settled
under the rules of the International Centre for Settlement of Investment Disputes by a sole arbitrator appointed in accordance with the said rules. The place of arbitration shall be Geneva,
Switzerland. The language of the arbitration shall be English.
choice-of-law clause: a provision inacontract in which the parties specify that any dispute arising under the contract shall be
determined by the law of aspecific jurisdiction (country or subnational state or province)
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Best-Efforts Clauses
It is not uncommon in international contracts that one party must take on an obligation to
obtain an approval from a government official, a specific import permit, or financing on specific terms or from a specific body. Difficulties may arise when the parties attempt to describe
this obligation in the contract. One method is to enumerate in detail the specific acts to be
performed and provide benchmarks, deadlines, or targets for performance. A second, very common, method is to state that the party obliged will make "all reasonable efforts" to achieve this
goal. Another method commonly used is to state that the party obliged will use its "best efforts"
to satisfy the objective. While the courts have been reasonably consistent in interpreting the
phrase "reasonable efforts" as those efforts that a reasonable person would make in the circumstances, judicial interpretation of "best efforts" has been less satisfactory. The courts generally
impose a higher standard of performance for a best-efforts clause and have gone so far as to require the party obliged to exert itself "to the extent of its total capabilities:' Another court found
the phrase to mean that the party must "leave no stone unturned:' Such interpretation may mean
that financial difficulties or economic hardships are not a sufficient excuse. For this reason, it is
unwise to agree to a best-efforts clause. It is wiser either to accept an obligation to expend reasonable efforts or to spell out in detail the actions required and their expected completion dates.
CRITICAL ANALYSIS: Business Law
Sales Manager Assumes That Ontario's Sale of Goods Act Applies to "His" Contracts
An Ontario firm, Fanview, has developed a camera stabilizer
that enables an operator to take excellent moving pictures
of sports and other action events. Fanview manufactures and
services the equipment and also provides a consu lting service,
sending advisers and trainers to clients to help them obtain
sharp pictures in chal lenging situations, whether they are using Fanview's equipment or that of a competitor. Fanview has
entered into t he fol lowing four major contracts this year:
1. a contract to deliver one unit to a film company in New
York state;
2. a contract to deliver one unit to a ski-instruction school
in British Columbia;
3. a contract to deliver two units to the British Institute of
Sporting Films in London, England; and
4. a contract to send two consultants to help the French
Broadcasting Network film skiing events in Davos, Switzerland, in January of next year.
The individual who arranged for these contracts is the sales
manager of the company. He is focused on selling the company's product and has no time for expensive lawyers and their
interference in his dealings, so the contracts were simple ones.
They con tained all the essential terms, such as price, packing
and shipping arrangements, dates for delivery, insurance, and
payment obligations. There was no thought given to settlement of disputes or what law would apply to the contracts.
The sales manager assumed that Ontario law would apply because all the contracts were signed in Toronto on a standard
form prepared by Fanview. He is fami lia r with the provisions of
the Sale of Goods Act of Ontario because he has been in sales
for many years and has taken a short course on the sale-ofgoods law in Ontario.
Critical Analysis Questions
Problems have arisen under each of these contracts, and Fanview has come to you seeking legal advice.
1. Is the sales manager correct in his assumption that
the Sale of Goods Act of Ontario applies to each of these
contracts? Why or why not?
2. Explain which laws will likely apply to each of the
contracts.
3. How could the sa les manager have ensured that the Sale
of Goods Act of Ontario applied to each of the contracts?
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6
Negotiation of International Contracts (Part 1): Pre-Contractual In struments and Sale of Goods Contracts
197
CRITICAL ANALYSIS: Business Law and Ethics
South Americans in Breach of "Fishy" Contract
Winnipeg Exports Ltd negotiated a contract for the sale of frozen goldeye fillets to a South American company located in
a country with strict currency-exchange-control regulations.
The parties agreed that the laws of Manitoba would apply to
the contract. At the request of the South American buyer, the
value of the fish was doubled for the purpose of the written
agreement, and an oral arrangement was made between the
parties in which Winnipeg Exports would deposit half the total
price stated in the contract to a Canadian bank account in the
name of an agent for the South American buyer. This arrangement enabled the South American buyer to obtain permission
for more hard currency to leave the country, contrary to the
regulations of that country.
Winnipeg Exports exported the fish according to the contract and invoiced the South American company as had been
agreed. The South American company refused to pay, although
the fish had been received in good condition. Wi nnipeg Exports sued the South American company, which gave evidence
as to all the arrangements that the parties had made.
Critical Analysis Questions
1. Is the Manitoba court likely to find in favour of Winnipeg
Exports?
2. How could the Manitoba company have avoided t his
issue?
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
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CHAPTER SUMMARY
In this chapter, we discussed:
- rules on battle of the forms, and
- issues of missing terms and oral variations of written
Pre-contractual obligations.
contracts.
• Remedies for breach of contract under common law, the
UCC, and the CISG are generally similar but approach
the following situations in slightly different ways:
- avoidance of the contract, and
• Pre-contractual obligations differ among legal regimes
of different countries.
Business people should be aware of any duties arising
from negotiations in different jurisdictions.
The basic principles of sale-of-goods law.
• The Canadian sales law is a subset of general common
law of contract and is statute-based.
The importance of the Convention on the International
Sale of Goods (CISG).
• The CISG provides a uniform law of sales in international
goods transactions.
It applies automatically to all contracts for the sale of
goods between places of business in different contract-
- specific performance and frustration of the contract.
How to draft a basic international sale-of-goods contract.
• It is also important to consider the common trouble
spots for international contracts, which include invoices,
packing, timelines for delivery, acceptance and rejection
of goods, implied warranties, and payment.
• Clauses that make provision for the parties' rights and
obligations when and if interfering or catastrophic
events occur are called "force majeure" clauses.
ing states.
The differences between the Convention on the International Sales of Goods, Canadian sale-of-goods law, and
the Uniform Commercial Code:
The CISG rules differ from those of the common law and
the UCC in the following areas.
- requirement of writing,
- requirements relating to offer and acceptance,
REVIEW QUESTIONS
1. Is there an implied duty of good faith to continue to
negotiate in Canada?
5. Describe the difference between the CISG and the
common law with respect to delivery on time.
2. Which organization has led the w ay in developing an
acceptable set of trade terms for use in international
trade? Where are these terms found and how do
traders make use of them?
6. If a vendor delivers goods that do not conform with the
agreement, what must the buyer do under the CISG?
3. In what circumstances does the CISG apply to a saleof-goods transaction?
4 . What is the importance of knowing how the
Canadian domestic sale-of-goods law, the UCC, and
the CISG differ in the following areas: requirement of
writing, what constitutes an offer, when an offer can
be revoked, requirements for a valid acceptance, a
battle of the forms, and m issing terms?
7. Do the common law, the UCC, and the CISG differ in
their approaches to frustration of contract?
8. Why should a force majeure clause always be
included in an international sales contract?
9. How would the question of whether a contract has
been formed be d etermined under the CISG and the
common law when the purchase order and the
confirmation form have different terms?
10. What do lncoterms do?
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 6 Negotiation of International Contracts (Part 1): Pre-Contractual Instruments and Sale of Goods Contracts
199
NOTES
1. RSNL 1990, c S-6.
2. 19 ILM 668 (1980), on line (pdf): United Nations
<https://www.uncitral .org/ pdf/ english/ texts/ sales/
cisgNl 056997-CISG-e-book.pdf>.
5. From United States Convention on Contracts for the
International Sale of Goods, by CISG, © 1980 United
Nations. Reprinted with the permission of the United
Nations.
6. 2018 BCSC 555.
3. RSNL 1990, c 1-16.
4. Legal Information Institute, "Firm Offers" (last visited
11 October 2019), online: Cornell Law School <https://
www.law.cornell.edu/ ucc/ 2/ 2-205>.
7. RSBC 1996, c 236.
8. Mineral Park Land Co v Howard, 172 Cal 289, 156 P 458
(1916).
FURTHER READING
Fabio Bortolotti, Drafting and Negotiating International
Commercial Contracts: A Practical Guide (Paris:
International Chamber of Commerce, 2017).
Joseph Lookofsky, Understanding the CISG: a Compact
Guide to the 1980 United Nations Convention on
Contracts for the International Sale of Goods
(Copenhagen: Djof Publishing, 2017).
Micha la Meiselles, International Commercial Agreements:
An Edinburgh Law Guide (Edinburgh, UK: Edinburgh
University Press, 2013).
WEBSITES
Pace Law School (an excellent website for up-to-date
information on the CISG): <http://www.cisg.law.pace.
edu>
International Chamber of Commerce (provides general
information on lncoterms and drafts and sells the
official text and explanatory notes): <http://www.
iccwbo.org/incoterms/ id3045/ index.html>
lncoterms Explained: <https://www.incotermsexplained
.com/ the-incoterms-rules/the-logic-of-the-rules/>
CISG Canada: <http://cisg.ca/ index.html>
LIST OF CASES
Mineral Park Land Co v Howard, 172 Cal 289, 156 P 458
(1916).
Pattison Outdoor Adver tising Limited Partnership v Zon LED
LCC, 2018 BCSC 555.
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
CHAPTER 7
Negotiation of International
Contracts (Part 2): Contract
Challenges and Risk Management
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand:
• how a letter of credit {L/C) is structured, how it works, and why it is
significant for international trade
• international transportation considerations and the significance of the
documentation that is provided by shippers and carriers
• insurance arrangements in international transactions, insurable interests,
marine insurance, and subrogation
• tort principles and special rules relating to product liability in Canada and
elsewhere
• legal rules for the privacy and protection of electronic data
• the implications of competition or antitrust law for contract negotiations
• the impact of e-commerce on business transactions
Introduction 201
Letter of Credit {L/C) 202
International Transportation Considerations 215
International Insurance Considerations 219
Tort Principles and Special RulesRelating to Product Liability 220
Privacy Law 223
CompetitionLaw: Implications for Contract Negotiations 226
E-commerce Considerations 227
Chapter Summary 231
Review Questions 231
Notes 232
Further Reading 233
Websites 233
List of Cases 233
Introduction
In Chapter 6 we examined some of the fundamental legal underpinnings of an international
contract, particularly a contract for the international sale of goods. In this chapter, we turn
our attention to the important ancillary contracts-that is, additional or supporting contracts
between one of the main contracting parties and a third party that are essential to these corn mercial transactions.
Given the rule of privity of contract, it is important to incorporate the parties' respective
obligations in these ancillary contracts into the primary contract as a condition so that if a party
fails to make these separate contracts as promised, the innocent party is relieved of its obligation
to perform under the primary contract and the failure is actionable as a breach of the contract
between the two principal parties. These ancillary contracts are most often in the areas of financing or credit arrangements, transportation, and insurance.
We will then consider managing risk and liability in international contracting generally
by reviewing the principles of tort law and the elements of a tort action. It is this area of law,
together with rapidly increasing national legislation in many countries, that imposes obligations
on the parties well beyond their control. We will consider three specific areas of legislation that
create obligations to society: product liability, privacy, and antitrust.
We will conclude the chapter by reviewing the very important area of e-contracts.
201
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202
Part II
Private International Law
Letter of Credit
Once the parties to a negotiation for an export of goods or services have settled the description
of the goods or services and the delivery or performance terms, the most important matter will
be the payment arrangements. The payment arrangement most often agreed upon by Canadian
parties doing business in countries other than the United States is the letter of credit (L/ C) , or
documentary credit . As mentioned in Chapter 6, an L/C is a written contract by the buyer's
bank to pay the seller upon presentation of specific, conforming documents. The risk of nonpayment is reduced because the transaction relies on the trustworthiness of the banks.
Understanding the Letter-of-Credit Arrangements
Box 7. 1 presents a typical international sales transaction in which an L/C will be used.
BOX 7 .1
Canadian Importer Makes Contract with Taiwanese Firm
A representative of Canadian Import Ltd ofToronto attends a trade show and sees an attractive line of
stainless-steel cookware at reasonable prices. He negotiates with the representative of the manufacturer, TI E Steel ofTaipei, Taiwan, w ith a view to importing t he products to Canada in time for autumn
when, according to market research, Canadians are most interested in such items. The two representat ives agree on the purchase by the Canadian company of 400 sets of stainless steel pots at US$80 per
set. They also agree on a date by which t he pots must be shipped CIF (cost, insurance, and freight) to
Toronto. These parties have had no prior dealings with each other.
Let us consider the expectations of each party to this transaction. The Taiwanese exporter will
want payment as quickly as possible and will not be willing to wait until the pots have arrived in
Canada and been accepted by the Canadian importer. The most favourable term for the exporter
would be payment before shipment. However, such a provision is not common and is only agreed to
by an importer in special circumstances, such as an order that requires some retooling on the part of
the exporter. A situation that is less satisfactory from the exporter's point of view, but most common
and thus acceptable, is assurance of payment as soon as the goods are shipped. The exporter's major
concern is to protect itself in a situation where valuable goods are being shipped far away, out of
reach of the exporter's legal system, and the exporter has not been paid for the goods. The exporter
will not be prepared to relinquish the title documents for the goods until it has been paid and will
want to receive payment at its own bank or at least through another bank in Taiwan.
The Canadian importer, on the other hand, will wish to postpone payment as long as possible- at a minimum, until the title documents are delivered to the importer or the importer's
agent. Canadian Import Ltd wants some assurance that the goods will be shipped in time and will
not want to pay until it is certain that the Taiwanese manufacturer has performed its obligations
fully. Thus, for the importer, payment after the goods have been received is the most satisfactory
arrangement. Payment at the time of shipment is a less satisfactory situation, and payment in
advance is even less satisfactory. Each of the parties may need advice and assistance in dealing
with a complex international transaction in which specific procedures must be followed to ensure
prompt payment for the exporter and a managed cash flow for the importer/buyer.
letter of credit (UC): see documentary credit
documentary credit: amethodof payment in whichabank (the issuing bank), actingat therequest andon the instructions of a
customer (the applicant) or on its own behalf, agrees to make payment to, ortotheorder of, athird pa rty (the beneficiary) or authorizes another bank toeffect such payment against stipulated documents, provided that thetermsand conditionsof thedocumentary
credit arecomplied with
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
In most international sales transactions, the services of banks in the importer's and exporter's
country will be necessary. For the seller, the L/C issued by the bank represents a binding contract
to pay, as long as the terms of the L/C are complied with. For the buyer, the L/C reduces the risk
of paying in advance or paying at all if the documents presented by the seller do not comply with
the terms of the L/C. Both parties reduce the risk of the transaction by using the L/C. When an
L/C is irrevocable, it cannot be modified by either the seller or the buyer. Most international
sales transactions will use an irrevocable L/C, as a revocable L/C can be unilaterally modified
and thus create a significant risk of non-payment for the seller.
The banks charge fees for issuing the L/C and for processing the payments. Normally, the
buyer is responsible for paying the fees, but this needs to be negotiated in advance and included
in the main sale of goods contract. The fees are normally based on a percentage of the amount of
payment. For smaller transactions, proceeding by way of L/C may be too expensive; other payment methods, like open account or cash in advance, would need to be negotiated.
There are usually four parties involved in an L/C transaction. Each have different financial
names and may play more than one role in the transaction. The parties are
•
•
•
•
the buyer/importer/account party;
the buyer's bank/issuing bank;
the seller/exporter/beneficiary; and
the seller's bank/corresponding bank, also known as the nominated or notifying bank,
which can perform the role of an advising or confirming bank.
The buyer requests its bank to open (issue) an L/C on the basis of the negotiated sale of goods
contract. The issuing bank provides the L/C to effect payment up to a specified amount, against
stipulated documents, and within a prescribed time limit. The buyer determines which documents will be required based on the sale of goods contract. The issuing bank sends the L/C to
the corresponding bank, which is usually located in the buyer's country. The corresponding bank
notifies the seller of receipt of the L/C and clarifies which documents the seller must provide to
receive payment. Then, the seller provides the required documents to the corresponding bank
and either gets paid by the confirming bank or waits for payment from the issuing bank.
The corresponding bank may be an advising or confirming bank, depending on the wording
of the L/C. A corresponding bank acting as a confirming bank undertakes a direct obligation
to pay the seller on the proper presentation of documents under the L/C. If the corresponding
bank is acting as a confirming bank, the seller minimizes the risk regarding default or creditworthiness of the issuing bank (the buyer's bank). After paying the seller, the confirming bank
will seek reimbursement from the issuing bank, pursuant to the terms of the agreement between
the two banks. An advising bank notifies the seller of L/C receipt from the issuing bank and
undertakes only to examine and forward the documents to the issuing bank. An advising bank
is not obligated or authorized to pay the seller, and the seller will have to seek payment from
the issuing bank. If the issuing bank fails to pay, the seller will have to sue the issuing bank in a
foreign jurisdiction. This can be avoided by ensuring a confirming bank is used instead.
corresponding bank: this is the bank that hasagreed with the foreign bank issuing an L/C to exa minethedocuments under
the L/C
confirming bank: thebank inadocumentary credit transaction (usually located in the exporter's country) that undertakes adirect
obligation to pay upon the proper presentation of documents under the L/C and isthen entitledto reimbursement from the foreign
bankthat has issued the L/C on behalf of the importer
advising bank: the bank ina documentary credit transaction (usually located in the exporter's cou ntry) that agrees to examine
andforward the required documents presented by theexporter to the foreign bankthat hasissued theL/C onbehalf of the importer
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II Private International Law
FIGURE 7 .1
Mechanics of the Lett er-of-Credit Transaction
3. Payment
Exporter/Seller
2. Documents
Corresponding or
nominated bank
(confirming)
4. Documents
5. Payment
6. Documents
Issuing bank
Importer/Buyer
7. Payment
Several factors-convenience, confidence in the banking and letter-of-credit laws and the
practices of financial institutions in the seller's own country, and an unwillingness to take the
credit risk on unfamiliar foreign financial institutions- motivate the exporter/seller to request
that the L/C name a familiar institution in its own country as the corresponding bank. Figure 7.1
illustrates the various parties and the mechanics of the letter-of-credit transaction.
It will now be clear to the reader that a letter-of-credit arrangement is built on separate contractual undertakings by different parties:
• the contract between the importer/buyer and the exporter/seller whereby the importer
agrees to obtain the L/C for the benefit of the exporter;
• the contract between the importer and its bank whereby the bank agrees to provide the
L/C on the importer's behalf; and
• the undertaking by the importer's bank (the issuing bank) to pay a specified sum when the
specified documents are presented to the importer's bank or its agent, which is usually
the corresponding bank.
Negotiation of the Letter-of-Credit Arrangements
The terms of the credit financing to be obtained by the buyer are very important for the seller.
For this reason, the requirements for the L/C must be spelled out and made a condition of the
primary sales contract. Making the terms of the credit financing a condition in the sales contract
means that if any of the provisions of the credit financing are not met, the seller is not required
to proceed with the contract.
Important Provisions in an L/C for the Sale of Goods
Important provisions that must be anticipated and agreed on by the parties include the following:
• The terms of payment must be specified. Will payment be immediate on presentation of
the documents or will it be deferred for, say, 60 days or 90 days? Other possibilities are
acceptance or negotiation by the importer's bank.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
• The party on whom drafts are to be drawn must be specified. Will this be the issuing bank
or the importer or the confirming bank?
• The goods must be described, and the information to be included in the commercial
invoice must be anticipated and settled.
• Details of freight costs for goods must be settled. Will freight be prepaid?
• The documentation required must be settled. In addition to the usual transport document, insurance document, and commercial invoice, many countries will require certificates of origin or inspection certificates. Packing lists are frequently required.
• Embarkation and destination points for the goods must be settled. Will the parties make
any provision for variation in these points in the event of strikes, plant closures, unforeseen events, etc.?
• It must be decided whether transshipment is permitted or prohibited. The last permissible date for shipment of the goods must be specified. This clause is very important for
the protection of the importer, who will be relying on the goods arriving within a certain
period of time.
• The L/C must state whether partial shipments are permitted.
• The L/C must specify the period of time within which the documents must be presented
for payment, acceptance, or negotiation.
• The L/C must state whether it is transferable. This may be very important to the parties.
• The date and place and expiry date of the credit must be specified.
• The method by which the L/C will be "advised" or communicated (mail or fax) must be
specified.
Once the parties have discussed and agreed on these matters, they are in a position to include
terms in the sales agreement providing for the requisite L/C. The buyer will then arrange with
its bank to issue an L/C conforming to the parties' agreement, and the seller will prepare the necessary documents to comply with the L/C and the terms of the sales agreement.
The st ipulated documents in the L/C and the sales agreement are likely to be the commercial invoice, a certificate of origin, an insurance policy or certificate, and a trans port document. The presentation of these documents often occurs well in advance of the
importer receiving the goods in the country of destination. Once the importer receives the
documents, it can then transfer title in the goods to a third party, even in advance of receiving the goods.
The advantage of this system is that it provides a form of security for each of the parties
involved, ensuring that the goods will be shipped by a certain date and that the exporter will be
paid so long as the terms and conditions of the L/C have been fulfilled. It is important to realize,
however, that payment is based on documents only and not on the receipt of the merchandise or
services that are the subject of the sales or service contract. It is, therefore, of utmost importance
that the importer or buyer of services be sure of the reputation and reliability of the provider of
the goods or services. Figure 7.2 provides a sample L/C and is based on the transaction described
in Box. 7.1 between a Canadian buyer and a Taipei seller.
International Rules for Letters of Credit
The set of internationally agreed-upon rules that govern letter-of-credit transactions is the Uniform Customs and Practice for Documentary Credits (UCP). These rules were adopted by the
International Chamber of Commerce in 1933 and are used by banks in most countries. The rules
have been revised from time to time to reflect changing commercial practices. The current set
of rules is the UCP 600, which came into force in 2007.1 The Supplement for Electronic Presentation, or the eUCP, covers the electronic provision of documents and complements the UCP.
All L/Cs are irrevocable under current UCP rules, so the commitment of the issuing bank is
a binding one and, provided that the correct documents are tendered before the expiry of the
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
Private International Law
FIGURE 7 .2
A Sample Letter of Credit
IRREVOCABLE LETTER OF CREDIT
Prestigious Bank ofToronto, 12345 111 Ave, Toronto, ON, Canada
SWIFT No.: Code PABCCTCX 1234XX
Date of Issue: April 15, 2020
Expiry Date: October 15, 2020
Cred it Number: 12345XYZ
Amount: *****USO 32,000.00****
Letter of Credit No. 02502-1087236
Applicant: Canadian Import Ltd
986 Bay Street, NW
Burlington, ON, Canada
Beneficiary: TIE Steel ofTaipei
456 Linshen Road, Zhongshan District, Taipei, Ta iwan
We, Prestigious Bank ofToronto, hereby authorize you to draw on us in respect of irrevocable letter of credit No.
02502-1087236 ("Credit") for the account of Canadian Import Ltd ("Applicant") up to an aggregate amount of
thirty-two thousand dollars [US$32,000] available by your draft at sight. This Credit is issued in connection with
the Sale of Goods Contract between TIE Steel ofTaipei ("Beneficiary") and the Applicant dated 11 th of March 2020.
Credit is available by negotiation of your draft in duplicate at sight for 100 percent of invoice value drawn on us
accompanied by the following documents:
1. Signed commercial invoice in 1 original and 4 copies
2. Full set of 4 clean, Multimodal (Combined) Transport Bills of Lading issued to the order of the Prestigious
Bank ofToronto, 12345 111 Ave, Toronto, Ontario, Canada, marked "Freight Collect" and "Notify Applicant ''.
3. Packing list in 3 copies.
Evidencing shipment of: 400 sets of stainless steel pots, each set including
1 x 1.4 L (1.5 qt) sauce pan with lid
1 x 3.7 L (4.0 qt) chef's casserole with lid
1 x 4.2 L (4.5 qt) saute pan with helper handle w ith lid
1 x 7.5 L (8.0 qt) stockpot with lid
1 x 21.5 cm (8.5 in) skillet
and as per proforma INVOICE NO. 1234
For Toronto, Canada
Shipment from: Taipei, Taiwan
Latest Shipping date: May 12, 2020
Partial Sh ipments: Not Allowed
Transshipment: Allowed
To: Toronto, Canada
4. Certificate of Origin stating that goods are ofTaiwanese origin issued by a chamber of commerce showing
the name and add ress of the manufacturers.
5. Insurance policy in duplicate issued to the order of issuing bank for full CIF value plus 10 percent covering
all risks from warehouse to warehouse; also, insurance to certify that coverage is not subject to a deductible.
All required documents including drafts - if any- must indicate our Credit number.
All banking charges outside Toronto, Canada, are for Beneficiary's account. Documents must be presented
within 15 days from bill of lading date.
Please examine this instrument carefully. If you are unable to comply with the terms or conditions, please communicate with the Applicant and arrange for an amendment.
This Credit shall be governed by the Internationa l Chamber of Commerce Uniform Customs and Practice for
Documentary Credit s, ICC Publication No. 600.
Authorized Signature: jos.qin SV\.\.~tn
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
L/C, the bank must pay the amount agreed upon. Even if the importer/buyer gives subsequent
instructions to the bank not to pay the exporter/seller, the bank will not accept a revocation of
the L/C.
Principles of Letter-of-Credit Transactions
Letter-of-credit transactions have two fundamental characteristics:
1. the "autonomy" of the credit, and
2. the doctrine of strict compliance.
It is advisable that any business person using an L/C in an international transaction fully
understand these concepts before negotiating the main or principal contract for the sale of goods
or services.
The Autonomy of the Letter of Credit
The autonomy of the L/C provides that the credit is separate from and independent of the underlying contract of sale or other transaction. This means that payment for goods or services is
made on the basis of satisfactory document presentation and not on the basis of delivery of
goods or services that conform to the contract. This principle is enshrined in the UCP, which has
become the accepted code for international bankers. The rules of the UCP have been confirmed
by judicial decisions in both common law and civil law jurisdictions, with the result that it has
become a uniform law of international trade financing.
Article 5 of the UCP 600 states that "in credit operations all parties concerned deal with
documents, and not with goods, services and/or other performances to which the documents
may relate:'
Article 14 of the UCP 600 provides that the banks should make payment based "on the documents alone" 2 and that the banks are not to look at extraneous material when determining
compliance. Also, the fact that under the UCP the banks have a maximum of five banking days
following the date of presentation to determine compliance emphasizes the narrow range of the
banks' examination process.
Because of this autonomy of credit the buyer should be aware of the risk that it may be
obliged to pay in full for shoddy goods or unsatisfactory services under an L/C if proper procedures are not established, independent of the L/C, to protect its interests. This risk exists because
it is possible for a seller to comply with the terms of an L/C by producing documents that apparently conform to the requirements while at the same time breaching the contract for the sale of
goods or services. The best protection is knowledge of the absolute reliability of the seller; however, this is a luxury enjoyed by few international traders. Some protection may be obtained by
pre-shipment inspection of goods, seller's warranties, and protective clauses in the sales contract,
but the latter may be expensive to enforce and lack the simplicity of merely stopping payment for
unsatisfactory goods or services. The risk inherent in the L/C should always be borne in mind
when negotiating the principal sales contract.
The Doctrine of Strict Compliance
Article 14(a) of the UCP provides that the "issuing bank must examine a presentation to determine, on the basis of the documents alone, whether or not the documents appear on their face
to constitute a complying presentation:'3
Compliance of the stipulated documents on their face with the terms and conditions of the
L/C will be determined by international standard banking practice as reflected in the UCP. Documents that appear on their face to be inconsistent with one another will be considered as not
appearing on their face to be in compliance with the terms and conditions of the L/C.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
BOX 7 .2
Private International Law
Case Highlight
Guatemalans Lose Out in Contract with Chicago Con Artist
Case Name and Court
lnstituto Nacional de Comercia lication Agricola (lndeca) v
Continental Illinois National Bank (US Court of Appeals for the
Seventh Circuit, 1988)4
Facts
lndeca, an agency that purchased food for Guatemala, made
a contract w ith Rumex for 6,000 tons of b lack beans for
US$5 m illion. Banco de Guatemala was l ndeca's bank and
issued an L/ C in favour of Rumex. The deal had been put together by a Chicago commodities broker, Deborah Bell, and
her attorney, and they arranged for the credit to be confirmed
by the Continental Illinois National Bank (Continental Bank)
in Chicago. The L/ C provided that payment would be made
upon receipt of documents showing that the beans had been
loaded on board a ship in Hong Kong.
Documentation was presented by Rumex, the exporter, to
the Continental Bank and was initially rejected because it did
not conform to t he requirements of the L/C. The documents
were revised and resubmitted with t he result that the Cont inental Bank paid Rumex on the UC and sent the documents to
Banco de Guatemala, the issuing bank, in order to be reimbursed. Banco de Guatemala duly reimbursed t he Continental
Bank under the UCP rules. It then looked to its client, lndeca,
for reimbursement under the terms of t he UC. The documents
were forged, however, and lndeca never received the black
beans.
Although the appropriate party for lndeca to sue was Rumex
and/or its principal, Ms Bell, this was not practical because she
had been convicted of wire fraud and of submitting false documents to a bank and was in no position to pay a judgment. lndeca t herefore decided to sue t he Continental Bank in the United
Stat es on the basis of negligence, alleging that Continental
should have known of the fraud and protected lndeca from loss,
even t hough Continental had no contractual relationship wit h lndeca. The lower court absolved Continental of any actual knowledge of the fraud and found that Continental had not acted
recklessly or carelessly. The plaint iff, lndeca, then appealed, alleging that Continental had a duty to lndeca to act more carefully.
Issue
Can the confirming bank be liable in tort (negligence) to the
importer/ buyer for payment on the UC, which on its face conformed to the requirements?
Decisio n
The decision of the appeal court in this case was to confirm the
lower court's finding that the confirming bank owes its duty of
care in inspecting the documents solely to the bank that issues
the UC, and not to t he buyer or importer.
Analysis
lndeca was out of luck; it had spent its money and received
neither beans nor restitution.
The bank will not assume any responsibility for knowledge of usages or practices of any particular trade. The doctrine of strict compliance requires that documents tendered must be in
strict conformity with the terms of the credit or the bank will refuse to accept them, even if the
goods or services conform to all the parties' requirements.
The meaning and application of the words "strict compliance" have troubled banking institutions and courts in several countries for many years. The question is, how strictly must the
documents conform to the terms of the credit? The UCP (article 14) provides that data in a
document must not conflict with data in that document, other stipulated documents, or the L/C.
The difficulty is that no absolute uniform banking practices actually exist. On a practical note,
issuing banks may well attempt to limit their liability to customers by including in their standard
form agreements wording such as the following:
The issuer is obliged to pay the beneficiary only if the documents presented strictly comply with the
credit, but the applicant is obliged to reimburse the issuer when the issuer has paid against documents that only substantially comply, or do not comply at all.
Common discrepancies and errors in documents that may lead to rejection by the bank
include the following:
• an unclean bill oflading;
• a shipment made between ports different from those named in the L/C;
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
•
•
•
•
•
•
•
•
•
•
•
incorrect insurance documents;
insurance coverage expressed in different currency;
underinsurance;
insurance not effective from the date-of-transport document;
documents inconsistent with each other;
description of the goods on the invoice differing from that on the L/C;
differing amounts on invoice and bill of exchange;
absence of documents called for in the L/C;
absence of required signatures on documents;
credit amount exceeded; and
credit expired.
In many cases, these discrepancies and errors can be corrected, but they may create an opportunity for the paying party to avoid the contract. In a situation where prices have fallen during
the period between the making of the sales contract and the presentation of the documents, the
importer may not be prepared to provide the written waiver that the bank will require.
How Canadian Courts Apply the Rules
A landmark Canadian case in which the Supreme Court of Canada dealt with the principle of
strict compliance is the Angelica case, decided in 1987. Two issues in this case are relevant to our
discussion. The first issue is what constitutes documentary compliance, and the second issue is
that of the fraud exception. The facts of this case are given in Box 7.3.
The Importance of Obtaining an Injunction
In Angelica, the court made some important distinctions with respect to the onus of proof, which
is on the importer seeking to prevent the bank from paying out on documents when there is a
suspected fraud. Such an importer has two options in this situation. One option is to attempt
to convince the bank of the existence of the fraud. The standard required is that the evidence of
fraud must be clear and obvious to the bank. The second option is to obtain an injunction ordering the bank to withhold payment. A court will grant an injunction if a strong prima facie case
of fraud is established against the beneficiary.
If no injunction is obtained, the rule of strict compliance is applied and the issuing bank must
honour the L/C unless the fraud is made clear and obvious to the bank before the L/C is drawn.
The issuing bank does not normally owe a duty to its customer to satisfy itself by independent
inquiry that there has been no fraud upon presentation of documents that appear regular on
their face. A court, on the other hand, has a duty to examine evidence and has the mechanisms
to ensure that the evidence presented is reliable and that both sides of a case are heard.
Practical Conclusions
On the basis of this discussion, we can come to certain practical conclusions. The first is that
banks will accept no responsibility for contractual compliance of the sales agreement between
the vendor and buyer in an international sale of goods or services. The second is that any serious
discrepancies in documentation will require a waiver by the buyer/importer or the L/C will not
be honoured. This can present an opportunity for the buyer/importer to renege on the payment
obligations of the contract. The third conclusion is that, when there is strict documentary compliance but the buyer has strong evidence of fraud on the part of the seller or its agent, there is an
injunction: acourt order requiring a person or corporation to perform or to cease performing aspecificaction
prima facie: aLatin term used frequentlyin law to state that something isapparent on first observation
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Part II
BOX 7 .3
Private International Law
Case Highlight
The Angelica Case
Case Name and Court
Bank of Nova Scotia v Angelica-Whitewear Ltd (Supreme Court
of Canada, 1987)5
2. Fraud exception issue. Did the fraud exception apply in
this case?
Decision
Facts
Documentary Compliance Issue
Angelica-Whitewear (Angelica), a Canadian cothing merchandiser, made a contract with Protective Clothing of Hong
Kong whereby Angelica would import uniforms from Protective Clothing and pay them by L/C. The Bank of Nova Scotia,
at Angelica's request, opened a confirmed irrevocable L/C in
favour of Protective Clothing of Hong Kong in the amount
of the proposed purchase of uniforms. The Shanghai Bank
was Protective Clothing's bank and was acting as a confirming bank.
The UC provided that shipments were to be made in installments from Taiwan to Montreal and that the foreign supplier
could recover payment for each installment by making partial
draws against the UC. Each draw was to be made by presenting a draft for the price of each shipment together with a bill
of lading, a commercial invoice, a Canadian customs invoice,
an insurance certificate, and a quality inspection certificate.
The L/C included the usual undertaking by the issuing bank
to honour drafts presented by the negotiating bank that are
accompanied by conforming documents.
The first and second shipments were made and invoiced
for$ 107,000 and $67,000, respectively. At the time of the first
shipment, the Shanghai Bank presented a draft with conforming documents to the Bank of Nova Scotia, and that draft was
honoured. After payment on the first draft, but before payment
on the second draft, Angelica discovered that the inspection
certificate for the first shipment contained a forged signature.
Angelica therefore requested that the Bank of Nova Scotia
withhold all further payments on the L/C.
When the second draft was presented, Angelica informed
its bank that the inspection certificate referred to the wrong
L/C, that the commercial invoice specified a different quantity
than the inspection certificate, and that the bill of lading specified freight prepaid to Vancouver rather than CIF Montreal as
required by the L/C. Angelica instructed its bank not to pay.
Meanwhile, the Shanghai Bank was insisting on payment of the
second draft. The Bank of Nova Scotia sought legal advice and,
based on this advice, paid the second draft and reimbursed itself by debiting the account of Angelica. Angelica challenged
its bank's action, and the bank sued its customer to recover the
moneys paid under the L/C.
The Supreme Court held that the reference to the wrong UC
on the inspection certificate did not violate the principle
of documentary compliance. The court also stated that the
quantity discrepancies between the invoice and inspection
certificate were not sufficiently material to justify refusal of
payment. On the third issue of documentary compliance,
however, Angelica won its case against the bank. The court
found that the bank had violated the principle by accepting
a bill of lading on the second shipment that specified freight
prepaid to Vancouver rather than CIF Montreal, as required in
the L/C instructions.
Issues
1. Documentary compliance issue. Had there been
documentary compliance in this case within the rules of
the UCP?
Analysis
This non-compliance obliged the bank to refuse the documents tendered. (It did not matter that the freight had in fact
been paid to Montreal by the seller as required by the underlying contract.)
Fraud Exception Issue
The Supreme Court confirmed that this rule does apply in Canada in a case where there is fraud in the underlying transaction.
It is not confined to cases of fraud in the presentation documents. The fraud must be committed by the beneficiary of the
credit. The rule does not extend to fraud committed by a third
party where the beneficiary is innocent. The bank was not put
on inqu iry by its knowledge that the first inspection certificate
had been forged. The beneficiary's fraud was not disclosed
on the face of the presentation documents and had not been
clearly established by Angelica at the relevant time. Therefore,
Angelica did not succeed in its argument that the fraud exception applied to this case.
Analysis/Application
In Canada, the United States, and the United Kingdom, there
are court precedents that indicate that an exception to the
strict rule of documentary compliance exists where there is
fraud in the transaction. This rule means that in some cases,
even where there is strict documentary compliance, the bank
can be prevented from paying out on the credit if there is sufficient evidence of fraud. The problem with the rule is its potential for creating serious uncertainty and lack of confidence
in the operation of letter-of-credit transactions. At the same
time, it is important that application of the rules of strict documentary compliance and of autonomy of credit not serve to
encourage or facilitate fraud in these transactions.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
exception to the bank's obligation to pay on the documents. It is impractical, however, to attempt
to convince the bank of the fraud as the level of proof required is very high. For this reason, an
importer's best action in these circumstances is to inform the bank of the details of the fraud and
advise the bank that it is instructing counsel to apply for an interim injunction. As a practical
matter, it is probably easier for the importer to satisfy a court of the need to issue an injunction
to prevent the bank from paying on the documents than it is to produce proof of fraud sufficient
to overcome the bank's duty to pay on conforming documents and to honour its obligation to
other banks under the rules of the UCP.
What Is the Significance of a Negotiable Instrument?
A negotiable instrument is a document whose ownership may be transferred by endorsement
and delivery; it may confer on the person receiving it greater rights than the transferor had. So
"negotiable" does not mean "negotiate" in the most typical sense of the word. The most corn mon examples of a negotiable instrument are cheques and bills of exchange. These instruments
have great advantages over contracts that must be assigned in writing with notice to the debtor
and that confer only those rights that the assignor possesses. Endorsement is simply signing the
instrument itself, and delivery is the act of handing over the instrument.
Law Governing Bills of Exchange
Bills of exchange have developed over many centuries and were an important part of the Law
Merchant in medieval times. The rules were eventually incorporated into the common law in
the United Kingdom and into the commercial codes of civil law countries. Our own legislation
in Canada, the Bills ofExchange Act, follows the UK equivalent very closely, and our laws in this
area are very similar to those of the United Kingdom. A "bill of exchange" is defined in Canada
as an unconditional order in writing, requiring the person to whom it is addressed to pay on
demand, or at a fixed or determinable time, a sum certain in money to or to the order of a specified person or bearer.6
In the United States, bills of exchange or drafts are governed by the Uniform Commercial Code
(UCC).7 (Note that the words "bills of exchange" and "drafts" are interchangeable for the purpose
of the general description of the written promises under discussion.) The law relating to bills of
exchange in many other countries is governed by legislation that conforms to the 1930 Convention Providing a Uniform Law for Bills ofExchange and Promissory Notes .8 Many European countries, as well as Japan and Brazil, have this convention as the basis of their law.
Negotiable Instruments: Their Role in Letter-of-Credit Arrangements
The usual stipulated documents for an L/C transaction include the commercial invoice, the certificate of origin, the insurance policy or certificate, and a transportation document. In addition,
a draft or bill of exchange may be included in the L/C requirements as part of the mechanism
for ensuring that the seller is paid. The initiative for drawing the bill of exchange lies with the
creditor (the seller or banker). Wanting to be paid, the seller prepares the document in which
the debtor acknowledges its indebtedness and agrees to pay according to the terms stated in the
instrument. A sample bill of exchange for the contract between TIE Steel and Canadian Import
(discussed in Box 7.1) is given in Figure 7.3.
Negotiation of Bills of Exchange
There are certain obligations inherent in initiating a bill of exchange that may come as a surprise
to many business persons. These involve the liability of the drawer of a bill. The bill of exchange
is usually drawn by the exporter, who prepares the document as part of the L/C arrangements.
There are three original parties to a bill of exchange: the drawer, the drawee, and the payee.
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FIGURE 7.3
A Sample Bill of Exchange in Connection with L/C
Drawn under Canabank
June 18, 2020
LIC 601 /80002
AT SIGHT
PAY TO THE ORDER OF
THE SUM OF
TI.£. Steel
of Taipei
Thirty-Two TMMaJUl
VALUE RECEIVED
Coverinj s~
U.S. Do{/an
oo; 100
of 400 retr offti:wtk£r Steel eookw-a,re,
from, Tttiu!tut, to Toroft±o, pu- CT Freijht f/1.,C-.
TO:
CANABANK
200 KING ST. WEST
TORONTO, CANADA
T.l.E. Steel ofTaipei
Signed:
jam,le, FraJ4U,;
President
Note that the drawer and payee are often the same party, as in the sample bill of exchange in
Figure 7.3, above.
Liability on a Bill
All three original parties normally are liable to honour the bill: the drawer by drawing it, the
drawee by accepting it (that is, writing its acceptance on or across the bill), and the payee by
endorsing the bill when negotiating it. The drawer or endorser who does not wish to maintain
further liability on the bill may reject liability by adding the words "without recourse" to its
signature. While this will protect the drawer or endorser from liability on the bill, it will also
increase the risk to the transferor and will therefore reduce the value of the bill.
Until an instrument is delivered, the drawer is not liable. Delivery is the term used for transfer from the payee to a new holder, and for later transfers to successive holders. Negotiation is
normally made by endorsement and delivery. A typical situation in which negotiation occurs is
illustrated in Box 7.4. Negotiation normally includes both endorsement and delivery.
Rights of the Transferee
The negotiable instrument is a very special type of assignable contract and is not subject to the
ordinary rules applicable to the assignment of contract. In the example in Box 7.4, Canada Steel
Inc has become a holder in due course and, as such, is entitled to collect payment according to
BOX 7 .4
Example of Negotiation
Canadian Auto Parts is a manufacturer based in Winnipeg that has sold parts to an Italian automaker
and is being paid by UC in the amount of Cdn$62,000 payable 60 days after sight (presentation to the
bank or other payer). The draft has been accepted as of March 15, 2020. However, Canadian Auto Parts
is indebted to Canada Steel Inc for $56,000, and this account is due no later than March 24, 2020. In order to satisfy this indebtedness, Canada Steel Inc agrees to allow Canadian Auto Parts to negotiate the
bill by endorsement (signing) and delivery. Canadian Auto Parts signs the bill, adds the words "payable
to Canada Steel Inc;' and delivers the bill to Canada Steel Inc on March 23, 2020.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
the terms of the bill even though the promiser or original debtor has not been notified. Indeed,
Canada Steel Inc, as transferee, may be in a better position to enforce its rights under the bill
than was the original payee, Canadian Auto Parts. All this has been achieved by the simple act
of signing and delivering the bill to the endorsee/transferee. Because of the transfer of the negotiable instrument, certain defences that could be used successfully against the original drawer/
payee are no longer available to the debtor. The two most important of these defences, sometimes referred to as personal defences, are lack of consideration (a very common and important
defence) and the right of setoff Other defences, referred to as "real defences;' are good against
any holder, even a holder in due course. These defences include failure of contract due to incapacity, cancellation of instrument, forged signatures, incomplete instrument, and fraud as to the
true nature of the instrument.
To ensure that the endorser has the maximum rights available, the endorsee/transferee must
be a holder in due course. A holder in due course is a holder who took a bill, which is complete
and regular on its face, in good faith and for value, without notice of any defect in the title of the
person negotiating it, before it was overdue, and without notice that it was dishonoured. Similarly, a subsequent holder who acquires its title through a holder in due course and who is not a
party to any fraud or illegality affecting the bill has all the rights of a holder in due course. Not
all endorsees/transferees are holders in due course. Personal defences are not effective against a
holder in due course, but real defences are.
Applying these principles to our example in Box 7.4, let us suppose that the goods supplied
by Canadian Auto Parts to the Italian importer were substandard in quality and did not conform
to the description in the contract of sale. This would be a failure of consideration and would be
a valid defence for the Italian importer in a lawsuit brought by Canadian Auto Parts against the
Italian company to enforce payment of the bill. This defence, however, being a personal defence,
is no longer available against the party to which the bill has been negotiated for value (in this
case, Canada Steel Inc), provided that, in all other respects, Canada Steel Inc qualifies as a holder
in due course. This situation is significant in international trade because often the bill is held and
enforced by a party other than the original payee.
Dishonour of a Bill
Dishonour is the failure or refusal of the party who is primarily liable on the bill to pay the debt
according to the terms of the instrument. This may occur when the drawee refuses to accept the
bill or it may occur later, if, after acceptance, he refuses to pay as acceptor.
A bill payable on demand, also known as a sight bill, is dishonoured if it is not paid on presentation. A time bill is dishonoured if it is not accepted by the drawee when presented for acceptance
or not paid when the time has expired. The law of Canada and the UK allows three days' grace
unless the bill provides otherwise. The grace period has been abolished in most other jurisdictions.
An endorser is liable to any holder for the amount of the bill if the party primarily liable fails
to pay, provided that the endorser receives prompt notice of the dishonour from the holder.
The drawer of the bill is liable if the bill is dishonoured and must compensate the holder or
any endorser who is compelled to pay and must also compensate that holder for any necessary
proceedings taken by reason of the dishonour.
The liability of the endorser and the drawer depends on prompt notice of dishonour. Prompt
notice is interpreted to be no later than the next business day following the day of dishonour.
If the bill is drawn or payable or accepted in Quebec or outside Canada, notice of dishonour
holder in due course: the person holding a cheque or promissory notethat was received as part of an exchange for something
of valuein good faith and with no suspicion that it might bedefective or claimed by another or overdueor previously dishonoured
(abank refused to pay since the account was overdrawn); such a holder isentitled to payment by themaker of thechequeor note
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must be in the special form known as protest. This is accomplished using the services of a notary
public or justice of the peace, who prepares the protest in a prescribed form and delivers it to
the endorser.
Documentary Credit and Standby Letters of Credit: Important Differences
Originally, the letter-of-credit law and practice was limited to the use ofL/Cs in commercial sale of
goods transactions. L/Cs were used exclusively for sellers who were unwilling to rely simply on a
buyer's promise to pay and provided them with assurance they would be paid once the goods were
delivered to the carrier. Increasingly, L/Cs are now being used to provide insurance to buyers of
large-scale services or owners oflarge-scale projects in the event that the contract or project is not
completed. A standby letter of credit anticipates the possibility that something will go wrong or
that a negative event will occur, such as the failure of the applicant to make a payment under a loan
agreement or the failure of the applicant to perform some contractual obligation. A standby L/C is
payable only if things go wrong in the underlying transaction. The documentary credit, or commercial L/C is a method of payment that anticipates a positive event- the consummation of the
underlying transaction. It is a means of implementing the performance of the buyer and the seller.
An L/C is referred to as "documentary" because it requires the presentation of documents as a
condition of payment. A standby L/C may or may not be documentary.
The Importance of Standby Credit in a Global Environment of Expanding Trade
in Services
Increasingly, international contracts are complex and high-risk endeavours that involve a mix of
trade in goods and services as well as many subcontractors from a number of countries. The possible failure of any one of these players to fulfill its obligations, along with the many risks associated with such projects, is a daunting prospect to many project owners and countries. To mitigate
these risks, many of them have sought financial protection. Some of the risks contemplated are the
following:
• physical risks, such as adverse weather, earthquakes, floods, tornadoes, tsunamis, heat,
cold, altitude, and humidity;
• labour risks, such as strikes, work slowdowns, and riots;
• human risks, such as corruption, vandalism, theft, work accidents, and disease;
• design and technology risks, such as problems with new technology, materials, or
processes;
• site risks, such as changes to subsurface conditions, environmental contamination, harm
to endangered or protected species, and archeological or anthropological discoveries that
prevent further use of the site;
• logistical difficulties, such as urban congestion and remote-access problems;
• regulatory risks, such as complex and uncertain government authorization;
• financial risks, such as the cost of borrowing, inflation, and taxes; and
• political risks, such as war, terrorism, and government change or intervention.
These risks are in addition to the usual risks associated with foreign projects, such as problems with currency exchange, international double taxation, barriers to repatriation of profits,
and the difficulties of conducting a legal dispute involving multiple jurisdictions.
standby letter of credit: awritten undertaking, given by a financial institution to the "beneficiary," to pay aspecified amount
of money in the event that the person with whomthebeneficiary is contracting does not meet specific financial or performance
obligations
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
International Transportation Considerations
As mentioned above, the sales agreement and the L/C will require a number of documents,
including those related to transportation. These are separate, ancillary agreements that need to
be negotiated to affect the main sale of goods transaction. A detailed discussion of international
transportation is beyond the scope of this book. However, some general guidelines on selecting
appropriate transportation contracts are outlined below.
International transportation is complex and highly specialized, and a business person lacking
experience in international shipping would be wise to embark on a contract of significant value
with the services of a qualified transportation specialist.
Freight Forwarding Services
Freight forwarders are specialized logistics service providers who act primarily to arrange international shipping of goods on behalf of exporters. The small or medium-sized exporter will
usually obtain the services of a freight forwarder to assist with making the appropriate shipping
arrangements with carriers due to the complexity of international shipping and lack of in-house
expertise and resources. Depending on the contracted service, the freight forwarder will act as a
principal or an agent or both. The following are examples of services commonly provided:
•
•
•
•
•
•
full-service documentation,
export packaging and container stuffing,
marine insurance,
L/C analysis and negotiation,
consolidation services, and
deconsolidation services.
Transportation of Goods
Unimodal
When goods are carried by only one mode of transport, the international transportation is
"unimodal:' In these cases, the contract of transport will be evidenced by a document that is
particular to the mode of transport being used: if the goods are transported by sea, an ocean bill
of lading or an ocean waybill is used; if the goods are transported by air, an air waybill or an air
consignment note is used; and if the goods are transported by rail, a rail consignment note is
used. These documents are issued by the carrier (for example, an airline) at the departure point,
contain the terms of the transport contract, usually refer to any applicable international conven tion or national law that regulates the particular mode of transport, and may limit liability.
Multimodal
When goods are carried by more than one mode of transport, the transportation is "multimodal:' This may be evidenced by the issue of a series of separate single-mode transport documents or by a combined or multimodal transport document. Each successive carrier is subject
to different rules concerning liability, which may create problems in the event of damage or loss
in a case where it is difficult to ascertain at which stage of the carriage the goods were damaged
or lost.
Container Transport
Container shipments may be unimodal or multimodal and may be door-to-door or consolidated. A door-to-door container shipment occurs when the exporter/consignor provides a full
container load, usually filled at the exporter's place of business and sealed by the carrier when
collected. The container is then delivered to the importer/consignee's place of business.
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Where the exporter's goods will not fill a full container load, they are taken to a container
freight station for consolidation with the goods of other exporters. The goods will be separated
and delivered to the various importers once they have arrived at the destination container freight
station.
The Incoterms 2020 (discussed in the previous chapter) provide a number of trade terms that
deal with cargo in containers and multimodal transport.
Bill of Lading
A bill of lading is a document, issued by a carrier, acknowledging that specified goods have
been received on board as cargo for conveyance to a named place for delivery to the identified
consignee. The term "bill of lading" presents some problems because in many countries, the
use of the term is restricted to the movement of goods by sea; however, in North America the
expressions "rail bills oflading" and "truck bills oflading" are used to indicate shipping by way of
train, truck, or multimodal transportation. In other English-speaking countries, the expressions
"goods receipt" or "shipping contract" may be used.
Generally speaking, the bill oflading serves three purposes:
as a receipt to the shipper acknowledging that specific goods have been received for
shipment,
2. as a memorandum of the terms and conditions of the contract between the shipper and
the carrier for the transportation of the named goods to the specified destination, and
3. as evidence of title to the goods (this is limited to common law countries and must be
an "order bill oflading").
1.
It is this last characteristic, the evidence of title to the goods, that, combined with its
negotiability, makes the bill of lading unique in international trade insofar as it enables
the property in the goods to pass on delivery or endorsement and delivery of the bill. (We
will discuss the concept of negotiability later in this chapter.) Thus, goods may be sold or
pledged to secure an advance while they are still in transit. Not all bills of lading are negotiable; in the common law, a bill made out "to order" or "to order or assigns" is negotiable,
but a bill made out exclusively to a named consignee is not. In the United States and in most
civil law systems, the holder of a negotiable document of title to goods is the owner of the
document and the goods.
In a straight bill oflading, the named parties on the bill oflading will be the shipper, the carrier, and the consignee or importer/buyer. This means only the consignee or buyer will be able
to take possession of the goods at arrival by presenting a signed original bill of lading to the
carrier. A bill made out "to order" is a negotiable instrument once it is endorsed on the back by
the shipper or the shipper's agent.
Carriers generally make their standard form bills oflading available in advance, and the shipper usually provides one of these in draft form to the carrier's agent. The shipper guarantees the
accuracy of the information supplied. If there are no problems, the bill oflading will be "clean";
if not, it will be "claused" or "unclean" - meaning the shipment does not completely correspond
to the description of the bill of lading. If an L/C is involved, this will create serious problems
because banks usually require clean documents of transport. The number of duplicates of the
bill of lading varies from one country to another: in Canada, they are issued in triplicate; in the
United Kingdom, in duplicate; and in some jurisdictions, in quadruplicate. The bill of lading will
bill of lading: a document, issued by a carrier, acknowledging that specified goods have been received on board as cargo for
conveyance toa named place for delivery to the consignee, who is usually identified
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
be included in the set of documents delivered to the advising or nominated bank in a letter-ofcredit transaction, or it will be forwarded directly to the consignee or agent.
The Ocean Bill of Lading
Shipments by sea occur in two ways. In the case of large shipments, the entire ship may be
hired under a charterparty. In the case of small shipments, the goods are transported as part
of the ship's general cargo under a contract of carriage by sea, evidenced by an ocean bill of
lading. Note that this is merely evidence of the contract of carriage and not the contract of
carriage itself.
Ocean Waybills
Ocean waybills are non-negotiable contracts of carriage of goods by sea; they are contracts of
carriage and receipts and not documents of title. A waybill consignee cannot obtain delivery of
the goods by merely presenting the ocean waybill. It must prove that the consignee is the person
named in the waybill.
Intermodal Bills of Lading
If the exporter itself arranges for shipment with several carriers, each carrier will issue a bill of
lading for its segment of transportation. Each carrier will be responsible for its portion of the
journey, and the terms and conditions appearing on each bill of lading will apply to that portion of the transportation process. Because this transport fragmentation may represent excessive
administrative time and uncertainty, the exporter may arrange for multimodal transport of the
goods through an intermediary-a "combined transport operator:' In this case, the operator will
act as principal and assume full responsibility for the shipment, including liability for loss or
damage, and will issue a combined transport document.
Air Waybill
An air waybill is a non-negotiable document and is used for the transportation of individual
shipments and consolidated shipments, in which case it may be a "house" air waybill. The air
waybill must indicate the places of departure and destination. Among the clauses appearing
in fine print on the back of a bill of lading will be terms and conditions that set limits on lia bility and specify carrier exemptions. These terms and conditions are regulated by each country's
domestic legislation as well as by international conventions applicable to each mode of transport.
The air waybill is prima facie evidence of the conclusion of the contract, of the receipt of the
cargo, and of the conditions of carriage. Air waybills are not usually negotiable.
Liability of the Air Carrier
The air carrier is liable for damage sustained in the event of the destruction of, loss of, or damage
to any cargo if the occurrence that caused the damage took place during the carriage by air. This
includes the period during which the cargo is in the custody of the air carrier, the preloading
period, and the period immediately after landing within the airport. The carrier is also liable for
damage due to delay in the carriage of the cargo. The air carrier may avoid liability if it proves
that all necessary measures were taken to avoid the damage. The liability of the carrier is limited
unless the parties have agreed otherwise.
nominated bank: see corresponding bank
charterparty: a hire or lease contract between theowner of avessel and the hirer for aspecificvoyage, usuallyfor the transport
of goods
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IATA Universal Air Waybill
The International Air Transport Association (IATA) has developed a common form of air waybill and conditions of contract for interline and online carriage. This is known as the IATA Universal Air Waybill. The document provides a receipt to the shipper at the time of delivery to the
carrier, indicates the charges for the carriage, enables the carriage of the shipment on more than
one carrier to be recorded on the same document, provides for settlement of charges between
carriers, specifies the conditions of the contract, and enables data processing and document
transmission.
Exemptions to Liability
The various documents described here may contain significant exemptions from liability for the
carrier. In addition to statutory provisions limiting the liability of carriers, there are four basic
exemptions allowed by the common law:
1. an act of God, such as an accident that is due solely to natural causes, without human
intervention, and that could not have been prevented by reasonable foresight or care;
2. enemies of the Queen or state, such as incidents of terrorism, insurrection, or war;
3. a defect in or inherent vice of goods, such as fermentation or evaporation of liquid or
failure of animals to eat; and
4. an act or default of the shipper, such as poor or inadequate packaging.
The exporter should remember that liability can always be extended beyond statutory limits,
for a price. In negotiating transportation contracts, careful inquiries should always be made
about the amount of liability and insurance coverage for damage and loss of goods. Adequate
coverage should never be assumed.
Electronic Transmission of the Bill of Lading
The bill of lading is a transferable document of title to the goods described in the bill. This
feature makes it difficult to adapt it to a paperless, digital version. When the bill of lading as a
paper document is eliminated and replaced with electronic data transmission, significant legal
problems arise as to the definition "written document, signature, and original:' These problems
have yet to be fully addressed or clarified internationally. If a negotiable bill oflading is transmitted through a network and printed out at several different locations, can each of the printouts
be considered an original and therefore negotiable? Are all the printouts copies? Which is the
original? Some international rules have evolved. The UCP allows the use of documents produced
by reprographic, automated, and computerized systems and for electronic signatures. Incoterms
2010 and 2020 are fully compatible with electronic data interchange. In 2008, under the sponsorship of the United Nations Commission on International Trade Law (UNCITRAL), the Convention on Contracts for the International Carriage of Goods Wholly or Partly by Sea, known as the
"Rotterdam Rules;'9 was developed to extend and modernize the rules and achieve more global
uniformity. The convention requires 20 states to ratify it before it comes into force, and, although
more than 20 nations, including the United States, have signed, only five have ratified to date.
This initiative, together with the Rules for Electronic Bills ofLading, 10 the UNCITRAL Model
Law on Electronic Commerce, 11 and the UCP, are all valuable attempts to develop universal
rules to accommodate electronic document adoption. Thus far, however, an electronic equivalent to a bill of lading that fulfills all its traditional functions has not been clearly defined. This
is relevant to trade payments, electronic funds transfers, and collections systems. Where these
are concerned, care must be exercised to ensure that the methods of transmission used by the
parties conform to the wording of the contracts between them, because the law is not clear in
the absence of specific provisions by the parties.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
International Insurance Considerations
Insurance for international transactions is a highly specialized area. Expert and reliable insurance advice is necessary in setting up any one export transaction or in developing an exporting
policy for the small or medium-sized business embarking on an export program. The following is a brief overview of the process of insuring goods against losses that may occur during
their international transportation by sea or by air. It is important to use the services of competent insurance brokers. The exporter must make satisfactory insurance arrangements to protect
its interest in the goods while they are being transported. Most relevant to the international
exporter is marine insurance.
Marine Insurance
Marine insurance is an essential part ofletter-of-credit arrangements for an export transaction
and can be extremely comprehensive; it covers marine losses resulting from incidental air or
land peril and losses incidental to the building, repair, or launch of a ship. It may be extended
to cover goods from the time they leave the warehouse at the point of shipment until they are
delivered at the destination named in the policy. This insurance overcomes the difficulty caused
by the fact that the liability of ocean shipping companies is strictly limited by international
conventions.
A marine insurance policy or certificate is usually made out to the order of shippers or drawers, like bills oflading, so that they may be endorsed and the loss collected by subsequent holders
of the policy or certificate.
Most exporters will use the services of a qualified marine insurance broker, who will act as an
agent of the insured, although the broker will be paid by the insurer. The terms of the contract of
sale or the trade term will indicate whether the buyer or the seller is responsible for paying the
cost of the marine insurance. Both the Incoterms and the UCP specify who pays for the insurance and the amount of insurance required. The parties to the contract of sale should always
specify what risks are to be covered as well as the value of the insurance coverage. Care should be
taken to consider whether the goods will be shipped on deck and whether goods will be insured
against exposure to the elements, and also whether pilferage will be covered.
Many exporters who transport their goods by recurring shipments will arrange for an open
cover policy-that is, a contract whereby the insurance company agrees to protect all shipments
made by the insured from the moment the shipment leaves the factory or warehouse until delivery to the destination. The insured in these circumstances agrees to report all shipments to the
insurance company periodically-usually monthly-and to pay premiums on the shipments
made in accordance with the agreed schedule of rates in the policy. If an exporter is dealing with
individual shipments of lower value, a blanket policy may be preferable; in this case, the insured
does not have to advise the insurer of each shipment but pays a lump-sum premium to cover all
shipments made.
The insured must have an insurable interest in the goods insured at the time of the loss but
not necessarily at the time the insurance is arranged. An insurable interest is not confined
to a strict legal right of property but is any interest that would be recognized by a court of
law or equity, such as possession of goods or the right to immediate possession. A contract of
insurable interest: abasic requirement for all types of insurance, an interest inasubject of insurance such that loss or damageto
it would cause the insurer afinancial loss; for purposes of life insurance, everyone isconsidered to have an insurable interest intheir
own lives as well as thelives of their spouses and dependants; for property and casualty insurance, theinsurableinterest must exist
both at the time theinsurance is purchased and at the time a loss occurs (for lifeinsurance, the insurableinterest needs to exist only
at the time the policy ispurchased)
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Part II Private International Law
marine insurance, like all insurance contracts, is a contract of utmost good faith, meaning that
the insured must disclose to the insurer, at the time the contract is made, every material circum stance that is known to the insured. A material circumstance is one that would influence the
judgment of a prudent insurer in determining whether to issue the insurance and in assessing
the risk so as to determine the appropriate premium.
Settlement of Losses
Normally the insurer is liable for any loss caused by a peril that has been insured against. Any
loss attributable to the willful misconduct of the insured will not be covered, nor will losses
caused by delay, ordinary wear and tear, leakage and breakage, inherent vice, or loss due to rats
and vermin. Losses may be total or partial. A total loss occurs when the subject matter insured
is destroyed or damaged so far as to cease to be a thing of the kind insured or where the insured
is irretrievably deprived of the subject matter of the insurance.
Subrogation
Under the principle of subrogation, once the insurer pays for a total loss, the insurer becomes
entitled to assume the interest of the insured and may pursue all the rights and remedies of the
insured and sue for any loss incurred.
Tort Principles and Special Rules Relating to Product Liability
The Principles and Purpose of Tort Law
As stated in Chapter 6, the parties to a contract can, to a large extent, manage the legal obligations between themselves. What the parties have less or- as is often the case- no control over
is the legal obligations to third parties and to the world at large. For this reason, we need to
examine the basic principles of tort law.
Historically, tort law has developed to compensate victims for harm suffered from the activities of others. Its purpose is compensation, not punishment. A modern society faces difficult
issues in determining who should bear a non-contractual loss arising from normal activities:
should it be the victim, the person whose act caused the harm, or those who benefit from the
overall activity- often all of society? With the increasing sophistication of societies, governments have gone well beyond legislating simply to rectify weaknesses in the common law of
tort for the purpose of regulating behaviour and imposing liability for undesirable conduct. The
specific areas that we will focus on are product liability, which is an extension of tort liability;
competition or antitrust law, which is an extension of common law rules against restraint of
trade; and privacy and data protection law, which has arisen in response to technology's increasing intrusion into personal lives. Consequently, it is critical for companies doing business internationally to understand the different laws and regulations in each country of operation in order
to effectively incorporate appropriate quality control for products, incorporate correct privacy
mechanisms, and not engage in anti-competitive behaviour.
Product Liability
A major concern of the international business person is the prospect of product liability- that
is, liability for the consequential damage that may occur as a result of a defective product. Liability for defective services, such as financial or consulting services, may also be of concern;
however, in the majority of these cases, liability is based on contract, not tort, because the courts
tort law: a branch of civil law (non-criminal law) that governs wrongful acts for whichalegal remedy isavailable independent of
any contractual relationship
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Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
have imposed limitations on tort liability to third parties for professional or financial services.
Because the distribution of products is so widespread, the potential for a defective product to
harm a third party is enormous. For this reason, most developed countries have special rules
relating to product liability.
Product Liability in Canada
In Canada, product liability is based on fault. Most cases involve proof of a manufacturing defect,
proof of a design defect, or a failure by the manufacturer or distributor to warn of an inherent
danger. The development of class actions is increasing the potential liability of manufacturers
and has resulted in more judgments based on economic loss. A case of significance is the Supreme Court decision in British Columbia v Imperial Tobacco Canada Ltd. 12 The court upheld
the constitutionality of BC legislation authorizing civil action by the province to recover health
care expenditures from the tobacco manufacturers. The tough new legislation puts an onus on
the defendant to prove that its breach of duty did not give rise to disease, allows claims to be
pursued on an aggregate basis (that is, against various parties in the tobacco industry), apportions liability on the basis of market share, and dispenses with the limitation period. Limitation
periods in Canada will vary from one province to another and range from two to six years. This
is a landmark judgment by the Supreme Court and greatly expands the product liability of a
manufacturer, albeit limited thus far to manufacturers in the tobacco industry.
In addition to common law liability for defective products, there are additional avenues for
liability for vendors of defective products in Canadian sale-of-goods legislation, which is relatively uniform across the ten provinces and three territories, Quebec being an exception. In
Quebec, the law is closer to the strict liability regime found in the United States and Europe;
injury cases begin with a presumption of product defect on the part of the manufacturer with
the onus on the manufacturer to rebut. Sale-of-goods legislation in the rest of Canada requires
that products must be merchantable and, if designed for a specific purpose, fit for that purpose.
Product Liability in the United States
Many, but not all, product liability claims in the US are based on the doctrine of strict liability.
This strict liability applies to sellers of defective and unreasonably dangerous products. Such
sellers will be responsible for any damage caused by their products, even without proof of negligence. Products identified by US court decisions thus far include food, furniture, appliances,
airplanes, industrial machinery, and building materials. Even if a product is not defective or
unreasonably dangerous, the manufacturer may be liable if the consumer was not adequately
informed of potential hazards arising from the product's reasonably foreseeable use. To avoid
liability, manufacturers have taken pains to include detailed instructions and warnings with their
products (see Box 7.5).
Product advertising can also contribute to liability for manufacturers and distributors insofar
as consumers who have suffered injury while using a product for the purpose for which it was
advertised may successfully claim for breach of warranty. This has resulted in advertisements
whose lists of adverse effects for the product are almost as long as the list of positive attributes. One defence available to manufacturers and distributors of products in the United States
is the "learned intermediary" defence, which can be used where products are sold to doctors or
other intermediaries whose expertise places them in a better position to communicate warnings
to the ultimate users. The most worrisome aspect of US product liability law to the business
limitation period: the timewithinwhich aplaintiff must bring an action
strict liability: the imposition of the burden of compensation on the person who ca used an injury, despitethe absence of any
blameworthyconduct on their part; alsocalled liability without fault
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BOX 7 .5
Some Warnings Issued by US Manufacturers
"Do not put any person in this washer!"
"This blanket should not be used as protection from a tornado:'
"Wearing of this garment does not enable you to fly:'
"Eating rocks may lead to broken teeth" (on a novelty rock garden) .
"This product not intended for use as a dental drill" (on an electric rotary tool).
"The contents of this bottle should not be fed to fish" (on a bottle of pet shampoo).
Source: Jeremy G Zimmermann, "Recent Developments in U.S. Product Liability Law" (2003) at 23, presented at
Ansvarskonferens I Liablity Conference in Stockhom, Feb 3, 2003, on line (pdf): Wiggin & Dana, LLP <https://www.wiggin.
com/wp-content/u ploads/201 9/09/remy-stockholm-ppt. pdf>.
community is the punitive damage awards for which the American legal system has become
famous. For example, in 1994, a woman who sued after spilling a cup of hot McDonald's coffee
in her lap was awarded $2.7 million in punitive damages. (The award was subsequently reduced
to $480,000.)
The growth of class actions in the United States is an important development and not without controversy. What began as a procedure for aggregating multiple claims in complex civil
litigation has become a complicated and unwieldy form of litigation in which individual class
members may receive a very small share of a very large damages award, with the attorney taking as much as one-third of the entire judgment. The class action system in Canada is much less
developed than in the United States. There is no such system in the European Union (EU) yet,
although a directive on representative actions is being negotiated between the Parliament and
Commission and the Council that is likely to become law in 2022, with potentially significant
effects for businesses and consumers.13 Because of the growing size of punitive damages awards
and the increasing number of class action lawsuits, the issue of tort reform in the United States
is an important one for US business.
Product Liability in the European Union
Since the adoption of the Directive on Liability for Defective Products 14 (the Directive) in 1985,
the EU has applied the principle of liability without fault for a manufacturer or producer in cases
of damage caused by a defective product. The result is that product liability claims in the EU
have increased substantially. A "producer" includes the following: the importer of the defective
product; any person putting her name, trademark, or other distinguishing feature on the product; and any person supplying a product whose producer cannot be identified. Because the Directive provides for liability without fault, it is not necessary to prove the negligence or fault of the
producer or importer. It is necessary to prove only the actual damage, the defect in the product,
and the causal relationship between the damage and the defect. Factors to be taken into account
when determining whether a product is defective include the presentation of the product, the
use to which it could reasonably be put, and the time when the product was put into circulation.
An injured person must bring his claim within three years from the time of injury. In 1999, the
EU expanded the scope of the Directive to include primary agricultural products such as meat,
cereals, fruit and vegetables, and game products.
The adoption of the Directive has made EU and US law very similar with respect to liability
for defective products, the important difference being that there is no real provision for class
actions or punitive damages in the EU.
Product Liability in China
Product liability law in China is developing rapidly in response to China's escalating participation in the global economy. Adverse publicity as to the quality of Chinese products motivated
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
China to try to be seen as vigilant on behalf of consumers of Chinese products. Since 2010, product liability in China has been effectively a strict liability tort, the broad requirement for liability
being products that contain defects and cause harm to others. There are no US-style provisions
for class actions, but there are "joint actions"; however, these are simply individual cases joined
together for efficient administration. All litigants in these joint actions must actively participate
in the litigation, which includes being available to provide evidence.
In 2011, China passed the Choice of Substantive Law in Foreign-Related Civil Relationships
law, 15 again in response to concerns about defects in Chinese export products. This law allows
an injured party in a cross-border product liability case to choose the national law that the Chinese court will apply to the dispute. This law is intended to provide comfort to consumers of
Chinese products abroad by giving these consumers the choice, theoretically at least, of having
their cases decided according to their own country's laws when they sue the Chinese manufacturer in China.
Product Liability Insurance
It is very important to have liability policies that cover the entire range of potential liability. This
includes the entire range of possible causes of action, including strict liability, negligence, breach
of warranty, misrepresentation, and failure to warn, and it must cover the full range of potential
remedies that the courts of various countries may order. It is also important to remember the
risk of product recall, for which a separate policy is usually required.
Privacy Law
Privacy Law in Canada
There are several pieces of provincial and federal legislation governing privacy in Canada.
Whether the provincial or federal legislation applies in a particular circumstance depends on
whether the issue concerns a provincially or federally regulated for-profit, not-for-profit, or government entity. Additionally, the type of law that will apply depends on the type of information
involved, whether the information crosses provincial or national borders, and where the organization is based.
The Personal Information Protection and Electronic Documents Act (PIPEDA) 16 is a federal
law that sets out the ground rules for how private sector organizations may collect, use, or disclose personal information in the course of commercial activities. PIPEDA protects information
about an identifiable individual, which includes a person's
name, race, ethnic origin, religion, marital status, and educational level;
email address and messages, and IP (Internet protocol) address;
age, height, weight, medical records, blood type, DNA code, fingerprints, and voiceprint;
income, purchases, spending habits, banking information, credit/debit card data, loan or
credit reports, and tax returns; and
• Social Insurance Number (SIN), driver's license number, or other identification numbers.
•
•
•
•
PIPEDA applies to federally regulated companies and provincially regulated companies that
conduct business in the following provinces:
•
•
•
•
•
•
•
Manitoba,
New Brunswick,
Newfoundland and Labrador,
Northwest Territories,
Nova Scotia,
Nunavut,
Ontario,
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• Prince Edward Island,
• Saskatchewan, and
• Yukon.
PIPEDA does not apply to organizations that do not engage in commercial, for-profit activities or to organizations that operate entirely within Alberta, British Columbia, and Quebec,
since each of these provinces passed their own privacy legislation that provides for protection
substantially similar to PIPEDA. All businesses that operate in Canada and handle personal information that crosses provincial or national borders must comply with PIPEDA irrespective of
which province or territory they are based in.
Ontario, New Brunswick, Nova Scotia, and Newfoundland and Labrador have passed legislation for the protection of personal health information, and this legislation also affords protections comparable to those of PIPEDA. There are oversight offices and government organizations
for the protection of privacy in all ten provinces and three territories.
This legislation requires organizations to take reasonable steps to safeguard the personal information in their care from risks such as loss or theft, unauthorized access, collection, use, disclosure, copying modification, or destruction. The first principle to be adopted is that personal
information should be collected only if it is needed for a particular purpose and with consent.
The website established by the Office of the Privacy Commissioner of Canada (OPC) 17 provides
invaluable information to help companies comply with the requirements of the Act and assess
the effectiveness and reasonableness of their privacy-protection policies based on the following
considerations:
•
•
•
•
•
the sensitivity of the personal information,
the foreseeability of the risks,
the likelihood and extent of potential damage,
the medium and format of the record containing the personal information, and
the cost of preventive measures.
In the event of a serious data breach, where there's a real risk of harm, the organization must
notify the OPC, the affected individuals, and any associated organizations. To assess whether
real risk exists, the organization must take into consideration the sensitivity of the accessed data
and the likelihood that it will be misused. If the data breach could lead to humiliation, damage
to reputation or relationships, loss of employment, loss of business or professional opportunities,
financial loss, identity theft, negative effects on the credit record, and damage to or loss of property, then a significant risk of harm exists. Pursuant to the legislation, there are significant fines
for failing to notify the OPC or the affected individuals. Businesses operating in Canada need
to be vigilant with respect to the collection and protection of their customers' personal data. To
do so, they should train employees on privacy legislation, implement internal policies regarding
collection and protection of data, assess the risk of breach, and determine if additional insurance
coverage is necessary in the event of a breach.
An example of the application of privacy law in Canada is the Equifax case, which is described
in Box 7.6.
Privacy Rules Around the World
According to the United Nations Conference on Trade and Development, 107 countries (55
percent of the 195 countries) 18 report having implemented data-protection and/or privacy
legislation. The data-privacy laws of other countries are becoming of significant importance to
Canadian businesses as, increasingly, they opt to store and process records abroad where wage
rates are lower and they can take advantage of 24-hour availability. Popular examples include
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7
BOX 7 .6
Negotiat ion of International Contract s (Part 2): Contract Challenges and Risk Management
225
Case Highlight
Canadian Privacy Office Finds Equifax Breached PIPEDA
Case Name and Tribunal
Office of t he Privacy Commissioner of Canada, PI PEDA Report
of Fi ndings #2019-00119
3. Did Equifax Canada adequately mitigate t he ongoing
risks of harm to affected individuals?
Decision
Facts
Equifax Inc is a large US-based consumer-credit reporting
agency. Equifax Canada Co is a subsidiary operating in Canada. In 2017, Equifax Inc reported a significant data b reach
comprom ising personal information of 143 mi llion consumers
g lobally. Equifax Inc estimated that the info rmat ion of some
19,000 Canadians, whose social insurance numbers, along with
ot her accompanying identifiers, was unlawfu lly accessed. The
attackers gai ned access to Equifax lnc's systems by exploiting
a known vulnerabi lity in t he software p latform supporting an
online dispute-resolution porta l and eventually gained access
to t he Canadian customers' persona l information. Although t he
information in Canadians' cred it fi les is stored by Eq uifax Canada on servers located in Canada and segregated from Equifax lnc's systems, du ring some processes the credit files were
t ransferred to the US. Equifax Canada's security policies, direct ion, and oversight were and are largely managed by Equifax
Inc despite the segregated servers. The OPC invest igated the
data breach and had to determine a number of issues, including the following:
Issues
1. Were Equifax lnc's secu rity safeguards appropriate for
the sensitivity of the information?
2. Did Canadians adequately consent to t he collection of
their personal information by Equifax Inc and to t he disclosure of their personal information to Equifax Inc by
Equifax Canada?
The OPC concluded that both Equifax Inc and Equifax Canada
contravened PIPEDA on all of the issues and recommended
improvements. The OPC found Equifax Inc had inadequately
managed the known vulnerabilities in its system, failed to
properly segregate its net works to reduce t he scope of access,
and failed to implement basic information-security practices.
The OPC noted that other than the provided privacy policy
and site te rms of use, there was no indication to consumers
t hat their information was being collected by or disclosed to
Equifax Inc in the US. Also, the OPC considered t he one year of
free credit monitoring as an inadequate mitigation measure to
protect against future unauthorized use of compromised data.
Analysis/Application
Of particular significance was the OPC's finding that the t ransfer of data from Equifax Canada to Equifax Inc was in breach of
the companies' obligation under PIPEDA to obtain adequate
consent from individuals before disclosing their personal information to a third party. The OPC clarified that for consent to
be valid, customers must be provided with clear information
about the disclosure, including the third party's location in another country, and the associated risks. This decision affects al l
cross-border transfers of information, whether to third parties or
within the corporate organizational st ructure. Companies that
process persona l information about individuals in Canada in
other countries are strongly advised to include a notice of this
practice in their privacy policies, and a statement that the privacy laws in those jurisdictions may differ from those in Canada.
accounting- and billing-information storage or customer or research services centres set up offshore. In these situations, care should be taken to comply with Canadian requirements as well as
those of the host jurisdiction. Often, by complying with the more stringent and robust privacy
legislation, like that of the EU, the business will inherently be compliant with the more moderate, underdeveloped, or lax laws of other jurisdictions. The EU has been a leader in enacting
legislation for the privacy and protection of personal data, with recommendations made as far
back as 1980. In 1995, it adopted the Privacy Directive20 based on elements from the European
Convention on Human Rights,21 specifically the rights of privacy in personal and family life.
The principles found in the Privacy Directive form the basis of EU data-privacy law and have
since been substantially adopted in the data-privacy legislation of most industrialized countries,
including Canada. The principles are as follows:
1. Notice: Subjects whose data is being collected should be given notice of such collection.
2. Purpose: Data collected should be used only for the stated purposes(s) and for no other
purpose.
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3. Consent: Personal data should not be disclosed or shared with third parties without
consent from its subject(s).
4. Security: Once collected, personal data should be kept safe and secure from potential
abuse, theft, or loss.
5. Disclosure: Subjects whose personal data is being collected should be informed as to the
party or parties collecting such data.
6. Access: Subjects should be granted access to their personal data and allowed to correct
any inaccuracies.
7. Accountability: Subjects should be able to hold personal data collectors accountable for
adhering to the above-mentioned principles.
In May 2018, a new harmonized privacy law came into effect in the EU. The General Data
Protection Regulation (GDPR)22 is seen as the world's most stringent and comprehensive piece
of privacy legislation. An organization that breaches its requirements may be fined an amount
up to 4 percent of its total worldwide annual revenue. The GDPR has far reach and applies to
EU-established entities and overseas organizations that offer goods or services in the EU. It has
a broad definition of what type of personal data is protected. For example, cookies, IP addresses,
and RFID tags are caught by the definition. In order to comply with the GDPR, businesses have
had to overhaul the way they collect, process, securely store, share, and destroy personal data.
Canada's Parliament amended PIPEDA in 2018 in order to be more in line with the GDPR.
Competition Law: Implications for Contract Negotiations
Any business negotiating an international contract for goods or services must bear in mind the
implications of its plans from a competition or antitrust law perspective. The OECD defines
anti-competitive behaviour as business practices in which a firm or firms restrict inter-firm
competition to maintain or increase their relative market position without providing goods and
services at a lower cost or of higher quality. These practices may occur between competing firms
in the form of cartels, collusions, conspiracies, mergers, predatory pricing, price discrimination,
and price fixing. They may also occur in supplier-distributor relationships such as agreements
for exclusive dealing, geographic market restrictions, refusals to deal, resale price maintenance,
and tied selling. Sometimes anti-competitive agreements made in one country can have impacts
in other countries, and most countries will assert some extraterritorial jurisdiction to protect
their own national market.
Canadian Competition Law
We will begin our discussion by examining Canadian competition law, since the basic tenets of
our law are similar to those in other industrialized countries. Canada introduced its competition
(or antitrust) legislation in 1889 and was the first industrialized country to do so, closely fol lowed by the US with its Sherman Antitrust Act23 a year later. The Competition Act24 provides for
both criminal and civil offences and is administered and enforced by the Competition Bureau
of Canada. Some conduct is seen as sufficiently serious to justify criminal sanctions, which can
include imprisonment (rarely imposed) or fines as high as $25 million. To demonstrate conspiracy, the Bureau must submit evidence that proves, beyond a reasonable doubt, that there is
an agreement between competitors to fix prices. Mere suspicions or evidence of identical prices
are not enough to prove a criminal offence.
Less egregious conduct that is only potentially anti-competitive is "reviewable:' The criminal
provisions of the Competition Act apply to cartels, conspiracy to fix prices, allocating customers or markets, controlling production or supply of product, bid rigging, and deceptive marketing practices such as misleading advertising, promotional contests, pyramid selling, and
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
bait-and-switch selling. However, with respect to deceptive marketing practices, the Bureau
tends to focus on cases with national implications. A number of anti-competitive behaviours can
be pursued either as criminal or as civil matters by the Bureau. The Act requires that only one
approach be used for each allegation, so criminal charges are reserved for serious cases where it
is likely that the criminal standard of proof can be met.
Reviewable practices include mergers that negatively affect competition. There is also
a requirement for pre-merger notification for mergers involving transaction value over
Cdn$96 million. Other reviewable practices include abuse of dominant position, and most vertical restraints such as resale price maintenance, refusal to deal, exclusive dealing, and tied selling.
It is important to know that under section 46 of the Act it is an offence for a corporation
operating in Canada to implement a conspiracy directed by persons outside Canada. The offence
does not require the Canadian company's knowledge of or an intention to participate in the
conspiracy. While this is an unusually harsh provision for Canadian law, it must be remembered
that Canada officially frowns on extraterritorial enforcement of domestic legislation. This section provides a mechanism for reaching offshore corporations by prosecuting their Canadian
affiliates. It should be remembered, too, that conspiracy is a criminal offence and that Canadian
criminal law imposes jurisdiction over a person only by serving the person within the territory
of the court. Thus section 46 makes it possible to reach a foreign-directed conspiracy.
International Cooperation on Competition Law
Increasingly, companies organize their affairs on the basis of economic regions rather than
national boundaries. For this reason, coordinated investigations of international cartels pursuant to mutual legal assistance treaties, competition law cooperation agreements, and informal
coordination between agencies are now the norm. Canada has international cooperation
agreements with the competition authorities in many other countries, including the US, the
EU, the UK, Brazil, Chile, Japan, Korea, Mexico, and New Zealand. The EU has extensive
and sophisticated competition regulation. More than 100 countries around the world now
have competition legislation or are in the process of adopting it. In 2001, the International
Competition Network was formed to promote greater convergence across national regimes
and foster broader and more effective enforcement. In 2007, China passed comprehensive
antitrust legislation.
It is obvious from this very brief overview of competition or antitrust law that this is a complex and highly specialized area of the law and one that reaches deeply into the affairs of many
firms. It is an area that requires constant vigilance when a firm is designing contracts with
other firms, particularly when the latter are in other jurisdictions. Specialized advice should
always be taken before entering into any arrangements that could possibly have any anti-competitive effect. The best protection for a firm is to have well-designed compliance policies based
on specialized legal advice and vigilant policies within the firm.
E-commerce Considerations
Any discussion regarding negotiation of international contracts for goods and services would be
incomplete without some consideration of the impact of e-commerce on these business transactions. In this chapter, we have reviewed a number of the legal rules that apply to the negotiation of international contracts, but many of these rules were designed with paper documents
in mind and country boundaries to define jurisdiction. These parameters no longer apply in
cyberspace-that notional environment in which communication occurs over computer networks. All laws that apply to business activity in the non-Internet world will apply to online
activity, with the important difference that there is real uncertainty as to what jurisdiction's
rules will apply to any given transaction. Although some progress has been made toward global
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acceptance of common rules, to date there is no overriding authority that transcends individual
country boundaries.
Some of the issues that will arise in connection with e-contracts include
•
•
•
•
determining which law applies to the transaction;
deciding which country's courts will determine a dispute that arises;
determining which country's intellectual property laws are relevant; and
identifying which country's trade restriction, import and export control, privacy, competition, and consumer protection laws must be obeyed.
Other issues unique to e-commerce arise, such as what constitutes an offer made to the world
online, when electronic messages are sent and received, and whether a contract is enforceable
if signed digitally.
As a result of the potential for uncertainty around e-commerce and the importance of ensuring the validity of electronic transactions for global business, UNCITRAL developed the Model
Law on Electronic Commerce25 in 1996. This model law was aimed at achieving some uniformity across national borders and establishing the principle of functional equivalency between
electronic messages and signatures and paper documents. The rules developed to ensure functional equivalency are as follows:
• Information or documents including contracts are not rendered unenforceable by being
in e-format.
• A legal requirement that a document be in writing is satisfied as long as the document is
accessible, capable of being retained, and is organized in substantially the same form as
its paper counterpart.
• A legal requirement to provide information or a document is satisfied if the information
or document is recognizable as being in the form required by law and is retained and
accessible.
• A legal requirement to provide original documents is satisfied if there is a reliable assurance as to the integrity of the information, complete and unaltered, and the information
is accessible and capable of being retained.
• A legal requirement for original signature is satisfied if, at that time the electronic signature is affixed to a document, it is reliably connected with the person making it and it is
reliably associated with the relevant e-document.
In 1999, the Uniform Law Conference of Canada (ULCC), whose purpose is to propose and
promote harmonization of legislation across the country, responded to the need for uniformity
and certainty in e-commerce by creating the Uniform Electronic Commerce Act. 26 This act mirrors the Model Law on Electronic Commerce and was recommended to all the provinces and
territories for adoption. This was duly done, and all provinces and territories except Quebec
have now passed conforming legislation. In Quebec, the legislation is the Act to Establish a Legal
Framework for Information Technology,21 and it differs considerably from the Uniform Electronic
Commerce Act. The ULCC has developed other uniform acts in alignment with international
instruments to address the evolution and prevalence of e-commerce. These include the Uniform
Electronic Evidence Act2B and the Uniform Electronic Communications Convention A ct,29 which
implements the United Nations Convention on the Use of Electronic Communications in International Contracts.Jo Variations of these instruments have been adopted across Canada by the
provincial legislatures.
functional equivalency: acceptability of an e-document based on assurances of the integrity of its information such that it
functionsinlaw asan original document
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Chapter 7
BOX 7 .7
Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
229
E-Signatures
Under the common law, a signature serves to verify the person or establish the connection between
the corporation and the document signed. E-documents are, of course, incapable of being signed.
An e-signature may be digital letters, characters, numbers, and symbols and may be accompanied by
a digital certificate or public key cryptography. Legislation in some jurisdictions and for some specified purposes may mandate a particular format to satisfy standards set for thee-signature of certain
documents.
For example, in Canada, PIPEDA allows for the creation of electronic alternatives for doing business
with government agencies, facilitates the use of e-documents in judicial proceedings, and gives legal
recognition toe-versions of official parliamentary publications. Part 2 of this legislation describes the
characteristics of secure electronic signatures and provides that, before a technology or process can
be prescribed,
thee-signature must be unique to the person using it,
the person whose e-signature is on the document must have control of the technology to
attach the signature,
the technology must be used to identify the person using thee-signature, and
thee-signature must be linked to an e-document to determine whether the document has
been changed after the e-signature was attached.
CRITICAL ANALYSIS: Business Law
Case Name and Court
Piaggio & CSpA v Bank of Nova Scotia (Ontario Superior Court,
2011)31
Piaggio CSpA (Piaggio) manufactures Vespa scooters and other
motorcycles in Italy. Canadian Scooter Corp (Scooter), a Canadian importer, entered into a distributorship agreement with
Piaggio for the supply of Italian scooters and motorcycles. Pursuant to this agreement, Scooter requested its bank, the Bank
of Nova Scotia (the Bank), to issue three L/ Cs in the following
names:
1. for the first credit, "Piaggio and CSPA/ Aprilia;'
2. for the second credit, "Piaggio and cspa (Aprilia);' and
3. for the third credit, "PIAGGIO AND CSPNAPRILIA:'
A dispute arose out of non-payment under the UCs. Piaggio
presented documents using its proper legal name, "Piaggio &
CSpA:'The Bank noted the discrepancy between the names on
the documents and the UCs and refused to pay out.
Piaggio sued the Bank, arguing that the discrepancies
were minor and stressed that the Bank was well aware that
Piaggio was the proper beneficiary under the UC irrespective
of the error in the name. It illustrated this point by providing
evidence of (1) the Bank's letter to Piaggio confirming it was
issuing an L/C to "Piaggio & CSPA" as beneficiary; (2) the Bank's
SWIFT communications confirming the L/C amendments described the beneficiary of the L/Cs as "Piaggio & CSPA"; (3) the
address of the beneficiary was identical on all three L/Cs and
related amendments; and (4) there was no legal entity called
"Piaggio & CSpA/ Aprilia" or "Piaggio & CSpA (Aprilia):' In addition to missing the word "Aprilia;· Piaggio committed other
errors in the presented documents, including misplacing the
bank's name, excluding its postal code, and excluding the word
"Canada" from Scooter's name. However, the latter mistakes did
not constitute material defects. With these errors alone, the
Bank would have honoured the L/C. It was because of the absence of the word "Aprilia" in the name on the drafts and documents that the Bank decided to deny the payment.
The Ontario Superior Court of Justice agreed with the Bank's
course of action. It stated that pursuant to the UCP 600, the ICC's
International Standard Banking Practice, and established case
law, the Bank is obligated to strictly comply with the terms of
the UC and has no duty to investigate who is the correct beneficiary pursuant to the contract between Scooter and Piaggio or
to determine whether Piaggio was in fact the only legal entity.
The court stated that the correct spelling of the beneficiary is
fundamental to the UC's integrity as a valued banking product
in international trade. The court also noted that Piaggio's fai lure
to produce an original of one of the amendments to the first UC
in accordance with the terms of the UC justified the Bank's refusal to pay the first UC.
Critical Analysis Questions
1. When a beneficiary receives an UC, what aspects of the
document should she pay attention to?
2. What could Piaggio have done once it saw the
discrepancy in names in the UC?
3. How does the law balance the interests of the
beneficiaries with those of the bank's duty to honour a
complying presentation when its client (the buyer)
contends it doesn't owe the funds to the beneficiary or
asks the bank to deny the payment?
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CRITICAL ANALYSIS: Business Law and Ethics
In exchange for immunity granted under the Competition Bureau's immunity and leniency program
and pursuant to the Competition Act, in 2017 Loblaw Companies Ltd (Loblaw) admitted it had participated in an industry-wide price-fixing arrangement with Canada's top bread suppliers, Canada Bread
and Weston Bakers, for 14 years. The conspiracy involved annually increasing bread prices, averaging
an increase of 10 cents per product, and coordinating their simultaneous application by the major
retailers-namely, Sobeys, Metro, Wal mart, and Giant Tiger. The information provided by Loblaw is
assisting the Competition Bureau in its investigation and prosecution of the other conspirators.
Critical Analysis Questions
1. Is it ethical for retailers and suppliers to canvass and match competitors' prices? Why or why
not? How is it different from competitors agreeing to price match?
2. Why do you think the Competition Bureau needs an immunity and leniency program?
3. Several class action lawsuits have been launched across Canada against Loblaw and the bread
suppliers. What are the potential ramifications for the companies involved stemming from
these lawsuits?
4. What is the maximum financial penalty that Sobeys or Wal mart could face if found guilty of
price fixing?
5. What can a business do to ensure it complies with its ethical and legal obligations?
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7 Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
231
CHAPTER SUMMARY
In this chapter, we discussed:
How a letter of credit {L/C) is structured, how it works,
and why it is significant for international trade.
An L/ C is a written undertaking by an importer's bank to
an exporter's bank that a payment will be made provided that specific terms and conditions are met.
Doctrine of Strict Compliance: payment will be made
only if the documents presented by the exporter conform exactly to the requirements in the written L/C.
Principle of Autonomy: the payment is based on the
documents and not the goods, services, or other performances to which the documents may relate.
Bills of exchange play a significant role in L/ C
transactions.
International transportation considerations and the significance of the documentation that is provided by shippers and carriers.
A bill of lading is a negotiable instrument and is a critical
document in international transactions for the sale of
goods.
Insurance arrangements in international transactions, insurable interests, marine insurance, and subrogation.
Purchasing insurance can significantly reduce risks in
international transactions.
Tort principles and special rules relating to product liability in Canada and elsewhere.
A major concern in international business is the prospect of product liability.
Legal rules for the privacy and protection of electronic
data.
• The Personal Information Protection and Electronic Documents Act, or PIPEDA, sets out how private organ izations
in Canada may collect, use, or disclose personal information in the course of commercial activities.
The principles of the Privacy Directive of the European
Convention on Human Rights form the basis of EU dataprivacy law and have been adopted by many other
countries.
The implications of competition or antitrust law for contract negotiations.
• The OECD defines anti-competitive behaviour as a firm
or firms restricting competition to maintain or increase
market position without providing goods or services of
higher quality or lower cost.
Canada's competition (or antitrust) rules can be found in
the Competition Act.
The impact of e-commerce on business transactions.
• E-commerce rules can be found in the Uniform Electronic
Commerce Act and provincial legislation.
REVIEW QUESTIONS
1. Eastern Industries Ltd, a manufacturer/ exporter in
Canada, is entering into negotiations with Brazilian
Telecom, a potential buyer/ importer in Brazil. The
product is subway cars. What contracts do you
anticipate will arise if the negotiations are successful?
Who wi ll be a party to the contracts?
2. What is the d ifference between a confirming bank
and an advising bank? What obligations and
responsibilities define both kinds of banks?
3. List at least 12 issues that must be addressed by
parties negotiating payment by L/ C.
4. Describe the differences between the usual
documentary credit and a standby UC, and describe
a typical situation in w hich each wou ld be most
commonly found.
5. Describe the two funda mental characteristics of
letter-of-credit transactions and describe the
precautionary measures that you would take to avoid
any losses due to these characteristics.
6. Describe the two important issues in the Angelica
case and report how the Supreme Court of Canada
decided upon each issue.
7. What is the role of a bill of exchange in a letter-ofcred it arrangement? What is particula rly sig nificant
about a negotiable instrument? What is a holder in
due course and what rights does the holder have?
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Part II
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What is the significance of this for the drawer and for
the holder of the bill?
8. Give at least two reasons why it is important to have
some knowledge of the differences among various
forms of documentation issued by ocean carriers.
9. What are the three purposes that a bill of lading may
have? How does an air waybill differ from a
"traditional" bill of lading?
10. What particular legal issue arises as a result of
electronic transmission of a bill of lading? Why is this
knowledge important to international traders
negotiating documentary credit transactions?
11. What is the major difference between liability in
13. What is the major difference in product liability
legislation in Canada as compared with that of the US,
the EU, and China? What less important differences are
there?
14. What is the origin of Canada's legal rules for the
privacy and protection of electronic data? What are
the major principles on which this legislation is based?
15. What are common forms of anti-competitive
behaviour that arise in national and international
business dealings? In what sorts of arrangements
might these arise?
16. What issues arise in connection with e-contracts on
the Internet?
17. What is meant by functional equivalency, and why is
contract and liability in tort?
12. What are the elements that must be proved for a
it important?
successful tort action?
NOTES
1. /CC Uniform Customs and Practice for Documentary
Credits: UCP 600 (ICC, 2007).
12. [2005] 2 SCR 473.
13. COM(2018) 184 final - 2018/ 0089 (COD): Proposal for
2. Ibid.
a Directive of the European Parliament and of the
Council on Representative Actions for the Protection
of the Collective Interests of Consumers, and
Repealing Directive 2009/ 22/ EC (2018), online: EUR-
3. Ibid.
4. 858 F (2d) 1264 (7th Cir 1988).
Lex < https://eu r-lex.europa.eu/ legal-content/ EN/
TXT/?uri=CELEX%3A52018PC0184>.
5. [1987] 1 SCR 59.
6. RSC 1985, c B-4.
14. Directive 85/374/ EEC.
7. Uniform Commercial Code (Last visited 29 October
2019), online: Legal Information Institute <https://
www.law.cornell.edu/ucc/ index.html>.
8. League of Nations, online: Lex Mercatoria <https://
www.jus.uio.no/ lm/ bills.of.exchange.and.promissory.
notes.convention.1930/ doc.html>.
9. United Nations (2009), online (pdf): UNCITRAL
<https://www.uncitral .org/pdf/eng lish/ texts/
transport/rotterdam_rules/Rotterdam-Rules-E.pdf>.
10. Comite Maritime International (last visited 29
October 2019), online: CM/ <https://comitemaritime.
org/work/rules-for-electronic-billing-of-lading/>.
11. (1996), on line: UNCITRAL <http://tfig.unece.org/
contents/ uncitral-model-law-ecommerce.
htm#targetText=Purpose%3A%20The%20Model%20
Law%20on,legal%20predictability%20for%20
electronic%20commerce>.
15. Helmut Koziol and Zhu Yan, "Background and Key
Contents of the New Chinese Tort Liability Law;'
(2010) Journal of European Tort Law 1 (3): 328-61.
doi:10.1515/ JETL.2010.328.
16. SC 2000, c 5.
17. (Last modified 31 October 2019), on line: Government
of Canada <www.priv.gc.ca>.
18. UNCTAD, "Data Protection and Privacy Legislation
Worldwide" (last visited 19 November 2019), online:
< https://u nctad.org/ en/ Pa ges/ DTUSTl_a nd_ICTs/
ICT4D-Leg islati on/ eCom-Data-Protecti on-Laws.
aspx>.
19. "Investigation into Equifax Inc and Equifax Canada
Co's Compliance with PIPEDA in Light of the 2017
Breach of Personal Information" (last modified 9 April
2019), on line: OPC <https://www.priv.gc.ca/ en/
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 7
Negotiation of International Contracts (Part 2): Contract Challenges and Risk Management
opc-actions-and-decisions/ investigations/
233
26. (1999), online: ULCC < https://www.ulcc.ca/ en/
investigations-into-businesses/ 2019/
uniform-acts-new-order/
pipeda-2019-001 />.
older-uniform-acts/ 703-electronic-commerce/ 1647-
20. Directive 95/ 46/ EC (last visited 1 November 2019),
online: EUR-Lex < https://eur-lex.europa.eu/ legalcontent/ EN!TXT/?uri=celex:31995L0046>.
21. The Convention for the Protection of Human Rights and
uniform-electronic-commerce-act-1999>.
27. CQLR, c C-1.1.
28. (Last visited 1 November 2019), online: ULCC <https://
www.ulcc.ca/ en/ uniform-acts-new-order/
Fundamental Freedoms (last visited 31 October 2019),
older-uniform-acts/ 749-electronic-evidence/ 1924-
online: ECHR < https://www.echr.coe.int/ Pages/ home.
electronic-evidence-act>.
aspx?p=basictexts&c=>.
22. European Commission (May 2018), online: European
Union < https://ec.europa.eu/ commission/ priorities/
justice-and-fundamental-rights/dataprotection/ 2018-reform-eu-data-protection-ru les/
eu-data-protection-rules_en >.
23. 15 USC§§ 1-38.
29. John Gregory (August 2011 ), online: Uniform Law
Conference of Canada < https://www.ulcc.ca/ images/
stories/ 201 l_pdf_en/ 2011 ulcc0014.pdf>.
30. United Nations Commission on International Trade
Law (2005), online: United Nations < https://uncitral.
un.org/ en/ texts/ ecommerce/ conventions/
electronic_communications>.
24. RSC 1985, c C-34.
31. Piaggio & CSpA v Bank of Nova Scotia, CV-11-9066-
25. United Nations, online (pdf): UNC/TRAL < https://
00CL (3-30-2011 ), 2011 CarswellOnt 15964 (Sup Ct J).
www.uncitral.org/ pdf/ english/ texts/
electcom/ 05-89450_Ebook.pdf>.
FURTHER READING
Documentary Credits
Agasha Mugasha, The Law of Letters of Credit and Bank
Guarantees (Annandale, AU: Federation Press, 2003).
Institute of International Banking Law and Practice,
International Standby Practices ISP 98, pub. no. 590 (New
York: International Chamber of Commerce, 1998).
Raymond Jack, Ali Malek, & David Quest, The Law and
Practice of Documentary Credits (London: Bloomsbury
Professional, 2009).
Rolf A Schutze & Gabriele Fontane, Documentary Credit
Law Throughout the World, pub. no. 633 (Paris:
International Chamber of Commerce, 2001 ).
Marine Insurance
Aldo Chircop, William Moreira, Hugh Kindred, & Edgar
Gold, eds Maritime Law, 2nd revi sed ed (Toronto: Irwin
Law, 2016).
WEBSITES
Com petition Bu reau of Canada : <http://w ww.
competitionbureau .g c.ca>
International Chamber of Commerce (ICC): < http://www.
iccwbo.org >
LIST OF CASES
Bank ofNova Scotia v Angelica-Whitewear Ltd, [1987] 1 SCR 59.
British Columbia v Imperial Tobacco Canada Ltd, [2005] 2
SCR473.
lnstituto nacional de Comercialization Agricola (lndeca) v
Continental Illinois Nat'/ Bank, 858 F (2d) 1264 (7th Cir 1988).
Piaggio & CSpA v Bank of Nova Scotia, CV-11-9066-00CL
(3-30-2011 ), 2011 CarswellOnt 15964 (Sup Ct J).
© [2020) Emond Montgomery Publications. All Rights Reserved.
© [2020] Emond Montgomery Publications. All Rights Reserved.
CHAPTER 8 /TIMOTHY M. LOWMAN
Intellectual Property and
International Business
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand:
• why intellectual property is important to international business
Introduction 235
The International Intellectual Property Framework 237
Trade Secrets/Confidential Information 238
Patents 242
Trademarks 247
Copyright 253
Industrial Designs 259
Geographical Indications 262
Personality Rights 264
Choice of Intellectual Property Rights: AFinal Word 265
Chapter Summary 268
Review Questions 268
• what types of property rights are described as intellectual property
• what trade secrets, patents, trademarks, copyright, industrial designs,
geographical indications, and personality rights are and how each of these
is protected internationally
• why intellectual property protection can be assured only by engaging the
specialized services of professionals in the relevant jurisdictions where
protection is sought
Notes 269
Further Reading 271
Websites 271
List of Cases 272
Introduction
Intellectual property has been defined as property that is created by human intellect or creativity and that has commercial application. It is intellectual in the sense that it encompasses
intangible subject matter-ideas, schemes, business and product imagery, and relationships with
the public (goodwill) arising from various forms of human innovation. It is property in the
sense that the rights associated with intellectual property are based on the owner's legal right to
exclude others from using the subject matter, that ownership of the rights can usually be transferred or assigned, and that the right to use them can be commercialized.
Intellectual property includes such diverse subject matter as
• confidential information: protection for trade secrets and lesser proprietary information that
provides a competitive edge, such as information relating to composition or design of products, methods of manufacture, market research, business strategies, and customer profiles;
• patents: protection for new, non-obvious, and useful inventions, including improvements
to existing inventions;
• trademarks: rights in words, designs, and other indicia that distinguish the source of
goods and services from other goods or services;
intellectual property: property created through human intellect or creativity that hascommercial application, such asinventions,
designs, literary, musical and artistic works, andsymbols, names, and images used in commerce
235
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• copyright: rights in original works including books, magazines, plays, films, photographs, drawings, sculptures, and architectural designs, as well as computer programs
and databases;
• industrial designs: rights in ornamental or aesthetic features of a manufactured article;
and
• personality rights: rights that prominent individuals such as entertainers and sport figures have in their personas, including their names, nicknames, and other distinguishing
features.
The breadth of this definition underscores the importance of intellectual property as a
necessary component of both the economic growth and the financial success of businesses.
In fact, m any businesses expand into other countries by commercializing intellectual property rights through assignments, licences, joint ventures, and other commercial agreements.
The proportion of world economic activity that is based on intellectual property is growing
at an exponential rate. The commercialization of intellectual property (also known as "technology transfer") represents a major source of global revenue, and it is expected that this trend
will grow. In 2017 the World Intellectual Property Organization (WIPO ) reported that the
macroeconomic contribution of intangible capital to global value chain production exceeded
US$5.9 trillion in 2015.1
The legal protection of intellectual property rights is both important and sophisticated. Intellectual property rights are international in that their existence does not depend on where the
creative activity took place. A web of international treaties and local implementation laws have
increased cross-border protection for certain intellectual property rights. These measures are
intended to ensure, among other things, that national laws do not discriminate against foreign
owners of such rights. However, the ability to directly assert those rights is territorially based.
For example, a Canadian patent, with limited exceptions, cannot be infringed by activities that
take place outside Canada. The territorial limitations of intellectual property rights are increasingly problematic because intellectual property is increasingly portable. As one writer has commented, "a person with the skills to write a complex software system can walk past any customs
officer in the world with nothing of value to declare:'2
The law relating to intellectual property is the subject of a number of complex and sometimes overlapping domestic and international regimes.3 It is constantly in flux as it is developed, refined, and grows more complex to serve various economic and social goals and to
strike a reasonable balance among the interests of owners and users. These interests include
the need for creative incentive, the desire for generally unfettered competition, and even
BOX 8.1 The Importance of Intellectual Property in Today's
Global Economy
Jim Balsillie, retired chairman and co-CEO of Research in Motion (BlackBerry) and co-founder of the
Institute of New Economic Thinking said,
Over the past 30 years, technological advances and their economic benefits became rooted
in the new rule-of-law framework that allowed for innovation to occur and get to the market. That new global economic framework is based on intellectual-property rights (IPR).
Today, intellectual property (IP) is the world's most valuable corporate asset and the companies that own the most IP are the most valuable entities in the world. IP began as an
incentive for inventors, then shifted to a tradeable commodity and then, most recently, to a
business investment protected by investor-state dispute settlement mechanisms.4
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8
Intellectual Property and International Business
cultural distinctions. Because intellectual property is novel by nature, existing legal systems
are frequently challenged by having to address new and complex issues that have serious economic consequences.
It is generally accepted that intellectual property rights encourage innovation, and that without sufficient intellectual property protection on a global basis, international business will be
limited because creators will refuse to divulge to third parties any detailed information relating
to their research and development. The result would be less dissemination of ideas, fewer trading
opportunities, and, ultimately, a poorer world. Developed and developing countries, however,
have different perspectives on what is sufficient protection. Because developing countries are not
major developers of intellectual property, they have little incentive to protect this form of property. From their perspective, weak protection is desirable and justified because the developing
world needs maximum access to intellectual property for its development; such knowledge is
considered the "common heritage of humankind" and should be freely available to all. The general perspective of the developed world is that information and its creative use are a valuable
resource upon which developed countries' economic well-being depends.
In the end, the task of developing, implementing, and continually amending acceptable international intellectual property-protection regimes is a daunting one: negotiators from different
countries with often irreconcilable perspectives must agree on what property will be protected
and what limits or exceptions are acceptable on a multilateral basis.
The International Intellectual Property Framework
This section explores some of the main treaties and conventions governing intellectual property
protections internationally.
World Trade Organization
The World Trade Organization (WTO) (see Chapter 2) is an international organization of 164
member states, including Canada, that governs the global rules of trade among nations. While
the earlier General Agreement on Tariffs and Trades dealt only with trade in goods, the WTO
deals with trade-related aspects of intellectual property as well as trade in both goods and
services.
Agreement on Trade-Related Aspects of Intellectual Property Rights
Along with the multilateral agreement establishing the WTO, the Agreement on Trade-Related
Aspects oflntellectual Property Rights (TRIPS Agreement) was established on January 1, 1995.6
The TRIPS Agreement sets minimum standards for intellectual property regulation and was
a historic first agreement to introduce intellectual property rules into the multilateral trading
system. Its objective was to narrow the gaps in how all types of intellectual property rights are
protected, including
•
•
•
•
•
•
copyright and related rights;
trademarks;
geographical indications;
industrial designs;
patents; and
undisclosed information, including trade secrets.
While agreement was achieved on mandatory, compliant intellectual property laws, controversially, those laws ensure that intellectual property laws of developing countries will be the
same or similar to those of North America and Europe, and they leave little opportunity for
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developing countries to tailor their intellectual property regimes to meet regional or individual
needs unless they wish to withdraw from the WTO.
Less controversially, the basic principles of the TRIPS Agreement include a commitment
to national treatment (treating both one's own nationals and foreigners equally) and mostfavoured-nation treatment (equal treatment for nationals of all WTO trading partners). The
agreement also covers other matters, including standards of protection, how member countries
should enforce those rights nationally, and how to settle intellectual property disputes between
WTO members. The agreement also established a council for trade-related aspects of intellectual
property rights (the TRIPS Council) to monitor and manage administrative issues surrounding the agreement, ensure member compliance, and provide assistance to members in matters
of dispute settlement. The subsequent integration of the TRIPS Agreement with the Dispute
Settlement Understanding of the WTO was an important step, indicative of the importance of
intellectual property in the world trading system.
The TRIPS Agreement is administered by the WTO and is binding on all WTO member
nations, including Canada.
World Intellectual Property Organization
The World Intellectual Property Organization (WIPO) was established in 1967 by the WIPO
Convention. There are currently 192 member states, including Canada, which has been a member since 1970. It is a specialized agency of the United Nations (UN) with a mandate to maintain
and increase respect for intellectual property throughout the world. WIPO and the WTO have a
mutually supportive relationship set out in the Agreement Between the World Intellectual Property Organization and the World Trade Organization.7
WIPO currently administers 26 treaties, including two of the most important intellectual
property treaties: the Paris Convention for the Protection of Industrial Property8 (the Paris Convention) for the protection of patents and trademarks, and the Berne Convention for the Protection of Literary and Artistic Works 9 (the Berne Convention) for the protection of copyright.
All WIPO-administered treaties fall into three groups:
1. treaties that establish international protection,
2. treaties that facilitate international protection, and
3. treaties that establish classification systems and procedures for improving them.
Canada is a party to some, but not all, of the treaties administered by WIPO.
Trade Secrets/Confidential Information
Defining Characteristics of Trade Secrets/Confidential Information
If most people were asked what form of intellectual property is most often relied on by businesses to protect competitive advantage, they would select from among patents, trademarks, and
copyright. The most common form of protection used by business is, in fact, the maintenance of
information as a "trade secret" or, as the concept is more broadly known, "confidential information:' Since most intellectual property is initially confidential information, many business must
choose early on whether to maintain the information as confidential or to exploit other forms of
intellectual property protection.
For centuries, people and businesses the world over have maintained confidentiality for
commercially valuable information. Apart from the oft-cited example of the secret formula
World Intellectual Property Organization (WIPO): aspecialized agency of theUnited Nationswith amandatetoencourage
creative activity and to promote the global protection of intellectual property
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8 Intellectual Property and International Business
for Coca-Cola, China secured commercial advantage for centuries by maintaining secret local
know-how in sericulture, which is the harvesting of silkworm thread. The Zildjians, an Armenian family, maintained an effective monopoly for hundreds of years in the production of superior orchestral cymbals simply by keeping their manufacturing techniques secret.
Scientific, technical, financial, and marketing information may all come within the scope of
confidential information. It may include such diverse material as formulas; processes; computer
programs and code; layouts; interfaces; databases; product concepts and designs; operations
manuals; research data and documents; supplier, distributor, and customer lists; and information
about customers and their needs and preferences. If the information is
• of a commercial nature,
• used in business to provide a competitive advantage, and
• kept in confidence,
it may be accorded legal protection as confidential information.
Confidential information receives relatively little attention compared with other areas of
intellectual property. There are many reasons for this, all related to the very nature of the property. For example, (1) there are few common rules and regulations internationally, even though
confidential information is, in fact, considered similarly in most jurisdictions; (2) disputes with
respect to enforcement are frequently conducted in confidential settings, out of the public eye;
and (3) unlike the other forms of intellectual property, confidential information does not engage
a government-operated registration process. Rather, protection is implemented by individual
businesses under a wide variety of practical regimes.
Maintenance of information as confidential has advantages for businesses. Larger volumes
of information can be protected through use of confidential information than through patents,
trademarks, industrial designs, or copyright, all of which have specific threshold requirements.
For example, many technical innovations provide significant commercial advantages for a particular business but lack the inventive step or novelty necessary to make them patentable.
Confidential information, however, can cover any information that provides a competitive
advantage, even if some others may also be using it, as long as it is not generally available to
the public. Maintaining information as confidential is also almost always less expensive than
securing intellectual property protection, which requires registration, such as patents and industrial designs. Registration invariably involves the expenditure of time with, and money on, professionals outside of the business. Maintaining confidential information, by contrast, requires
only that the owner take reasonable steps to ensure the information does not become generally
known. Employing security measures for facilities and electronic systems where the information
is stored and securing confidentiality agreements with employees, contractors, suppliers, licensees, and others who may require access to the information is usually sufficient.
The simplicity of the legal concept of confidential information is in contrast to the increasingly complex practical problems of maintaining information as confidential. The difficulty in
maintaining information as confidential arises from
• the growing volume of data that is susceptible to designation as confidential information;
• the proliferation of innovation and, in particular, the use of computer systems for information storage and transfer, which has led to cyber-espionage and theft of confidential
information on an unprecedented scale;
• the growth of workforce mobility in the global market;
• the increasing complexity of distribution and supply chains; and
• the proliferation of outsourcing together with digital communication.
The above factors have all conspired to make it increasingly difficult to control the access
to, and use of, confidential information. For many businesses, the issue is not restricted to
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protecting their own information; they also need to avoid unwanted exposure to confidential
information-including trade secrets-of third parties, such as former employers of newly hired
employees.
Confidential information is also an integral part of the protection of other intellectual property rights, specifically patents. Because the patent regime in many jurisdictions requires absolute novelty, avoidance of public disclosure of information relating to the invention until the
filing date of the application is essential. During this period, all security measures required for
protection of the business's most valuable confidential information must be deployed.
Ownership, Exploitation, and Transfer of Confidential Information Rights
The concept of ownership is problematic in the case of confidential information law. In Canada,
courts have cast doubt on whether confidential information can be considered as purely property. Critically, the law does not preclude either independent development of the same information or its acquisition by any proper means (for example, after the restrictive terms of an
employment contract or licence expire, or where the information is obtained from a person
not obliged to hold it in confidence). As a result, an owner of confidential information has no
monopoly right in the information; he has only an enforceable remedy for breach of an express
or implied agreement to keep it confidential. The enforcement of rights in confidential information, whether based on legal notions of property, implied contract, or fiduciary obligation, arises
only from evidence that the information is or has been
• confidential,
• communicated by the holder to the recipient in circumstances of confidence, and
• misused by the recipient to secure a commercial advantage over others without access to
the information.
In considering the issue of whether confidential information is owned by the employer or by
the employee/independent contractor who developed it, Canadian courts have had recourse to
the same principles that apply to the ownership of inventions: the nature of the employment or
contracting relationship; use of the employer's time, facilities, personnel, and equipment; and
whether its development was within the scope of the employee's or contractor's duties.
Most developed countries accept that employees have a right to exploit the knowledge,
skills, and experience they acquire in the course of employment to earn their living. However,
there is an enforceable, concurrent obligation imposed on employees during their employment to act in good faith toward employers with respect to the use and disclosure of significant confidential information. For example, even after their employment ends, employees are
obliged not to use or disclose trade secret information of the former employer. Employers
often seek to enshrine and enlarge the obligation in employment contracts, prohibiting the
post-employment use and disclosure of general confidential information. However, restrictive
covenants such as agreements not to compete are critically reviewed by most courts to ensure
they are not so restrictive that they constitute an undue restraint of trade. The distinction
between the former employee's rights and her obligations is not always easy to draw. Even in
the absence of an employment agreement setting out obligations of confidence, employees
are under a clear common law duty not to disclose or use confidential information about the
particular trade secrets of present or former employers, whether created by the employee or
others. This duty is more onerous where the employee has a senior position with the company
and, as a result, is subject to fiduciary duties.
As with most other forms of intellectual property, confidential information is assignable and licensable, and non -disclosure agreements relating to confidential information
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are a frequent component of joint venture arrangements and various forms of business
collaboration.
Infringement and Enforcement of Confidential Information Rights
The enforcement of confidential information rights, as in other forms of intellectual property, is
governed by national or sub-national legal systems, and unauthorized use and disclosure of confidential information is inhibited by common law or statutory means. A number of jurisdictions
(not including Canada) have enacted specific legislation for the protection of confidential information, while others consider confidential information an aspect of unfair competition or tort
law. Still others have enacted criminal, administrative, commercial, and civil law provisions prohibiting the unauthorized use or disclosure of trade secrets. Furthermore, because employees,
consultants, independent contractors, and joint venturers are most often privy to trade secrets,
national contract law and employment law statues relating to employee contracts are frequently
engaged in the protection of confidential information.
In Canada, if the holder of confidential information cannot rely on an express or implied
contract (for example, in cases involving former employees), the breach of confidence action
provides a mechanism to require the person who owes the obligation to respect the confidentiality of such information and pay damages arising from the breach. An action for breach of
confidence has three basic requirements: a relationship of confidence at the time of disclosure,
specific confidential information, and unauthorized use of that information. The leading Canadian case on the enforcement of confidential information rights is Cadbury Schweppes Inc v
FBI Foods Ltd.ID
The Treaty Framework of International Confidential Information Protection
The Paris Convention does not specifically mention confidential information, but article 10,
relating to unfair competition, requires protection against any act of competition contrary to
honest practices in industrial or commercial matters. Clear international standards for protecting confidential information were established as part of the TRIPS Agreement. Article 39 provides that member states shall protect "undisclosed information" against unauthorized use "in
a manner contrary to honest commercial practices:' 11The standard adopted by the majority of
members of the WTO for laws relating to such undisclosed information is that the information
must not be generally known or readily accessible, must have value because it is secret, and must
be the subject of"reasonable steps" 12 to keep it secret. As for "manner[s] contrary to honest commercial practices;' these include unfair competition, breach of contract, breach of confidence,
and inducement to breach, as well as the acquisition of undisclosed information by third parties
who knew (or ought to have known) that such practices were involved in the acquisition. The
TRIPS Agreement does not require undisclosed information to be treated as a form of property,
but it does require that a person lawfully in control of such information have the possibility of
preventing it from being disclosed to, acquired by, or used by others without consent and in a
manner contrary to such practices.13
Articles 42 to 49 of the TRIPS Agreement cover enforcement and include a provision that
civil judicial proceedings be available to protect confidential information from disclosure. 14
Paris Convention: the Paris Convention for the Protection ofIndustrial Property; enables residents of member countries tofile
patent applications in other member countries and to receive national treatment and priority rights
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Private International Law
Recent Canadian Developments
June 17, 2019, was the coming-into-force date of amendments
to Canada's intellectual property statutes intended to harmonize Canada's intellectua l property laws with other developed
countries in accordance with Canada's obligations underWIPOadministered international treaties.
The treaties are
1. Protocol Relating to the Madrid Agreement Concerning
the International Registration of Marks (the Madrid
Protocol): The Madrid Protocol creates an international
registration system for trademarks and allows trademark
owners to protect their marks in multiple countries by
filing one international application and designating one
or more member countries in which t he mark is to be
p rotected. The Protocol relates to the earlier Madrid
Agreement and aims to render the Madrid system more
flexible and more compatible with the domestic legislation of certain countries that had not been able to accede to the Madrid Agreement.15
2. Singapore Treaty on the Law ofTrademarks (the Singapore Treaty): The Singapore Treaty harmonizes the administrative trademark-registration procedures by
establishing common standards for the procedural aspects of trademark registration and licensing.16
3. Nice Agreement Concerning the International Classification of Goods and Services for the Purposes of the
Registration of Marks (the Nice Agreement): The Nice
Agreement provides a comprehensive classification system of goods and services for the purpose of registering
trademarks. Classification is done according to a numbered list of classes and an alphabetical list of goods
and services so that applicants themselves do not have
to name each particular good or service to which the
registration relates.17
4. Geneva Act of the Hague Agreement Concerning the
International Registration of Industrial Designs (the
Hague Agreement): The Hague Agreement creates an
international registration system for the protection of
industrial designs whereby an applicant can obtain protection in a number of member countries by a single
application. 18
S. Patent Law Treaty: The Patent Law Treaty is intended to
harmonize and streamline formal procedures in respect
of national and regional patents and patent applications
by providing maximum sets of requirements that the
patent office of a contracting party may apply.19
(A discussion of these treaties can be found on the "Extras"
tab at <www.emond.ca/ laib4>)
Patents
Defining Characteristics of Patents
Patents are statutory monopoly rights that provide protection for new and useful "inventions;'
which is broadly defined to include machines, processes, compositions of matter, and improvements to existing inventions.20 The monopoly rights are only available through the registration
of an application for a patent, which in Canada is pursuant to the Patent Act.21 An issued patent provides the owner with certain rights to exclude others from commercially exploiting the
invention that is disclosed and claimed in the patent, generally for a non-renewable period of
20 years following the date of filing the patent application. Patent rights are generally based on a
bargain theory. In exchange for the grant of a monopoly, the inventor is required to provide full
disclosure of the invention so that others can fully benefit from it when the monopoly period
expires.
Patent rights are national. To obtain patent protection, an application must be filed in each
country where protection is sought. International treaties are in place to facilitate the process of
filing applications applicable in more than one country.
In most countries, to obtain a valid patent, three conditions must be demonstrated in connection with the invention: novelty, utility, and non-obviousness.
patent: agovernment authority that provides monopoly rights in an invention for aset period, including the right to excludeothers
from making, using, or selling the invention
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Importantly, in order to be patentable, the invention claimed must be proper subject matter
for patent protection. Internationally, "patentable subject matter" is determined by statute. The
general rule, established by article 27.1 of the TRIPS Agreement, is that patent protection is
available for inventions in all fields of technology. Abstract ideas, scientific theories, mathematical formulas, methods of medical treatment (as opposed to medical products), business methods, higher life forms, and computer software, for example, are not patentable in many countries
regardless of their novelty, utility, or lack of obviousness. These exclusions are expressly permitted by the agreement (article 27.2). Member states are also enabled by article 27.3 to exclude
from national patent protection inventions that would contravene public order or morality.
The patchwork of patentability that results from different jurisdictional treatment of patentable subject matter can be readily illustrated. For example, in the United States, methods of
medical treatment are patentable, but they are not in Canada.22
"Business method" patents claim novel methods of doing business such as ordering goods and
services. They relate largely to financial data processing in e-commerce, banking, and insurance.
Many of these methods are derived from actuarial, statistical, and other mathematical algorithms
and models. They often include software processes. To the extent that they are divorced from
machines or other physical embodiments, however, many jurisdictions consider these methods
to be in the realm of mathematical formulas, abstract ideas, and professional skills and, therefore,
not patentable. The European Patent Office (EPO), which coordinates patent application processes
for all EU member states, formally prohibits the granting of patents for the following: "schemes,
rules and methods for performing mental acts, playing games or doing business, and programs for
computers" where the patent claims are directed to those items "as such:' 23
Treatment of business methods in the United States is different from in Europe. Since the
State Street24 decision of the US Supreme Court (the US) in 1998 determined that methods of
doing business are not excluded subject matter, a flood of patent applications and issued patents
has resulted. In a more recent decision, Bilski v Kappos,2s the US focused on distinguishing patentable subject matter and found that a patent method for hedging losses in the energy sector
was a "mere abstract idea'' and, therefore, not patentable. Uncertainty remains in the United
States concerning the distinction between applications of abstract ideas, which are patentable,
and abstract ideas, which are not.
In Canada, the treatment of business methods is different from the US and European treatments. Not until the 2011 and 2012 decisions of the Federal Court and Federal Court of Appeal
in relation to Amazon.corn's "one-click" patent application did it become clear that business
methods are patentable in Canada (see Box 8.3).
The Harvard Mouse case illustrates the different national treatments afforded to the patenting
of living organisms. The "Harvard Mouse" was a transgenic mouse with cells genetically altered
by a cancer-promoting gene (oncogene) for cancer research. It received patent protection elsewhere, including the United States, Europe, Japan, Australia, and Korea, but the Supreme Court
of Canada rejected the patent claim on the mouse itself.26 The majority of the court concluded
that the patenting of a higher life form is impermissible because it is not a "manufacture" or
"composition of matter" within the meaning of"invention'' in section 2 of the Patent Act. Higher
life forms, the court held, have characteristics that transcend the genetic material of which they
are composed, and patenting such life forms raises highly complex and serious practical, ethical,
and environmental issues that are properly left to Parliament.
Related issues arose in Schmeiser v Monsanto, decided by the Supreme Court 18 months after
the Harvard Mouse case (see Box 8.4).
The patentability of computer software has been a particularly vexing issue internationally.
While limited protection is generally available under copyright law for software-related inventions, national practices and case law relating to the patentability of software-related inventions
vary widely.
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Private International Law
Case Highlight
Amazon.com
Case Name and Court
Amazon.com Inc v Canada (Attorney General) (Federal Court of
Canada, 2010);27 Canada (Attorney General) v Amazon.com Inc
(Federal Court of Appeal, 2011 )28
Facts
In 1998, Amazon.com filed a patent application (CA 2,246,933)
titled "Method and System for Placing a Purchase Order via a
Communication Network:•29 The invention allows a customer
to purchase an item on line with a single click of a mouse. This
application is often referred to as the "one-click" patent application. The Patent Office found the invention to be novel and
non-obvious but refused the application on the basis that it
was directed to non-patentable subject matter. In analyzing
the claims of the application, the Patent Office focused largely
on determining what it considered the "actual invention" of
the claims and whether that invention comprised patentable
subject matter. On Amazon.corn's appeal to the Federal Court,
the court disagreed with the Patent Office and set the test for
determining patentable subject matter.
Issue
What is the test in Canada for patentable subject matter?
Decision
If the claim, as purposively construed, is directed toward a machine, manufacture, or composition of matter, then the claim
meets the statutory threshold for patentable subject matter.
If the claim, as purposively construed, is directed toward a
method or process, it meets the definition of the term "art" if:
(1) it is not a disembodied idea but has a method of practical
application; (2) it is a new and inventive method of applying
skill and knowledge; and (3) it has a commercially useful result.
Applying that test, the Federal Court found the one-click
system claims disclosed a machine that is used to implement
the one-click ordering system and was, therefore, patentable
subject matter. When construing the process claims, the Federal Court found the claimed invention to be a process that
uses stored information and cookies to enable customers to
order items over the Internet simply by clicking on them on
screen. Since the claims were not rejected for lack of novelty,
the Federal Court found that an online ordering system that
facilitates this process adds to the state of knowledge in this
area. The Federal Court further found that the process is not
merely a disembodied idea but is put into practice through
the use of cookies, computers, the Internet, and the customer's
own action. Finally, the Federal Court found that there was an
undisputed commercially applicable result.
On appeal, the Federal Court of Appeal confirmed that
there is no Canadian jurisprudence determining that a business method cannot be patentable subject matter, and the
court rejected the approach adopted by the Patent Office as
incorrect in law. However, the court returned the patent application to the Patent Office for review, noting that it (the court)
generally requires the expert evidence of persons skilled in
the art in order to properly analyze claims, and because such
evidence was not available, the Federal Court's analysis lacked
the necessary foundation. On January 17, 2012, Amazon.corn's
patent issued. However, the Patent Office does not publish reasons for its decision, so no further insight is available. To date,
the patent has not been the subject of infringement or invalidity proceedings in Canada.
Obtaining a Patent
There is no such thing as a "world" or "international" patent. The process of obtaining a patent
involves filing an application in one or multiple countries or in a regional office, if available.
A patent is granted by a national patent office or by a regional office established by a multilateral treaty or agreement. The EPO and the African Regional Intellectual Property Organization
(ARIPO) are examples of regional offices that accept patent applications and grant patents that
have the same effect as if they were filed or issued in a member state of the region. In addition,
any national or resident of a contracting state of the Patent Cooperation Treaty (PCT) may file a
single international patent application under the PCT.30 Doing so has the same effect as filing a
national patent application in each contracting state designated by the applicant. However, even
after filing under the PCT, the applicant must enter and prosecute the application in the national
or regional patent office of each designated state. The PCT procedure, in other words, provides
for filing a standardized international application, but that application may be ultimately granted
or rejected in each designated state according to its local law.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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BOX 8.4
Intellectual Property and International Business
245
Case Highlight
Monsanto v Schmeiser
Case Name and Court
Monsanto Canada Inc v Schmeiser (Supreme Court of Canada,
2004)31
Facts
Monsanto, an agricultural company, sued Saskatchewan farmer
Percy Schmeiser for collecting and using seeds of Monsanto's
patented Roundup Ready canola without paying the licensing
fee to Monsanto.
acres of Roundup Ready cano la that would otherwise have
cost him $15,000. Regarding the important issue of patenting
higher life forms- in this case, a canola plant-the courts at
trial and at both levels of appeal held that Schmeiser infringed
the Monsanto patent notwithstanding the fact that the claims
of the patent were directed to the plant gene and cells on ly.
While there were no claims directed to the canola plant itself,
the patented genes were found to be present throughout the
genetically modified plant, and the patented cel ls were found
to compose the entire physical struct ure of the plant.
Issue
Was Schmeiser liable for appropriating patented seeds that his
neighbour had paid for?
Decision
In a S- 4 decision, the Supreme Court found that Schmeiser had
deliberately cultivated, segregated, and bagged Monsanto's
seeds and sowed them. It found that he cultivated over 1,000
Analysis/Application
If we consider the results in both the Harvard Mouse and Schmeiser cases, we find that while higher life forms (whether
plant or animals) are not patentable in Canada, valid claims to
genetically modified cells or genes can confer patent protection on a transgenic higher life form. Parliament has still taken
no action on the issue of patenting higher life forms.
Prior to filing a patent application, a patentability search is typically conducted. This
involves researching "prior art" in order to determine whether the invention may be patentable. The term "prior art" is not uniformly defined internationally. It generally refers to the
existing state of knowledge surrounding the invention. Depending on the country, however, it
can broadly include any information that is publicly available anywhere in the world through
written or oral disclosure or, more narrowly, through information disclosed in publications
(including patents and published patent applications). In general, any invention that is made
public before an application is filed is considered prior art. As a result, the inventor's public
disclosure of the invention prior to filing a patent application can preclude the obtaining of
a valid patent for that invention. Under these circumstances, the invention would be considered prior art and may not comply with the novelty requirement. To provide relief from this
circumstance, and to help ensure inventors have a reasonable opportunity to secure needed
benefits from disclosure, such as financing of further research and development, some countries employ a grace period. This allows inventors and their assignees to disclose inventions
during a specific period before filing a patent application without running afoul of novelty or
non-obviousness requirements.
Where a patentability search is conducted and the results suggest the invention may be patentable, a patent application is prepared. Generally, patent applications will describe the invention and indicate its technical field. They will also include the background as well as a description
of the invention in sufficient detail that an individual with an average understanding of the field
will be able to use that description to reproduce the invention at the end of the monopoly period.
Such descriptions are usually accompanied by illustrative drawings. Most importantly, they end
with a recitation of the specific claims that determine the scope of protection for the patent.
The claims are the crucial part of the patent: they enable the public to know what it is excluded
from doing. The drafting, procedural, and substantive requirements for patent applications vary
significantly from one country to another. (An example of a patent, including an excerpt of the
claims, can be found at <www.emond.ca/laib4> under the "Extras" tab.)
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After a patent application is filed, the relevant patent office will engage in a process of examining the application for technical compliance, searching for prior art, and conducting a substantive examination of the application to ultimately determine whether it meets the requirements
of novelty, utility, and non-obviousness. This process, called "patent prosecution;' often takes
years to complete. Indeed, depending on the country, the patent office will not examine applications until requested to do so, subject to a domestic limitation period (in Canada, five years
from the filing date). This is intended to give inventors more time to assess the marketability of
their inventions. Various maintenance fees, established by each of the national patent offices, are
required to keep patent applications as well as issued patents from lapsing.
Pending patent applications are laid open to public inspection 18 months after the earlier of
the actual Canadian filing date or the date on which it was first filed elsewhere, also known as
"the priority date:'
Most countries require patent-maintenance fees to be paid by the applicant. In Canada, the payment of these fees is required starting two years after the Canadian patent application filing date.
If the patent prosecution process concludes in favour of the applicant, a patent is granted and
issued.
Patent drafting and prosecution is a highly specialized process, and it is recommended that a
patent seeker consult a professional patent agent or lawyer who specializes in intellectual property in the country in which the patent seeker wishes to obtain patent protection. That professional can coordinate the patenting process in other requested countries through the retaining
of local professionals.
Ownership, Exploitation, and Transfer of Patent Rights
An inventor-a person who conceives of the invention and reduces it to a definite and practical
form-is considered the owner of the invention unless ownership is assigned to others. In many
jurisdictions, the law is unclear on the issue of whether the employee or the employer owns an
invention invented by an employee. Canadian courts, for example, will consider a number of
factors in making this determination, including whether the employee was hired for the specific
purpose of inventing, whether the employee was privy to confidential information of the em ployer used in connection with the invention, and whether the problem solved by the invention
was the problem that the employer directed the employee to solve. As a result, it is prudent to
address issues of intellectual property ownership and related rights by way of agreement.
Patents and patent applications are like other forms of property, and there are many ways to
extract value from them, even if the patent owner does not choose to develop, market, or use
products or processes of the invention. Patents can be used to leverage financing. They can be
sold outright or assigned. They can be licensed.
Infringement and Enforcement of Patents
There are no enforceable rights in a pending patent application. Once issued, any unauthorized
manufacture, use, or sale of a patented invention without the patent owner's consent is generally considered to be an infringement of patent rights, whether or not the defendant was aware of the patent.
The right of the patent owner to exclude others from such activities is enforceable in court
proceedings. In the same proceeding, the court will often deal with challenges to the validity of
the patent, since defendants typically allege the invalidity of patent claims.
In general, a person who infringes a patent is liable to the patent owner and all persons
claiming under the owner (for example, a licensee) for all damages sustained as a result of the
infringement. Importantly, a patent can be infringed, notwithstanding a defendant's modification to the form of the invention, if the principle and mode of operation of the invention is
retained. Therefore, if a defendant has achieved the same result as a patented invention using the
essential features in combination, there may be a finding of infringement even if non-essential
features are replaced by equivalents.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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In legal proceedings involving claims of patent infringement and patent invalidity, the court
will determine the appropriate meaning to ascribe to words used in the claims and then consider
whether the claims, so "construed;' are infringed by the activities of the defendant. In Canada,
the first part of this process is called "purposive construction:'32
Various civil remedies are available for infringement of patent rights. In most developed
countries, these include the following:
• Interlocutory or permanent injunctions. These are orders that require the defendant to cease
activities that infringe the patent rights during the time the case is pending (interlocutory) or
following judgment. Interlocutory injunctions in Canadian patent cases are exceptionally rare.
• Damages. This is monetary compensation for the patent owners' losses as a result of the
defendant's infringement.
• Accounting ofprofits. An alternative to the damages remedy, this remedy allows the patent
owner to receive the profit that the defendant made from the infringement and is of particular use in cases where the patent owner would have been, for any number of reasons,
unable to make the sales.
• Seizure/ destruction. Another civil remedy is the seizure or destruction of the infringing
products or the tools used to make them.
Damages (described in Canada's Patent Act as "reasonable compensation"33 and usually taking
the form of a reasonable royalty) are also available to the patent owner in most countries as compensation for infringement that occurs before the patent is issued, beginning from the date the patent application is laid open and therefore accessible by the public. In some jurisdictions, infringers
are not liable for damages if it is determined on the evidence that they were not aware, and had no
reasonable ground to suspect, that the patent existed. Criminal sanctions, such as a fine or imprisonment, are available in some jurisdictions in limited circumstances of intentional infringement.
The Treaty Framework of International Patent Protection
Important harmonization and international norms have been established by treaty, specifically
the Paris Convention, the Patent Cooperation Treaty, and the TRIPS Agreement. (More details
on these treaties can be found at <www.emond.ca/laib4> under the "Extras" tab.)
The Patent Prosecution Highway
Recently, a set of initiatives for providing accelerated patent-prosecution procedures has been
implemented, enabling some patent offices to share information. This is the Patent Prosecution
Highway (PPH). To prevent avoidably inconsistent results, the PPH permits patent offices to
expedite the prosecution of patent applications filed in multiple jurisdictions for the same invention. For example, the Canadian Intellectual Property Office (CIPO) is able to take advantage
of, and rely on, patent search results and examinations of a patent application filed in a patent
office of another contracting state. Presently, Canada has PPH agreements in place with various
national patent offices, including those of the United States, Japan, Germany, and Korea.
Trademarks
Defining Characteristics of Trademarks
Trademarks distinguish the products and services of one person or corporation from another.
The following are examples of elements that may be eligible for trademark protection:
• Words, letters or numbers, alone or in combination. Examples include ROLEX and
FORMULA 1.
trademark: asign, design, or expression that is legally registered or established by use as distinguishing aproduct or service of the
owner from productsor services of others in the marketplace
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• Symbols or images. The Apple logo and the Ralph Lauren polo design are examples.
• Three-dimensional shapes, such as the shape of products or their packaging. The CocaCola bottle and the triangular shape of a Toblerone bar are examples.
• Colours, such as coloured words and symbols and coloured products. For example, the
colour pink is a trademark for certain building insulation products.
• Sounds, such as a sequence of musical notes. The sequence of musical notes G-E-C is a
trademark of NBC Television.
• Smells, such as recognizable fragrances.
From the perspective of the public and also the courts, trademarks function as a form of consumer protection-identifying the source of the product or service, giving assurance to the public
about the quality of products or services, and protecting the public from confusion as to the source.
From the commercial perspective of trademark owners, a trademark's function is to protect the
goodwill (an intangible corporate asset; the reputation of the company or its product or service)
that consumers associate with the company or with its product or service through its trademark.
In many countries, "trademarks" is the term used in relation to products, while the term
"service marks" is the nomenclature used for services. Service marks are, however, frequently
referred to as trademarks for the sake of convenience. Some countries also provide for registration of "certification" marks (which identify products of multiple traders that adhere to identifiable and defined standards) and "collective" marks (which identify enterprise affiliation or
membership of users in an organization).
Trademark rights are unlike other forms of intellectual property, where rights arise from
providing the public with something new. Patents, for example, are granted for new and useful
inventions. Copyright requires originality. A trademark's claim to monopoly rests not on conferring a benefit on the public in the way patents or copyrights do but on serving the public interest
in assuring consumers that they are buying from the source they think they are buying from and
receiving product of the quality they associate with the trademark. The Supreme Court observed
in Mattel Inc v 3894207 Canada Inc 34 that trademarks operate as a kind of shortcut allowing
consumers to get where they want to go.
Choosing a Trademark
The trademark-selection process normally begins with a preliminary search to determine whether
the trademark is available for use and/or registration in the relevant jurisdiction. Such searches
normally encompass the records of the national trademarks office as well as the Internet, corporate
registries, trade journals, and directories in order to identify users who may claim rights in unregistered trademarks that are the same or similar to the selected trademark. Key considerations for
a new trademark include whether the proposed mark is the same as or confusingly similar to an
existing trademark, and the ability of the proposed mark to be distinctive of a single source.
In order to create and maintain the association between the trademark and the source/quality
of the products or services, the trademark must be distinctive. Distinctiveness is the cardinal
requirement of any trademark. There are degrees of distinctiveness. "Coined" marks, such as
GOOGLE, XEROX, and MONDELEZ, are the most inherently distinctive and therefore have
the strongest potential to be associated with a single source. "Arbitrary" marks, by contrast, have
meaning but not in relation to the products and services for which they are used, such as APPLE
for computer equipment rather than for fruit. Such marks can still exhibit distinctiveness provided they are not used "descriptively" - that is, in a manner suggestive of the product or service
to which they apply. "Suggestive" marks, such as AIRBUS for airplanes, are different again, in
that, while not descriptive, they suggest an attribute of the product or service. Many companies
and brand managers prefer and select arbitrary or suggestive word trademarks that already have
a positive association with consumers. The arbitrary trademark SAMSUNG, which translates as
"Three Star;' and the suggestive trademark MICROSOFT are examples.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Intellectual Property and International Business
Using a Trademark
Not all reproductions of a trademark constitute "use:' Trademarks are typically used in association with products if the mark is on the products themselves or on the packaging. A trademark
is used in association with services if is it used or displayed in the performance or advertising of
the services. Use and distinctiveness are inherently connected-the more a trademark is used,
the more distinctive it will become.
In some countries, particularly those with common law legal systems (including Canada, the
United Kingdom, and the United States), use alone underpins enforceable common law rights
in the trademark. Registration provides broader rights, such as the right to use the trademark in
the whole of a country or region. In countries that do not recognize common law rights in trademarks, the first registrant of the trademark has the exclusive-use right.
Applying for and Registering a Trademark
Failure to file a trademark application within a specified time does not, as in the patent regime,
result in an irrevocable waiver of right to protection in the relevant jurisdiction. Trademark applications can, in most countries, be filed at any time. That said, in the majority of jurisdictions,
priority rights in a trademark are based on the early filing of trademark applications, and it is usually wise to file applications before the use or adoption of the trademark becomes publicly known.
Delay in filing until after a new product or business announcement invites competitors and/or
trademark opportunists to apply for and secure priority with respect to trademarks in order to
block a later application. The consequences are usually costly litigation and financial settlements.
In addition to identifying the trademark, a trademark application requires a list of products
and/or services that the registration seeks to cover.
In most countries, after an application is filed, an examiner reviews the trademark application to determine its registrability and compliance with local trademark law and practice. To be
registrable in Canada, for example, a trademark must not be
• deceptively misdescriptive in English or in French of the character or quality of the wares
or services with which the trademark is associated;
• primarily the name of a living person or a person deceased within the past 30 years;
• the name in any language of the product or services with which the trademark is
associated;
• likely to be confused with any other trademark; and
• likely to be confused with a "prohibited" mark (trademarks that are associated with governmental agencies or other public institutions, such as the royal coat of arms, crest, or
other insignia of the Crown, the UN, the RCMP armorial bearings, the Red Cross, the
Red Crescent, and the Canadian Olympic Association).
Once a trademark is registered, the relevant national trademarks office issues a certificate to
the owner. Registered trademarks that are in use are renewable indefinitely for varying periods.
In Canada, as ofJune 17, 2019, a registration is in force for 10 years and subject to indefinite
renewals for the same period, on payment of a fee.
There is no requirement in many countries, Canada included, that an owner prove it is still
using a trademark in order to maintain or renew a trademark registration. By contrast, in the
United States, a trademark owner must file an affidavit of use between the fifth and sixth year
after registration and also on renewal.
Registration also provides the owner with significant procedural advantages. These include
the right to register the trademark in other countries that are member states of the Paris Convention and a presumption of validity and ownership of the trademark. 35
In the United States, a "federal" trademark registration is available only if a mark is for use
in interstate or international commerce, while in Canada, trademarks may be registered only
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federally, and registration is permitted even if the mark is used or intended for use in one province or territory.
Most jurisdictions consider unused trademarks to be an impediment to commercial activity
and therefore susceptible to cancellation. A Canadian trademark registration, for example, may
be cancelled for non-use at any time following three years after the registration date if the owner
has not used the trademark within the previous five years.
Individual trademark applications are usually filed in each country in which protection is sought;
however, applicants are able to cover multiple jurisdictions with a single trademark application through
the EU's trademark office, the registered trademark (also called a "Community Trade Mark:' or CTM)
being valid in all member countries of the EU. In African countries, the ARIPO provides a similar filing alternative. It is also now possible to file a single international trademark application to obtain registrations in multiple countries under the provisions of the Madrid Agreement or the Madrid Protocol.
These provisions permit an application to be filed with the trademark office in the home country in
a single language. Such applications can designate over 80 countries (primarily in Europe and Asia,
but now also the United States). This significantly reduces the cost, time, and complexity of securing
trademark rights in multiple jurisdictions.
Assignment and Licensing
An owner of a trademark or pending trademark application may sell or assign that property and
the rights relating to it. However, in many countries (not including Canada) an assignment is
invalid unless it includes the goodwill of the business symbolized by the trademark. Some countries also have related formal requirements for valid assignments, such as recording the assignment with the national trademark office, and applicable transfer taxes.
Rights relating to trademarks can also be licensed. Indeed, licensing is the primary means by
which foreign-company trademarks are used by domestic or local business. Trademark licences
are secured on a variety of terms including territory, exclusivity/non-exclusivity, use, and compensation. The use of a trademark by licensees will support the trademark's distinctiveness and
benefit the trademark's owner. However, in exchange for that benefit, many countries (including
Canada) require a trademark owner to include in any licence the right and obligation of the
owner to control the nature and quality of the trademarked products or services of the licensee.
This ensures that the owner continues to have direct or indirect control of the character or
quality of the products or services. Many countries also impose a withholding tax on trademark
royalties paid to a foreign licensor, and some (such as the United Kingdom) also require licences
to be recorded or licensees to be recorded as registered users of the trademark.
Enforcement and Litigation of Trademarks
In common law jurisdictions, unregistered trademarks may be protected by an action of passingoff or unfair competition (to prevent another trader from misrepresenting its goods and services
as those of the trademark owner). In Canada, for example, such actions can be brought at common law or under section 7 of the Trademarks Act. In such actions, there are three required
elements for a plaintiff to prove
1. goodwill (reputation in the marketplace),
2. misrepresentation by the defendant to a prospective or actual customer of goods or
services supplied by the plaintiff, and
3. actual or potential damage to the plaintiff.
Actions for passing-off and unfair competition, originally developed by common law courts
and in som e cases (including Canada) later codified in trademarks legislation, remain the primary
basis of protection from competitors for unregistered trademarks in common law jurisdictions.
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Chapter 8
Intellectual Property and International Business
251
That is not to say that countries with a civil law tradition do not have equivalent protections. Article
10(1) of the Paris Convention requires member states to provide effective protection against unfair
competition. Although they are not obliged to introduce special legislation for the purpose, they
must provide effective safeguards-at least through existing general legislation-against acts that
are "contrary to honest trade practices:' The legal bases for the suppression of unfair competition
have, in the past, not been afforded by comprehensive statutes in civil law jurisdictions. European civil law jurisdictions have traditionally provided for equivalent causes of action to those in
common law jurisdictions through tort law as well as through consumer-protection legislation
regulating specific cases of undesirable market behaviour, such as misleading advertising. A more
modern trend has been toward comprehensive legislation. Switzerland, for example, adopted a law
against unfair competition in 1986 that contains a broad general provision and detailed regulations
regarding specific market behaviour. Spain's Unfair Competition law of 1991 contains regulations
prohibiting practices harmful to consumers and competitors.
The owner of a registered trademark has the exclusive national right to its use in association
with the products or services set out in the registration and may also restrain competitors from
using confusingly similar trademarks.
Aside from counterfeiting cases, unauthorized use of identical trademarks is uncommon. As
referenced in Source Perrier (SA) v Canada Dry Ltd, "Of course, few would be stupid enough
to make exact copies of another's mark or symbol. It has been well said that the most successful form of copying is to employ enough points of similarity to confuse the public with enough
points of difference to confuse the courts:' 36
BOX 8.5
Case Highlight
Masterpiece Inc v Alavida Lifestyles Inc
Case Name and Court
Masterpiece Inc v Alavida Lifestyles Inc (Supreme Court of Can-
Alavida on the basis that it was confusingly similar to the unregistered trademarks of Masterpiece Inc.
ada, 2011 )37
Analysis/Application
The court held, among other things, the following:
Facts
The parties in this proceeding were both engaged in the retirement residence industry. Masterpiece Inc had used "MASTERPIECE" as a trade name as well as part of several unregistered
trademarks (including "MASTERPIECE THE ART OF LIVING") in
Alberta starting around 2001. That date was well before Alavida filed its application for MASTERPIECE LIVING. But when
Masterpiece Inc later tried to obtain its own trademark registrations for MASTERPIECE and MASTERPIECE LIVING, the
Trademarks Office refused to register them on the basis of the
previously filed Alavida application . Masterpiece Inc applied to
the Federal Court to expunge the Alavida registration.
Issue
Was the Alavida registration sufficiently likely to be confused
with Masterpiece's previously used common law trademark as
to render the registration expungable?
Decision
The Supreme Court overturned the decision of the Federal
Court of Appeal and expunged the registered trademark of
The fact that Masterpiece Inc's prior use of the trade
name had been in Alberta only was not relevant to the
question of confusion. The court observed that "geographical separation [in Canada] in the use of otherwise
confusingly similar trade-names and trade-marks does
not play a role in the hypothetical test'.'38
The first consideration in the confusion analysis should
be whether an aspect of either mark is particularly
unique or striking, because that is critical to making
an impression on the notional casual and hurried consumer. In this case, MASTERPIECE was found to have
such an aspect.
The parties had filed survey evidence in the case showing
consumer reactions in the marketplace to the trademarks.
The Supreme Court observed that while expert evidence
could assist the court in analyzing confusion in specialized
markets of which the court does not have knowledge,
such evidence may not be useful in respect of goods that
"are sold to the general public for ordinary use:•39
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In assessing the likelihood of confusion, Canadian courts will primarily consider the similarity between the trademarks, the extent to which the competing marks have become known,
how long they have been in use, and the nature of the businesses.
While the scope of protection afforded to a trademark registration will, of course, vary
from case to case, Canada has been hesitant to grant broad protection to "famous" trademarks. A particular example is the Supreme Court's decision to permit a Montreal restaurant
to obtain a trademark registration for its name, BARBIE'S over the objections of Barbie-dollmaker Mattel.
While trademark policing and enforcement can be time-consuming and costly, it is essential
to maintaining the validity of trademark rights. Because trademarks employ a "use-it-or-lose-it"
system, distinctiveness can be acquired, increased, or lost. A term that is descriptive of products
or services can acquire distinctiveness with use over time if consumers come to recognize it as
an indicator of a particular source. A term that is distinctive can acquire additional distinctiveness, which may be used to support its subsequent registration for a broader range of products
and services. Conversely, a term that is distinctive can, with widespread unauthorized use over
time, become descriptive or generic. TRAMPOLINE and LINOLEUM, for example, were once
trademarks that became generic terms, and thus trademark rights became unenforceable. Loss
of trademark distinctiveness may vary from country to country, as in the case of ASPIRIN, now
a generic term in the United States but still protectable as a trademark in Germany and Canada.
As in the case of patent infringement, civil remedies for trademark infringement include the
following:
• interlocutory and permanent injunctions to restrain the infringer from continuing to
engage in activities that infringe the trademark rights;
• compensatory damages;
• in the alternative to damages, an accounting of profits requiring the infringer to pay to the
trademark owner the profits received from use of the trademark; and
• delivery up to the trademark owner, or disposal of, all products bearing the trademark
and any other materials that would offend any permanent injunction granted.
Damages and profits can be difficult to prove in trademark-infringement cases. The available
injunctive relief is frequently the most important objective of the trademark owner.
Criminal penalties are also available for trademark infringement, particularly in the case of
counterfeit products, but are rarely invoked.
Black Marketing and Grey Marketing
"Black marketing" (or counterfeit) and "grey marketing" deserve special mention in connection
with trademark enforcement.
Counterfeit products, from knockoff GUCCI bags to fake RO LEX watches, are products
that are sold, without authorization, by persons other than the trademark owner and are manufactured, packaged, and/or labelled to appear like the authentic product. Counterfeit products
do more economic damage than merely deceiving consumers and damaging the reputation
and distinctiveness of brands. Not only does the sale of counterfeits circumvent tax and other
payments, it is a significant revenue source for organized crime. Counterfeiters are subject to
infringement actions, in the case of registered trademark rights, and to passing-off actions in
the case of unregistered rights.
counterfeit: a product or service that isoffered or sold, without authorization, by persons other than thetrademark owner and
that ismanufactured or packaged toappear like theauthentic product
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8
TABLE 8.1
Intellectual Property and International Business
The World's Most Valuable Brands
Rank
Brand
Brand Value
Brand Revenue
Industry
#1
Apple
$205.5 B
$265.8 B
Technology
#2
Google
$167.78
$136.2 B
Technology
#3
Microsoft
$125.3 B
$110.2 B
Technology
#4
Amazon
$97 B
$211.48
Technology
#5
Facebook
$88.9 B
$48.8 B
Technology
#6
Coca-Cola
$59.2 B
$23.8 B
Beverages
#7
Samsung
$53.1 B
$221 .6 B
#8
Disney
$52.2 B
$33.8 B
#9
Toyota
$44.6 B
$190.8 B
Automotive
#10
McDonald's
$43.8 B
$96.1 B
Restaurants
Technology
Leisure
Source: "The World's Most Valuable Brands;' Forbes (last visited 25 September 2019), online:
<https://www.forbes.com/ powerful-brands/list/>.
Grey-marketing products, on the other hand, are genuine trademarked articles that are authorized for distribution in a specific country but are diverted for sale into a different country.
Grey-market goods may or may not be physically different or differently packaged from local
authorized goods, and their legality is a controversial issue. Because grey-market products
are genuine and the trademark was applied by the owner (or authorized representative of the
owner), a passing-off claim cannot be made, nor can a claim of public confusion be made in
support of a claim of trademark infringement. Furthermore, most countries apply a principle of
"trademark exhaustion:' This means that when the trademark owner has put the product into the
stream of commerce under the trademark, it cannot object to further sales of the same product
in the course of trade. As a result, in most jurisdictions, the importation and sale of grey-market
products can be inhibited only where the products are not put into the stream of commerce by a
domestic entity that owns the domestic trademark, the grey-market products vary from genuine
goods (for example, the packaging is not compliant with local law), or copyright can be asserted
in packaging elements.
Copyright
Defining Characteristics of Copyright
Copyright deals with the rights of creators of original literary, dramatic, musical, and artistic
works. These may be expressed through virtually any medium, from printed publications, films,
television and sound recordings, public performances, and communications signals to computer
systems for information storage and retrieval. Copyright encourages cultural as well as economic
development through protection of creative works.
copyright: the exclusive legal right of acreator of aliterary, dramatic, musical, or artistic workto publish, perform, distribute, or
use the work and to authorize others to do thesame
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Copyright has become increasingly important to the worldwide economy, especially the
economies of developed countries that have been transformed from industrial, manufacturing-based economies to information economies. As with other forms of intellectual property,
however, there is presently no such thing as international copyright providing protection on a
worldwide basis. Instead, countries maintain their own national copyright laws. While distributing copyright content across national borders remains a challenge, more than 160 countries have
ratified the primary international copyright treaty-the Berne Convention-which is administered by WIPO and sets minimum standards for the protection of the rights of the creators of
copyrighted works. There have also been significant regional initiatives to harmonize copyright
law in Europe and elsewhere.
The definition and scope of what is protected by copyright varies from one country to an other. It includes such broad subject matter as novels, newspapers, magazines, technical articles,
essays, advertisements, instructions, song lyrics and poems whether published or unpublished
("literary" works), photographic images, paintings, engravings, sculptures, drawings, maps,
product packaging and logos, architectural works, and other two- or three-dimensional works
("artistic" works), plays, choreographic works, mimes, films ("dramatic" works), musical works,
and even computer software, either as a literary work or a separate category.
Copyright law protects only the creator's original form of expression of ideas-for example,
the arrangement of words in a novel or the sequence of musical notes in a score. It does not protect the ideas themselves. The protection afforded by copyright law centres on the act of reproduction, which is the legal basis for most exploitation of literary, artistic, musical, and dramatic
works. As a result, copying or other reproduction of a work, either in its entirety or in substantial
part, requires the authorization of the rights holder. However, more broad protection of copyright is enshrined in national laws so that the rights-holder's authorization is also required to
• produce or publish a work in any material form;
• perform the work in public (for example, public readings or dramatic or musical
performances);
• make a sound, visual, or audiovisual recording of the work; 40
• broadcast the work; or
• translate, adapt, or otherwise modify the work.41
Furthermore, the protection of copyright is extended to rights related to copyright, usually
referred to as "neighbouring rights:' These rights afford protection to those who assist in the
dissemination or communication of a creator's works to the public. Neighbouring rights include
three broad categories:
1. rights of performing artists in their performances of the works,
2. rights of producers of phonograms that include the works, and
3. rights of broadcasting organizations in radio and television programs that include the
works.
Neighbouring rights are an area of increasing complexity in copyright law as a result of
advances in transmission technologies (for example, cable and satellite) and in the means of the
fixation of works (for example, digital media).
The Berne Convention sets a minimum duration of copyright equal to the life of the author
plus 50 years. In the case of most literary, dramatic, musical, or artistic works, related copyrights
Berne Convention: the Berne Convention for the Protection ofLiterary and Artistic Works; the first international treaty in thefield
of copyright; sets minimum standards for theprotectionof the rights of the creators of copyrightedworks
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8 Intellectual Property and International Business
in most Berne Convention countries prescribe copyrights that last for the life of the author plus
either 50 or 70 years after her death. In some cases, then, a specific work may still be the subject
of copyright in some countries while in other countries the copyright has expired and the work
is in the public domain (that is, the work is in a category not protected by copyright law or the
copyright has expired). In the case of joint creators, the term of protection for copyright usually
extends from the death of the last author to die.
In the majority of countries, recognition is given to a division of rights within copyrightbetween "economic rights" and "moral rights:' Economic, or exploitation, rights are emphasized
in developed countries, especially those in common law jurisdictions (such as the UK, Canada,
and the US) and relate to the copyright holder's exclusive right to use, authorize, or prohibit use
of a work. These rights generally include
• the right of reproduction (for example, copying by either analog or digital means);
• the right of communication to the public (for example, public performance, public display, and transmission over the Internet or other digital networks);
• the right of distribution (for example, selling, lending, or renting of tangible copies); and
• the right of modification (for example, translation or adaptation of works).
Moral rights, by contrast, are non-economic and recognize the creator's parental and dignitary rights to control his identification with the work and how it is treated by others. These
rights are
• the "paternity" right (the right to be identified as the creator of the work);
• the "integrity" right (the right to prohibit alteration, mutilation, or other modification of
the work that is prejudicial to the creator); and
• in some jurisdictions, the "first divulgation" right (the right to make the work public).
Obtaining Copyright
The primary requirement for copyright is that the work be an "original" creation. The ideas
in the work need not be new, inventive, or even of a particular quality, but the form (whether
literary, artistic, musical, or dramatic) in which the ideas are expressed must be original to the
creator and not copied from another work. Apart from originality, most countries require the
work to be fixed in some tangible form and for the creator to be a citizen or resident of a Berne
Convention or WTO member state. If these conditions are satisfied, a creator's copyright arises
automatically on the creation of a work and, unlike other types of intellectual property, there
is no formal requirement for registration or notification in order for copyright to subsist in a
work. Registration is, however, helpful in the enforcement of copyright in relation to notice to
infringers. In some countries (including Canada and the US), registration gives rise to a rebuttable presumption that the work is validly protected by copyright.
Ownership, Exploitation, and Transfer of Copyright
In most Berne Convention and WTO member states, including Canada, the creator is generally
the first owner of the copyright in a work. Where the creator is an employee who creates a work
within the scope of his employment, the employer will be entitled to the copyright.
Generally, copyright (except for moral rights) may be assigned or licensed by the creator,
but the domestic law of many countries provides for various exceptions to the rule. In Canada
and elsewhere, assignments are invalid unless in writing and, if the creator is the first owner of
copyright, copyright cannot be assigned for a term beyond 25 years after the death of the creator.
Beyond that time, the rights revert to the estate of the creator. In jurisdictions where assignment
is not permitted, licensing is allowed, even for the full term of copyright, which has a practical
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and legal effect that is generally similar to assignment. Moral rights may not be assigned, but
their waiver is permitted in most jurisdictions.
Unique to the field of copyright commercialization is the use of copyright collective and
reproduction-rights organizations to do the following: license the use of works on behalf of large
numbers of creators and other rights-holders in their large portfolios, collect licence royalties for
that use, and distribute the royalties back to rights-holders. Copyright collectives often specialize
in the licensing of different categories of works (for example, text/image-based works or musical works) and representation of different rights-holders (for example, creators or neighbouring
rights holders).
A concern often raised in the copyright context is copyright protection for traditional knowledge and folklore. Over the past two decades, the issue has led to a number of initiatives,
including efforts by WIPO and the UN that have given rise to the WIPO Intergovernmental
Committee on Intellectual Property and Genetic Resources, Traditional Knowledge and Folklore. The requirements and expectations of Indigenous peoples and traditional communities
have been the subject of extensive study, but no broad consensus has emerged on the adequacy
or inadequacy of the present intellectual property regime. Some communities look to claim
intellectual property rights over tradition-based works for economic purposes, while others seek
the defensive benefit of copyright (and other intellectual property rights such as trademarks) to
prevent others from exploiting cultural heritage, including derivations and adaptations of that
heritage.
Infringement and Enforcement of Copyright
Copyright is infringed and enforceable against a person who, without the rights-holder's consent, does any act that only the rights-holder has the right to do under the relevant national
law. In the enforcement of copyright, however, the challenge is to maintain a balance between
rights-holders and content users-that is, to provide adequate rewards to creators of works while
ensuring that those rewards are not unreasonable in light of the public interest.
The public interest has resulted in some activities that would normally be restricted by copyright being exempted from action for infringement. The most important of these activities are
collectively described as "fair use" or "fair dealing:' These include copying for the purpose of
research or private study; copying for the purpose of criticism, review, or news reporting (provided that the name of the author, performer, maker, or broadcaster is given as the source); copying for educational use; and copying for use by libraries, museums, and archives. Exemptions
are also provided through the doctrine of "exhaustion of rights;' applicable in many countries.
This doctrine provides that, after the copyright owner has sold or otherwise transferred ownership of a copy of a work, the owner of that copy may generally dispose of it without further
authorization of the rights holder-for example, by giving it away or even by reselling it. Other
exemptions are found in national laws. For example, some countries employ compulsory licence
regimes, which permit the broadcasting of copyright-protected works without authorization,
provided that fair compensation is made to the rights-holder.
The seminal decision of the Supreme Court in CCH Canadian Ltd v Law Society of Upper
Canada provided much needed guidance on the issues of originality and fair comment (see
Box 8.6).
The need to balance interests has led to a number of generally recognized limitations to
enforcement of a copyright holder's rights. These include the following situations:
• where permission has been given for copying or other protected activity in connection
with the work,
• where the term of the copyright has expired, and
• where an insubstantial amount of the work is used by the alleged infringer.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8
BOX 8.6
Intellectual Property and International Business
257
Case Highlight
Photocopying and Copyright
Case Name and Court
CCH Canadian Ltd v Law Society of Upper Canada (Supreme
Court of Canada, 2004)4 2
Facts
In the operation of its law library, the Law Society of Upper
Canada (LSUC) provided a fee-based photocopy and delivery
service for patrons as well as a self-service photocopier in the
library and posted a notice stating that it was not responsible
for any copyright infringement. A publishing company, CCH,
commenced an action claiming that the photocopying activities at the LSUC library included infringement of copyright in
legal materials it published, specifically headnotes, which are
short summaries and keywords prepared by CCH and placed
at the beginning of reported court decisions.
Issue
Was the activity of the LSUC library fair dealing or was it a violation of copyright?
Decision
The Supreme Court found in favour of the LSUC and, in doing
so, provided a seminal ruling on issues of originality, fair dealing, and liability for authorizing copyright infringement.
Analysis/Application
On the issue of originality, the issue was whether headnotes
were sufficiently original to attract copyright protection.
The Supreme Court explicitly held that, in interpreting the
Copyright Act, 43 courts should seek an appropriate balance
between the two goals of copyright: (1) promoting public interest in the encouragement and dissemination of works of the
arts and intellect; and (2) securing a just reward for the creator
of the work. It then went on to consider whether originality requires only sweat of the brow-that is, effort or whether some
creative spark is necessary in order for a work to be "original"
and therefore accorded protection under copyright. The Supreme Court decision adopted a middle ground, imposing a
standard requiring some exercise of skill and judgment in order for a work to be the subject of copyright. In this circumstance, the court found that headnotes/case summaries and
topical indexes originated with the creator (that is, they were
not copied) and were the product of an exercise of skill and
judgment that was more than trivial. In the result, the works
in issue were found to be sufficiently original to be protected
by copyright.
In its liberal interpretation of the fair dealing exemption for
research, the court held that research is not limited to private,
non-commercial circumstances, and that the LSUC's activities
were "fair dealing" for the purpose of, and as an integral and
necessary part of, its patrons' research.
Finally, on the issue of authorizing copyright infringement,
the court observed that the mere maintenance of self-service
photocopiers in the LSUC library that could be used for infringing
purposes did not, on its own, constitute authorization of infringement. Even where there is evidence of infringing use, the LSUC
did not have sufficient control over patrons' activities to permit
the conclusion that it sanctioned or approved the infringement.
Further, copyright does not extend to subject matter such as processes or methods, which are
protectable under other intellectual property regimes (for example, patent regimes) that have
different terms of protection.
The advent and proliferation of digital and other means of recording and disseminating in formation, including copyrighted works, have combined to expand exponentially both the marketplace for works and the potential for infringement, the latter often referred to in the copyright
context as "piracY:' Piracy involves infringement of copyright for commercial gain and constitutes a global problem insofar as it diverts economic rewards from creators, from their business
partners who hold neighbouring rights, and from other rights-holders. In doing so, it removes
the incentive to invest skill, resources, and time in the creation of new works.
The remedies provided in most Berne Convention member states include injunctive relief, dam ages, accounting of profits, and delivery up of infringing articles. Unlike patent and trademark law,
where the remedies of damages and accounting of profits are alternative remedies, copyright law
in many jurisdictions (including Canada) provides that a person who infringes copyright is liable
in a civil action to pay damages and also to account for the profits resulting from the infringement.
As well, courts may award statutory damages, which fix a range for damages44 and allow rightsholders to obtain monetary judgments without their having to prove specific loss. Certain acts of
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copyright infringement in Canada and most other countries expose infringers to criminal penalties, including fines and imprisonment.
The Treaty Framework of International Copyright Protection
There are a number of international and regional treaties dealing with copyright law, the purpose of which is to achieve reasonable harmony and reciprocity among member states in the
worldwide protection of copyright. As indicated above, the primary international treaty is the
Berne Convention. Others include the Universal Copyright Convention, the TRIPS Agreement,
the WIPO Copyright Treaty, and the WIPO Performances and Phonograms Treaty. (A discussion of these treaties can be found at <www.emond.ca/laib4> under the "Extras" tab.)
Copyright Protection: A Comparison
National efforts to achieve the required balance of the public and creator interests in copyright
have led to broad and significant differences in the ways different countries protect copyright.
Following are some examples of the differences between Canadian and US law:
• The basic term of copyright protection in Canada is the life of the creator plus 50 years. If
the renegotiated NAFTA (also known as the United States-Mexico-Canada Agreement)
is implemented, the term will increase to life of the creator plus 70 years to align
Canada's term of protection with the US and the EU.
• In Canada, in cases where copyright is co-owned, no co-owner may license her interest
without consent of the other co-owners, and she may not assign anything less than the
whole of her interest in copyright. The doctrinal basis is essentially that such activities
would unfairly dilute the value of the other co-owners' interests. Conversely, US copyright
jurisprudence generally follows a real property law analogy and promotes ease of commercial exploitation. Any one co-owner may freely exercise or license his interest in the
whole of the copyright without the consent of all the other co-owners; however, he must
then share the benefits with them. A licensing co-owner, for example, will be liable to the
other co-owners for their proportionate share of the licence proceeds.
• Moral rights apply to all types of creative works in Canada, whereas the United States
recognizes moral rights only in the context of visual artists. Furthermore, in the United
States, unlike Canada, moral rights may be transferred or assigned in the same way as an
economic copyright.
• In Canada, works created by government employees in the course of their duties are
subject to copyright protection, and works created under the direction or control of a
government department are subject to Crown copyright. In the United States, domestic
legislation excludes government documents from US copyright protection.
• Canada's Copyright Act provides a limited list of fair dealing exceptions to copyright
infringement- specifically, research, private study, criticism, news reporting, education,
parody, and satire. The US concept of fair use is more open-ended and not limited to
those purposes.
• Although registration of copyright is not a prerequisite for protection in Canada or
the United States, registration confers certain presumptive benefits in Canada, while
lack of registration in the United States limits the availability of certain remedies for
infringement.
• The US concept of "work for hire" (the creator and owner of a work that is made as part
of an employee's job is the employer- often a corporation) does not exist in Canadian law.
Generally, in Canada, the creator of a work made pursuant to a contract is the employee
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8 Intellectual Property and International Business
or independent contractor, even if the employer is the owner by operation of law. This
distinction has an obvious effect on the duration of the relevant copyright, as a corporate
employer is not a natural person and use of the "life of the creator" concept to determine
the duration of copyright for a work for hire would be meaningless. In the United States,
a work for hire published after 1978 receives copyright protection for the earlier of 120
years after creation or 95 years after publication.
Industrial Designs
Defining Characteristics of Industrial Designs
Industrial designs protection applies to non-functional design features of shape, configuration, pattern, or ornament, and any combination of those features that have solely visual
appeal. "Shape" and "configuration" cover three-dimensional designs (such as a chair or coffee
cup) while "pattern" and "ornament" cover two-dimensional designs (such as an engraving or
embossing). Industrial designs protect an enormous range of designs applied to mass-produced
products-for example, wallpaper, textile patterns, ornamentation on cutlery, the user-interface
graphics for mobile phones, and the visual features of a running shoe. (An example of an industrial design can be found at <www.emond.ca/laib4> under the "Extras" tab.)
Industrial-design protection is important to modern market-based economies because distinctive designs differentiate products and drive sales when the products' functional attributes
and performance are relatively equal.
The subject matter of industrial-design protection is not the manufactured article itself but
its ornamentation. Therefore, industrial-design rights do not prevent other traders from manufacturing or otherwise dealing in similar products that provide the same function, as long as
those products do not embody or reproduce the protected design. A belt design, for example,
if sufficiently novel and inventive on a functional basis, may qualify for patent protection, in
which case other traders can be excluded from the marketplace for products of the design. However, permitting protection for belt designs that are dictated solely by the fastening functionality
required by all belts would be unfair, because such protection could be used to exclude others
from selling any belts. Designs that are essential to the function that the product performs are,
therefore, excluded from protection by industrial design.
Subject matter that qualifies for protection under the law of industrial designs may also be entitled to protection under copyright. Unlike copyright, however, registration of industrial designs
is a precondition of enforceable rights; protection is lost in many countries unless the applicant
files for registration before publication or public use anywhere, or at least in the country where
protection is claimed. Industrial-design protection subsists for between 10 and 25 years, depending on the country, while copyright subsists, in most countries, for the life of the creator plus 50
years. The requirement that a design be applied to functional articles in order to be protected
is another principal distinction between industrial-design protection and copyright protection.
Copyright is concerned solely with aesthetic creations. This intersection between copyright and
industrial design is dealt with in section 64.2 of Canada's Copyright Act, which provides that twoand three-dimensional designs, shapes, patterns, or ornamentation are not protectable under
copyright law if more than 50 copies of an article bearing such design are made. This mutual
exclusivity of copyright and industrial design in Canada applies to designs and works other
than those expressly excepted in section 64(3) of the Copyright Act- namely, designs used as
trademarks, drawings, or photographs applied on the product and images of real or fictional
characters used as features of shape. All of those excepted works enjoy full copyright protection
notwithstanding that they are produced in quantity.
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Ownership, Exploitation, and Transfer of Industrial-Design Rights
The ownership and right to protection of an industrial design presumptively belongs to the
creator of the design. In Canada, section 12( 1) of the Industrial Design Act provides as follows:
The author of a design is the first proprietor of the design, unless the author has executed the design
for another person for a good and valuable consideration, in which case the other person is the first
proprietor. 45
Where the design is created by an employee or by an independent contractor, the majority
of countries (including Canada) provide that the employer or the person who commissioned
the design has entitlement to it where the creation or production of the design falls within the
scope of employment duties for which the employee or contractor is paid. Where designs are
produced with the aid of computers, which is increasingly the case, the individual responsible
for operating the computer to produce a design will, subject to the employment/contractor issue,
usually be considered to be the author of the design-the computer being no different from any
other tool used in the creative process.
As indicated above, industrial design rights (like patent rights) are obtained only by registration. In Canada, for example, the owner/proprietor of the design makes the application for registration of the industrial design. The application must have been filed no more than one year after
the publication of the design in Canada or elsewhere. There is a similar one-year grace period
after public disclosure for filing a US application for a design patent, which is the US equivalent
of an industrial design. Nationals of Paris Convention countries are entitled to a six-month priority in Canada in connection with their application for registration of a design abroad.
To be registrable, it is a uniform requirement that the design be original and, in most jurisdictions, it must also have aesthetic appeal and not be contrary to public morality or order. What is
"original"? The novelty of the design is the fundamental basis for granting the industrial design
right, but the novelty requirement differs among various countries. In some cases, the standard
imposed is absolute, which means the design must be demonstrably new compared with all
other designs previously produced elsewhere in the world and disclosed by any written or oral
means. In other cases, a qualified standard is imposed to judge the novelty of the design- for
example, by referring to designs published within a set period or published in the country of
registration. Under Canada's Industrial Design Act, a qualified standard is imposed. A design is
original if it is not identical to any other design already registered or does not so closely resemble
such a design that it would be confused with it. This is not to say that a person can obtain valid
industrial design rights in Canada or any other qualified standard jurisdiction simply by registering a design found overseas and copied; it is also a requirement that the applicant be the
author of the design.
As a practical matter, the degree of originality required for Canadian industrial designs
is greater than that required for copyright but less than that required for patents. Because an
industrial design is concerned with ornamental appeal, it is this attribute that must be original;
the concepts underlying the design, or the application of the design to the article, need not be
original.
Industrial-design applications in Canada are filed with the industrial design office of the commissioner of patents. The Register of Industrial Designs is maintained in that office. In order to
maintain the registration, maintenance fees are payable by the owner/proprietor of a registered
design.
Many jurisdictions employ a registration system that provides for an examination of an application with regard to formalities or technical requirements only. No search is made of the prior
art to determine whether the design meets the domestic novelty or originality requirements.
In this respect, the administrative burden and expense of assessing novelty and originality are
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8 Intellectual Property and International Business
transferred to competitors and other interested persons who may have used, or wish to use, the
design or a substantially similar design. Such persons are afforded the opportunity to oppose
registration of the design either in a pre-grant opposition procedure similar to a trademark
opposition or in post-grant proceedings for the expungement of a registration alleged to be
invalid.
A registered industrial design generally confers on the owner an exclusive right to make, sell,
rent, or import for the purpose of trade any article in respect of which the design or a design not
substantially different has been applied.
The period of monopoly for registered industrial designs varies among countries and ranges
between 10 and 25 years, including renewal periods. In Canada, for example, the period is five
years from the issuance of the registration, renewable for a further five years.
The owner of an industrial design, whether registered or unregistered, may assign rights to
the design, but the assignment must be in writing and, in most countries, recorded in the office
of the relevant governmental authority, which in Canada is the commissioner of patents. An
owner of a design may also license rights to the design but, as is the case with an assignment, in
Canada and many other countries the licence must be recorded.
Infringement and Enforcement of Industrial Design Rights
The system of protection developed for industrial designs, as with all intellectual property protection systems, seeks to balance the required incentive for design activity with the need to
ensure the fewest impediments to the use of available designs. An industrial-design right prevents others from exploiting an industrial design by giving the owner the exclusive right to do
any of the following for industrial or commercial purposes:
• make articles in which the design is embodied or to which the design is applied;
• import such articles; and/or
• sell, offer for sale, or rent such articles.
The rights are, however, limited so that
• protection extends only to the design or a substantially similar design (meaning one that
differs only in immaterial respects) applied to an article,
• features embodied in a useful article that are dictated solely by a utilitarian function of the
article are not protected, and
• any method or principle of manufacture or construction is not subject to protection.
The enforcement right conferred by registration of an industrial design is conceptually
broader than copyright because there is infringement whether or not the infringer acted independently and without knowledge of the registered design-that is, whether or not there is
deliberate copying. Copyright infringement requires actual reproduction of the work or a substantial part of it.
An action for infringement can be brought in most countries by the proprietor/owner of the
design or by an exclusive licensee, and a full range of remedies is available to enforce the right,
including injunctive relief, recovery of damages or profits, punitive damages, and the disposal
of any infringing article, as is generally the case in enforcement of other intellectual property
rights. The following important restriction on remedies related to product marking applies in
Canada, among other jurisdictions: if a defendant establishes it was not aware and had no reasonable grounds to suspect that a design was registered, the Industrial Design Act precludes a
court from awarding any remedy (in particular, damages) other than an injunction. This provision does not apply, however, if all or substantially all of the products to which the registration
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BOX 8.7
Private International Law
Case Highlight
Apple v Samsung
Case Name and Court
Apple Inc v Samsung Electronics Co Ltd (US District Court for the
Northern District of California, 2012)46
F
'I
Fa cts
Between 2012 and 2018, tech giants Apple and Samsung engaged in legal actions all over the world (including in the United States, Germany, Australia, France, United Kingdom, Italy,
Japan, and South Korea) involving intellectual property rights,
largely cent red on patent and industrial designs. A billiondollar decision of a California jury in 2012 sparked a resurgence
of interest in industrial design rights.
In April 201 1, Apple had commenced an action in Ca lifornia against Samsung Electronics, a Korean company, alleging
it had copied the look and feel of its iPhone and iPad products. Samsung counterclaimed for patent infringement, and
there were other patent, trademark, and anti-trust issues also
in play. But the primary focus of t he case was on industrial
design.
On t he visual aspects of the user interface, Apple's position
was that Samsung product s marketed prior to the introduction
of t he iPhone and iPad did not incorporate similar visual feat ures. Samsung adduced evidence from its internal documents
showing research and development on touch-screen mobile
phones with large rectangu lar graphics with rounded corners
prior to Apple's market ing.
Issue
Had Samsung violated Apple's intellectual property rights, including industrial-design rig hts?
TJ
•
:;n·
"!"b ~
CJ
l
..
>l
r
-
.....
.
,.,
/
Decision
In August 2012, the nine-person US jury found for Apple on
a majority of its claims, awarding damages of $1.0S billion
and dismissing Samsung's counterclaims. In a second trial on
damages in 2013, ordered after the t rial judge found a legal
error in the original jury award, the damages were reduced
to $888 million and later in the p rocess of various appeals, to
$S39 million. Finally, on June 27, 2018, Apple and Samsung announced t he settlement of the longstanding actions but did
not disclose the terms of settlement.
pertains, or the labelling or packaging of such products that were distributed in Canada, were
marked with "D'' in a circle and the name or usual abbreviation of the name of the proprietor.
Industrial-design litigation has enjoyed a recent resurgence of interest as a result of the ongoing
global smartphone litigation between industry giants Apple and Samsung. The case in Box 8.7
illustrates the significant potential value of industrial-design protection.
The Treaty Framework of International Industrial Design Protection
The relevant international treaties are the Paris Convention, the Hague Agreement Concerning the International Registration of Industrial Designs, as well as the TRIPS Agreement.
(A further discussion of these provisions can be found at <www.emond.ca/laib4> under the
"Extras" tab.)
Geographical Indications
Defining Characteristics of Geographical Indications
Geographical indications are marks used on products- most often food, spirits, and wine- that
identify a product as originating in a particular geographical region where its quality, reputation,
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Chapter 8
Intellectual Property and International Business
or other characteristic is linked to that region. Well-known examples of geographical indications
are Cognac (spirits), Parmigiana Reggiano (cheese), and Parma (ham). Unlike the narrower category of "appellation of origin;' which is especially familiar to consumers of wine, a geographical indication need not be a place name. Rather, any word or design capable of identifying the
source of the product or service is sufficient. "Feta'' for cheese is an example: it is not named
after a specific geographic region but is nevertheless identified as an inherently Greek product.
While Europe has traditionally been the centre of geographical indications, they are an intellectual property right of increasing significance for developing countries seeking to promote
economic and social development, especially in their rural areas. Most countries have a range of
local products that can be protected by this intellectual property right.
Ownership, Exploitation, and Transfer of Geographical Origin Rights
Different jurisdictions have employed a variety of legal principles and legislation for domestic
protection of geographical indications, including trademarks, unfair competition claims, and
statutes concerned with consumer protection and false and misleading trade practices.
The international framework, in particular the TRIPS Agreement, does not specify formal
preconditions for the protection of geographical indications. In some countries, the indication
must be registered in order to be protected and, once registered, all producers meeting the criteria of origin may use it in connection with the product. Other jurisdictions have no formal
procedure for acquiring the intellectual property right, one result of which is that any interested
party has the ability to inhibit false or misleading uses of the geographical indication.
The similarity between geographical indications and trademarks is striking. Both function to
identify the source, and inferentially the quality, of products by distinguishing them from other
similar products in the marketplace. Both seek to preclude unauthorized parties from using the
identifier, and both provide remedies for unauthorized use. Both trademarks and geographical
indications can lose critical distinctiveness through public misuse. However, apart from the fact
that most jurisdictions prohibit the registration of trademarks consisting exclusively of marks
that designate the geographical origin of products or services, a trademark may be assigned or
licensed without significant restriction, while a geographical indication cannot. This is because
it is not the exclusive property of any one producer or group of producers. In these respects, geographical indications have more in common with certification marks than "regular" trademarks.
A certification mark identifies products or services and distinguishes them from uncertified
products by origin, material, method of manufacture, quality, or other features. By way of example, "JAMAICA BLUE MOUNTAIN COFFEE" is protected as a certification trademark both
in Jamaica, where the coffee is grown, and in the US. In the EU, it is a "protected designation of
origin" (which indicates that the quality and characteristics of the product are either essentially
or exclusively the result of a particular geographical environment and that the product is produced, processed, or prepared in that area).
As a result of the similarities between geographical indications and trademarks/certification marks, many countries permit geographical indications, registered and unregistered, to
coexist with a registered trademark containing the indication provided the use is neither false
nor misleading as to the actual place of origin. Some jurisdictions also provide for relief where a
trademark has been applied for or registered prior to the time a domestic law protecting a geographical indication becomes operative. In that circumstance, registration, validity, and right to
use a registered trademark are not prejudiced by the indication.
Infringement and Enforcement of Geographical Indications Rights
Geographical indications are particularly, although by no means uniquely, prone to abuse. The
use of a geographical indication for products or services not originating from the respective
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area is misleading and deceptive for consumers and may also constitute misappropriation of the
goodwill in the indication.
Most jurisdictions provide for enforcement actions based on statutory provisions or common
law principles that control unfair competition and misleading commercial practices. Although
specific legal requirements vary, the following elements are required to prove infringement:
1. the geographical indication must have acquired reputation or goodwill, in that purchas-
ers of the product associate the indication with a definite place of origin;
2. the use of the geographical indication on goods not originating from the designated
place of origin; and
3. resulting consumer deception.
The primary element of proof in actions to enforce rights in geographical indication is that
the indication must have acquired reputation or goodwill. The required standard of proof varies
widely among jurisdictions. For example, an indication that has not yet established a reputation
in the domestic market may not be protected from use by competitors. The Canadian Federal
Court decision in Consorzio del Prosciutto di Parma v Maple Leaf Meats Inc 47 is an example of
such an outcome.
The Treaty Framework of International Geographical Origins Protection
A discussion of the international framework for the protection of geographical indications can
be found at <www.emond.ca/laib4> under the "Extras" tab.
Personality Rights
Defining Characteristics of Personality Rights
Personality rights protect the rights that prominent individuals, such as entertainers and sport
figures, have in their personas, including their names, nicknames, images (in two or three
dimensions), voices, and other distinguishing features. They are of particular importance in the
film, music, and sports industries; however, the rights are not limited to those fields of activity,
and the threshold of "celebrity" is met by persons including authors, artists, politicians, wellknown business executives, and even reality TV stars.
Celebrity rights can be classified under three major headings:
1. personality rights (often used to describe the whole of this area oflaw),
2. publicity rights, and
3. privacy rights.
In terms of intellectual property protection, the primary concern is with publicity rights,
which are frequently described in terms of exploitation of the economic value of an individual's fame.
Ownership, Exploitation, and Transfer of Personality Rights
Personality rights- in particular the subset of publicity rights- are generally assignable and
licensable. Unlike other forms of intellectual property, rights of personality- as distinct from
rights of privacy that expire with the death of the individual- are descendable in the United
States and Canada, although there is a dearth of legal authority in Canada as to the durational
personality rights: the proprietary rights that prominent individuals, such as entertainers and sport figures, have in their personas, including their names, nicknames, images (in two or three dimensions), voices, and other distinguishing features
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8
Intellectual Property and International Business
limit of such rights. It has been judicially suggested that the limit would be in line with the terms
of Canadian copyright: 50 years following the death of the individual.
Infringement and Enforcement of Personality Rights
Use of an individual's fame to promote goods and services without authorization is generally
actionable; personality rights are protectable using trademark law, copyright law, the common
law tort of passing-off, and equivalent causes of action that are the subject of both statute and
common law in various jurisdictions. As with other forms of intellectual property, the nature of
the rights and the extent to which they are susceptible to enforcement varies among countries.
Court decisions and legislation have been mired in confusion between principles of privacy and
property, which has exacerbated the uncertainty as to what is protectable.
• Canadian courts have recognized and enforced publicity rights by both common law
and statutory means. At common law, courts have prohibited unauthorized commercial
exploitation of prominent individuals by employing the tort of misappropriation of personality, at least for the life of the celebrity. Trademark law-by means of both passing-off
claims and the provisions of the Trademarks Act (subject to overcoming the restrictions of
section 12( l )(a))-has also been employed where there is unauthorized use of the names
of celebrities in the context of personality merchandising, endorsement, or sponsorship.
A claim in copyright is available where a person's likeness or a recognizable part of her
likeness is coincidentally a work qualifying as an artistic work. Under Canada's Competition Act,48 a remedy for civil damages is available where an advertisement falsely suggests
that a person is endorsing a product or service. Protection of rights to commercial exploitation of personality is also included in many provinces' privacy legislation, including
Quebec's Civil Code. 49
• Most European civil law jurisdictions have enacted specific statutory provisions to protect
an individual's images as well as personal data.
The Treaty Framework of International Personality Rights Protection
The international treaty/convention framework does not provide for broad-based, uniform personality rights protection. The Rome Convention, 50 the TRIPS Agreement, and the 1996 WIPO
Performances and Phonograms Treaty51 provide limited protections for performer's rights.
Article 14( 1) of the TRIPS Agreement, for example, requires that performers be provided with
the "possibility of preventing" fixation and broadcasting of their live performances. In the case
of the WIPO treaty, performers are provided with the equivalent of a paternity right to be identified with their performance as well as economic rights relating to reproduction, distribution,
and rental of performances.
Choice of Intellectual Property Rights: A Final Word
Products can exhibit a number of attributes that are eligible for protection under different intellectual property regimes. The ubiquitous iPhone smartphone, for example, has the following
attributes:
• the display (including the display panel, circuit board, and cover assembly), the machinery for making the device, and the process by which the device is made are patent protectable or may be maintained as trade secrets;
• the "iPhone" word mark and Apple design mark are trademark protected;
• the shape and ornamentation of the handheld device is industrial-design protectable; and
• the user interface and instruction manual are copyright protectable.
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FIGURE 8.1
Apple Design Trademark
Furthermore, in many jurisdictions, Canada included, intellectual property concepts overlap,
and there are circumstances where protectable intellectual property rights can coexist in the
same attribute, such as in the case of trademark and copyright in design packaging elements. The
Apple design trademark is an example (Figure 8.1).
Finally, and importantly, there are circumstances in which more than one form of intellectual
property subsists in an attribute, but the intellectual property rights cannot coexist and an election must be made. In Canada, this principle is well illustrated by the Supreme Court decision
of Kirkbi AG and Lego Canada Inc v Ritvik Holdings Inc.52
Determining which form of intellectual property protection is the most desirable or appropriate involves careful, expert analysis of the following:
• the precise nature of the development and potentially available forms of intellectual
property;
• the potential for reverse engineering or other discovery of the development;
• the duration of available rights;
• the geographic extent of available rights;
• the likelihood that any right requiring registration will be fulfilled;
• the length of time required to secure any registered right;
• the scope and likelihood of enforceability of rights;
• potential ownership disputes; and
• the perceived, and actual, value of the rights.
The time-sensitive question as to which of the available intellectual property rights owners
should avail themselves of arises most often in circumstances involving patent and trade-secret
protection. The question is not easily answered and requires case-by-case analysis, including the
consideration of the following:
• Canadian patents provide owners with robust enforceable rights relating to inventions
that are new and useful arts, processes, machines, manufactures, or compositions of
matter. Assuming the invention qualifies, the owner- in exchange for full, public invention disclosure through the patenting process- has a monopoly, defined by the claims
© [2020) Emond Montgomery Publications. All Rights Reserved.
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•
•
•
•
Intellectual Property and International Business
267
in the patent, to make, use, and sell the invention for 20 years from the filing date of the
patent application. During the remaining term of the patent, the patent owner can take
legal action against those who interfere with that monopoly, restraining such activities
by injunction and seeking an award for money damages or an account of the infringer's
profits.
Trade secrets, in contrast, can be any formula, plan, or other coordinated information,
used for competitive advantage, which is not generally known.
Trade secrets and patents can be sold, transferred, or licensed.
The primary advantages of trade secrets over patents are ( 1) while an invention must
satisfy certain criteria to be patentable, including the requirements of inventiveness and
novelty, trade secrets can protect non-patentable subject matter; (2) unlike patents, tradesecrets rights generally have no time or geographic limitations; (3) properly managed,
trade secrets are entitled to protection indefinitely, as long as they remain secret; and (4)
a patent publishes the invention, which may be a process or formula the use of which is
impossible to detect in a final product, rendering enforcement difficult.
Caution is required in electing the trade-secret option. Trade secrets are protected only
by agreements (express or implied) and by legal action to inhibit disclosure or misuse and
money damages for lost opportunity; Canadian common law provides limited protection. Maintenance of trade secrets also requires substantial, potentially costly, security
efforts, including contractually binding those to whom the secret is disclosed. These security efforts include restrictive covenants in employment agreements and confidentiality
provisions in licences or other agreements with contractors, customers, and suppliers of
the holder. Most importantly, trade secrets, unlike patents, are not protectable against
those who independently discover the secret (including through reverse engineering),
and while a trade-secret owner may seek legal action to restrain the disclosure or misuse
of a trade secret, once a trade secret is publicly disclosed, anyone may use it.
CRITICAL ANALYSIS: Business Law and Ethics
Trademark Infringement
Dan Richter is a Canadian veteran of the Afghanistan war who
operates a boutique bicycle shop, Cafe Roubaix Bicycle Stud io,
in Cochrane, Alberta, where he produces custom-made wheels
and sel ls bicycles. In 2013, he received a cease and desist letter
from one of the biggest bicycle manufacturers in t he industry,
Specialized Bicycle Components (Specialized) threatening a
lawsuit by Specialized and claiming that use of t he "Roubaix"
name infringed Specialized's trademark for a product line of
bicycles. Roubaix is a city in France associated with the worldfamous Paris-Roubaix bicycle race.
Richter could not afford the legal fees to fight the potent ial
lawsuit, and the Calgary Herald picked up the story.53 Following
an immediate media and public backlash, 54 Advanced Sports
International (ASI), the owner of the Roubaix trademark, advised Richter that he could continue using the name under a
license from ASl.55
Critical Analysis Questions
1. Does every case of trademark infringement wa rrant
legal action? Why or why not?
2. What legal and ethical obligations should trademark
owners consider before asserting trademark rights?
3. What could Richter have done to avoid being in breach
of a trademark before naming his business?
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CHAPTER SUMMARY
In this chapter, we discussed:
Why intellectual property is important to international
business.
Intellectual property is a necessary component of both
economic growth and the financial success of
businesses
What types of property rights are described as intellectual property.
Intellectual property includes patents, trademarks, copyright, industrial designs, geographical indications, confidential information, personality rights, and other more
specialized forms.
What trade secrets, patents, trademarks, copyright, industrial designs, geographical indications, and personality rights are and how each of these is protected
internationally.
The most common form of protection used by business
is maintenance of information as a trade secret or confidential information.
- The TRIPS Agreement provides some framework for
confidential information laws, and the Paris Convention indirectly addresses the subject.
Patents protect function and are monopoly rights granted for specific inventions or for new and usefu l improvements of existing inventions.
- International norms in patent law have been established by the Paris Convention, the Patent Coopera-
• Trademarks protect elements used to distinguish the
products and services of one source in the marketplace
from another.
- International norms in trademark law have been established by the Paris Convention, the Trademark Law
Treaty, the Singapore Treaty, the Nice Agreement, the
Vienna Agreement, and the Madrid Agreement and
Protocol.
• Copyright is the exclusive right of a creator of a literary,
dramatic, musical, or artistic work to reproduce or otherwise disseminate the work and to authorize others to do
the same.
- The Berne Convention, administered by the WIPO,
sets standards for copyright protection.
• Industrial-design law protects a large range of designs
applied to mass-produced products.
• Geographical indications are indicia used in relation to
products and services that originate in a geographical
region where their quality or reputation is linked to that
region.
• Personality rights protect the personas (including the
names, nicknames, images, and voices) of prominent individuals such as entertainers and sport figures.
Why intellectual property protection can be assured only
by engaging the specialized services of professionals in
the relevant jurisdictions where protection is sought.
• Intellectual property can exhibit a number of attributes
eligible for protection under different IP regimes.
tion Treaty, and the TRIPS Agreement.
REVIEW QUESTIONS
1. What types of property are included in the
description "intellectual property"?
6. What are geographical indications? Provide three
examples of recognized geographical indications.
2. What three conditions must be demonstrated in
most countries to obtain a valid patent? Can an
abstract idea be patented?
7. What is the most common form of intellectual
property relied on by business, and how is it
protected?
3. Describe the elements that can be protected
by trademark legislation. What is the purpose of
a trademark?
8. What do personality rights protect? How are they
protected in Canada and the US?
4. What does copyright law protect and in what media
would you find examples of protected material?
5. What does the law of industrial design protect?
Provide three examples of property rights protected
by this legislation.
9. What factors would you take into account in
det ermining what form of intellectual property
protection to choose where more than one form of
intellectual property subsists in an "attribute"?
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Chapter 8 Intellectual Property and International Business
269
NOTES
1. World Intellectual Property Organization Report 2017:
Intangible Capital in Global Value Chains (2017),
online: WIPO <https://www.wipo.int/ publications/ en/
details.jsp?id=4225>.
2. Walt Wriston, Bits, Bytes, and Balance Sheets: The New
Economic Rules of Engagement in a Wireless World
(Stanford, CA: Hoover Institution Press, 2007).
3. Intellectual property rights, even within Canada, are
inconsistently recognized by statute and common
law. Patents, copyright, and industrial designs are
creations of federal statute. Trademarks and
personality rights are the subject of both statute and
common law. The Canad ian law relating to trade
secrets/ confidential information is an ama lgam of
legal principles drawn from the law of contract,
equity, and property. Because they are protected at
common law, intellectual property rights such as
confidential information and trade secrets exist
without registration. Copyright and certain
trademark rights also exist without registration,
although optional registration systems are provided
by statute, the use of which enhances the scope and
enforceability of those rights. Patents, industrial
designs, and less-well-known intellectual property
rights- plant breeder rights and integrated circuit
topography rights- however, depend on registration
for their existence.
4. Jim Balsillie, "The Case for an Ideas-Based Economy;'
The Globe and Mail (16 June 2017), on line: <https://
www.theglobeandmail.com/report-on-business/ robcommentary/ the-case-for-an-ideas-based-economy/
article35334952/>.
5. "The GATI Years" (last visited 18 October 2019),
online: WTO <https://www.wto.org/ english/
thewto_e/ whatis_e/ tif_e/fact4_e.htm>.
6. (Last visited 18 October 2019), online: WTO <https://
www.wto.org/ english/ tratop_e/ trips_e/ trips_e.htm>.
7. WTO-WIPO Cooperation Agreement (22 December
1995), online: WTO <https://www.wto.org/ english/
tratop_e/ trips_e/wtowip_e.htm>.
8. Online: WIPO <https://www.wipo.int/ treaties/ en/text.
j sp ?file_id=288514>.
9 . Online: WIPO <https://www.wipo. int/ treaties/en/ip/
berne/>.
10. [1999] 1 SCR 142.
11. Part II- Standards Concerning the Availabil ity, Scope
and Use of Intellectual Property Rights (last visited 22
October 2019), at para 2, online: WTO <https://www.
wto.org/ english/docs_e/legal_e/ 27-trips_04d_e.
htm>.
12. Ibid at para 2(c).
13. The TRIPS Agreement also contains provisions on
undisclosed test data requ ired for submission to
governmental authorities as a condition of securing
regulatory approval for the marketing of chemical
products (both agricultural and pharmaceutical).
Member states are specifical ly obl iged to protect
such data against disclosure (except where necessary
to protect the public) and against unfair commercial
use by others.
14. Pa rt Ill- Enforcement of Intellectual Property Rights
online: WTO <https://www.wto.org/ english/ docs_e/
legal_e/27-trips_OS_e.htm >.
15. Protocol Relating to the Madrid Agreement
Concerning the International Registration of Marks
(last visited 22 October 2019), online: WIPO <https://
www.wipo.int/ treaties/ en/ registration/
madrid_protocol/> .
16. Singapore Treaty on the Law ofTrademarks (last
visited 22 October 2019), online: WIPO <https://www.
wipo.int/ treaties/ en/ ip/ singapore/> .
17. Nice Agreement Concerning the Internationa l
Classification of Goods and Services for the Purposes
of the Registration of Marks (last visited 22 October
2019), on line: WIPO <https://www.wipo.int/ t reaties/
en/ classification/ nice/>.
18. Hague Agreement Concerning the International
Reg istration of Industrial Designs (last visited 22
October 2019), online: WIPO <https://www.w ipo.int/
treaties/ en/ registration/ hague/>.
19. Patent Law Treaty (PLT) (last visited 22 October 2019),
on line: WIPO <https://www.wipo.int/ treaties/en/ip/
pit/>.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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20. Note: Most patents are for improvements to existing
inventions. The Canadian Intellectual Property Office
in its 2019 Guide to Patents estimated that such
patents constitute 90 percent of the patents granted
in Canada.
then synthesized and articulated the principles
applicable to patent construction. Their object was to
determine the meaning of the claim language
intended by the inventor (assignee) and how it would
be understood by the notional person skilled in the
art, based on a reading of the claims and in the
context of the patent specification as a whole.
21. RSC 1985, c P-4.
22. Tennessee Eastman Co v Canada (Commissioner of
Patents), [1974] SCR 111 . There is no explicit
prohibition in the Canadian Patent Act or its
regulations against patents in this area. However,
methods of medical treatment are not patentable as
a consequence of this Supreme Court decision. The
court rejected a claim relating to a surgical
procedure, holding that methods of medical
treatment involve professional skill and, as such, do
not produce an economic result in relation to trade,
industry, or commerce.
23. Legislative Implementation of Flexibilities- European
Patent Office (EPO) (last visited 22 October 2019) art
52(2)(c), online: <https://www.wipo.int/ ipdevelopment/ en/agenda/flexibilities/ details.
jsp?id=8706>.
24. State Street v Signature Financial Group, 47 USPQ 2d
1596 (CAFC 1998).
33. Section 55(2).
34. 2006 sec 22.
35. Changes to Canadian trademark laws which came
into force June 17, 2019, permit a trademark
application to proceed to registration without the
applicant having established that it has commenced
use of the trademark in Canada in association with
the products and services referenced in the
application. Among other things, this allows foreign
trademark owners to protect their foreign trademarks
in Canada prior to commencing use of those
trademarks in Canada. An undesirable collateral
result is that non-practicing entities, also known as
"trolls" (persons who file trademark applications with
no intention of using the trademark in commerce)
are enabled to file applications and inappropriately
claim trademark rights for non-commercial purposes.
36. 1982 Canlll 1854 (Ont H Ct J).
25. 130 us 3218 (2010).
26. Harvard College v Canada (Commissioner of Patents),
2002 sec 76.
37. 2011
sec 27.
38. Ibid at para 30.
27. 2010FC1011 .
39. Ibid at para 88.
28. 2011 FCA 127.
40. In some countries, the maker of a recording is also
29. Canadian Intellectual Property Office, "Patent
2246933 Summary" (last visited 18 October 2019),
online: Government of Canada <http://brevetspatents.ic.gc.ca/ opic-cipo/cpd/eng/ patent/2246933/
summary.html>.
30. Patent Cooperation Treaty, on line: WIPO <https://
www.wipo.int/ pct/ en/ texts/ articles/atoc.html>.
31. 2004 sec 34, [2004J 1 srn 902.
32. Free World Trust v Electro Sante Inc, 2000 SCC 66 and
Whirlpool Corp v Cameo Inc, 2000 SCC 67 are the
seminal Canadian authorities on "purposive
construction:' In these decisions, the Supreme Court
examined and analyzed the existing jurisprudence,
required to obtain the authorization of the
performers who play the music and those who sing
the words or otherwise act, declaim, or otherwise
perform the work.
41. Translations and adaptations of works are also
copyright-protected works. In order to either
reproduce or publish a translation or adaptation,
authorization is required from both the rights-holder
of copyright in the original work and the rightsholder of copyright in the translation or adaptation.
42. 2004 sec 13.
43. RSC 1985, c C-42.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 8
44. In Canada, for example, a copyright owner may elect,
before final judgment in an infringement proceeding,
to recover statutory damages for an amount between
$500 and $20,000, as determined by the court.
45. RSC 1985, c 1-9.
Intellectual Property and International Business
271
52. 2005 sec 65.
53. Tom Babin, "War Vet Forced to Change Bike Shop's
Name After Threat from US Bike Giant Specialized;'
Calgary Herald (last modified 26 November 2014).
online: < https://calgaryherald.com/ news/ local-news/
46. C 11-1846 and C 12-0630.
47. [2001] 2 FC 536.
war-veteran-forced-to-change-bike-shops-nameafter-threat-from-u-s-bike-giant-specialized >.
54. Caley Fretz, "Specialized 's Disastrous Trademark
48. RSC 1985, c C-34.
Case Is Unnecessary to Defend the Brand;' VeloNews
(9 December 2013), online: < https://www.velonews.
49. CCQ 1991 .
com/ 2013/ 12/ bikes-and-tech/ specializeds-
50. Rome Convention for the Protection of Performers,
Producers of Phonograms and Broadcasting
Organizations (last visited 23 October 2019), online:
WIPO < https://www.wipo.int/ treaties/ en/ip/ rome/ > .
51. WIPO Performances and Phonograms Treaty (last
disastrous-trademark-case-is-unnecessary-to-defendthe-brand_310878>.
55. Steve Frothingham, "ASI Says Calgary Bike Shop Can
Use Roubaix Name;' Bicycle Retailer (9 December
2013), online: <https://www.bicycleretai ler.com/
visited 23 October 2019), online: WIPO <https://www.
north-america/ 2013/ 12/09/ asi-says-calgary-bike-
wipo.int/ treaties/ en/ ip/ wppt/>.
shop-can-use-roubaix-name#.UqbvxWRdVE8 >.
FURTHER READING
Canadian Intellectual Property Council (CIPC), "Intellectual
Property Enforcement Manual: A Practical and Legal
Guide for Protecting Your Intellectual Property Rights"
David Vaver, Intellectual Property Law: Copy right, Patents,
Trade-marks, 2nd ed (Toronto: Irwin Law, 2011).
World Intellectual Property Organization, Intellectual
(last visited 21 October 2019), online: < http://www.ipr-
Property Handbook: Policy, Law and Use, 2nd ed, (2004),
policy.eu/ media/ pts/ 1/ Brand_Enforcement_Manual_
online (pdf): WIPO, < https://www.wipo.int/edocs/
FINAL.pdf>.
European Intellectual Property Review (Sweet & Maxwell).
Christopher May & Susan K Sell, Intellectual Property Rights:
pubdocs/ en/ intproperty/ 489/ w ipo_pub_489.pdf>.
World Intellectual Property Organization & International
Trade Centre, Exchanging Value: Negotiating Technology
A Critical History (Boulder, CO: Lynne Rienner Publishers,
Licensing Agreements, A Training Manual (2005), on line
2006).
(pdf): WIPO <https://www.wipo.int/ edocs/ pubdocs/
Howard B Rockman, Intellectual Property Law for Engineers
en/ licensing/906/ wipo_pub_906.pdf> .
and Scientists (New Jersey: Wiley, 2004).
WEBSITES
Canadian Intellectual Property Office, "A Guide to
Copyright": <http://www.cipo.ic.gc.ca/ eic/ site/
United States Patent and Trademark Office, "General
Information Concerning Patents": < http://www.uspto.
cipoi nternet-internetopic.nsf/ eng/ h_wr02281 .html >
gov/ patents/ resources/general_info_concern ing_
Canadian Intellectual Property Office, "A Guide to Patents":
<http://www.cipo.ic.gc.ca/ eic/ site/ ci poi nternet-
patents.jsp>
United States Patent and Trademark Office, "Intellectual
internetop ic. n sf/ eng/ h_ wr03652 .htm I>
Canadian Intellectual Property Office, "Trademarks Guide":
<http://www.cipo.ic.gc.ca/ eic/ site/ci poi nternetinternetop ic. n sf/ eng/ h_wr02360.htm I>
Property Policy": <http://www.uspto.gov/ ip/>
World Trade Organization, "Intellectual Property:
Protection and Enforcem e nt": < http://www.wto.o rg/
english/ thewto_e/ whatis_e/ tif_e/ agrm7_e.htm >
© [2020) Emond Montgomery Publications. All Rights Reserved.
272
Part II
Private International Law
LIST OF CASES
Amazon.com Inc v Canada (Attorney General), 2010 FC 1011
Apple Inc v Samsung Electronics Co Ltd, C 11-1846 and C
12-0630
Masterpiece Inc v Alavida Lifestyles Inc, 2011 SCC 27, (2011]
2 SCR 387
Mattel Inc v 3894207 Canada Inc, 2006 SCC 22
Monsanto Canada Inc v Schmeiser, 2004 SCC 34, (2004] 1
Bilski v Kappos, 130 US 3218 (201 O)
Cadbury Schweppes Inc v FBI Foods Ltd, (1999] 1 SCR 142
Canada (Attorney General) v Amazon.com Inc, 2011 FCA 127
CCH Canadian Ltd v Law Society of Upper Canada, 2004 SCC 13
Consorzio de/ Prosciutto di Parma v Maple Leaf Meats Inc,
(2001] 2 FC 536
SCR 902
Source Perrier (SA) v Canada Dry Ltd, 1982 Can LI I 1854 (Ont
H CtJ )
State Street v Signature Financial Group, 47 USPQ 2d 1596
(CAFC 1998)
Free World Trust v Electro Sante Inc, 2000 SCC 66
Harvard College v Canada (Commissioner of Patents), 2002
SCC76
Tennessee Eastman Co v Canada (Commissioner of Patents).
(1974] SCR 111
Whirlpool Corp v Cameo Inc, 2000 SCC 67
Kirkbi AG and Lego Canada Inc v Ritvik Holdings Inc, 2005
SCC65
© [2020) Emond Montgomery Publications. All Rights Reserved.
CHAPTER 9 I ADAM ARMSTRONG
Legal Aspects of Different
Foreign Market Strategies
LEARNING OBJECTIVES
CHAPTER OUTLINE
After reading this chapter you will understand:
• the key methods through which a business can enter aforeign market
• the legal rules that affect international agency agreements
• when a foreign distribution agreement is appropriate
• what licensing is and how to negotiate a licence agreement
• the characteristics of afranchiseagreement and why it has competition law
implications
• the different types of joint ventures and pitfalls to be avoided
• what outsourcing is and why it is so important in the global business
environment
• what foreign direct investment is and what international rules exist to
protect foreign investors
Introduction 273
Distributorship 279
Licensing 280
Franchising 287
Joint Venture Agreements 288
Outsourcing 292
Foreign Direct Investment 295
Chapter Summary 300
Review Questions 300
Notes 301
Further Reading 302
Websites 302
List of Cases 302
Introduction
With globalization has come an enormous increase in the global value chain, or worldwide
dispersion of production. Falling transportation costs, lower barriers to trade and investment,
and improvements in information and communications technology have made it easier for firms
to do business in, and locate parts of their businesses in, foreign markets around the world.
Different functions can be shifted to the most efficient site-for example, design in Canada, the
United States, or Europe; manufacturing in Malaysia or China; and after-sales service in India.
Whether a business is a "born global" firm or an established business in Canada wishing to
expand into foreign markets, it must determine the method by which foreign and domestic markets will be accessed and expanded. A business may opt to enter into various contractual agreements that fall short of establishing a direct presence in the targeted market, or it may choose
to make a direct foreign investment by establishing or purchasing a firm in the targeted market.
The decision will vary depending on the type of business, the chosen market, and the resources
that the business is able to allocate.
There are many forms that such access can take. We will review several business forms that
are most commonly used in today's global business environment. These are
• agency,
• distributorship,
global value chain: the worldwide dispersion of production
273
© [2020) Emond Montgomery Publications. All Rights Reserved.
274
Part II
Private International Law
•
•
•
•
licensing agreement,
franchising agreement,
joint venture, and
direct investment.
It is often apparent which business form is appropriate to increase business activity and presence in a country or region. However, some business arrangements are complex, presenting the
parties with difficult choices. It is important that the parties understand the characteristics of
these forms of market entry to ensure that they are establishing viable and enforceable arrangements. This knowledge should help the parties ensure that adequate thought has been given to
the structure of any new arrangement, which may involve a number of arrangements with differing parties. Careful attention should be paid to ensure that the parties
• clarify their expectations,
• anticipate any possible problems, and
• adopt proper legal safeguards for the protection of each party.
In this chapter, we will discuss the business forms mentioned above. At the end of the chapter,
we will discuss outsourcing-a process through which a business decides to obtain services from
a third party because it has determined that the third party can provide the services either at a
lower cost or more efficiently than the business itself can do internally, or both. In the globalized
world, the basis for outsourcing is often either the lower costs at the third party's location or
economies of scale due to the size of the third party's operations.
Some Canadian businesses may initially be content to ship their goods or sell their services
in various parts of the world and have no desire to increase their direct presence in the countries
to which the goods are shipped or services sold. The pressure of intense international competition and the need to expand markets coupled with the need to understand the legal and business
practices in a particular foreign market, however, may make it necessary to establish a stronger
link to that foreign market. One of the simplest ways to achieve this increased presence is to
appoint an agent in the foreign market. The common commercial reasons for appointing an
agent and thereby increasing local participation in the target market include the following:
•
•
•
•
•
a need for more committed and locally focused marketing of the product or service;
a need for more local sourcing of inputs or personnel for political or competitive reasons;
a need to comply with particular local laws or regulatory regimes;
a desire to service the products in the country of sale; and
a need for more local feedback in the development of the product or service.
Sometimes a business will appoint an agent in a foreign market as an interim step before
undertaking more formal licensing or franchising in that country or setting up offices in
the country directly, although, in some cases, the Canadian business's need for a presence in the
foreign market will be satisfied by an agency relationship.
Common Characteristics of an Agency Relationship
An agency is a relationship between one person who is a supplier of services or a manufacturer
of goods (whom we will refer to as the principal) and another person who carries out a specific
task on the principal's behalf (whom we will refer to as the agent), usually to sell the principal's
agency: therelationship between one person who isasupplier of services or amanufacturer of goods(theprincipal) andanother
person (the agent) who carries out aspecifictask on the principal'sbehalf, usually tosell the principal'sproduct or service
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9
BOX 9.1
Legal Aspects of Different Foreign Market Strategies
275
Canadian Businesses Consider Market Entry Strategies
A Canadian aerospace company that manufactures
short-haul passenger jets is contemplating a joint venture with the dominant short-haul passenger jet manufacturer in Brazil.
A Canadian manufacturer of precision laser instruments
for eye surgery would like to expand its market into
northern Europe even though it already has a distributor in Spain. It is important that the northern European
representative can deliver full after-sales services including providing replacement parts and on-site repairs.
A major property developer based in Canada believes
that there are excellent prospects for expansion into
Southeast Asia. It has identified two possible sites for
the establishment of a luxury resort with a major hotel
and an 18-hole golf course. The t wo countries being
considered are the Philippines and Sri Lanka.
A Canadian manufacturer of water-purification equipment, "Purosure;' has identified a manufacturer in Kenya
that is interested in becoming a licensee to manufactu re
and sell the equipment under the trade name "Pu rosure"
in Kenya, Zambia, and Botswana.
A large Canadian retailer plans to open a service and
technology centre in India to perform many of the Canadian company's IT and customer-support functions,
thus providing cost-effective and around-the-clock services for Canadian staff and customers.
What questions should each of these Canadian businesses
be asking with respect to the legal aspects of these foreignmarket strategies, and what challenges or pitfalls do you foresee for any of these plans?
product or service. This person is usually located in the foreign country, is familiar with local
laws and regulatory regimes, may have special knowledge with respect to the product or service,
and may provide additional technical services, such as installation and repair, that cannot easily or economically be provided from outside the foreign country. Characteristics of an agency
arrangement may vary, but usually the following conditions apply:
• the agent does not buy or sell for his own account;
• the agent simply facilitates the buying or selling on behalf of the principal by taking
orders on the principal's behalf but submits these orders to the principal for approval or
rejection;
• the agent is compensated by commission, which is usually related to sales;
• the agent is unable to bind the principal unless she has express or implied authority to do
so (that is, the contract to buy or sell the goods is directly between the principal and the
customer);
• the economic risk for failure of delivery of the goods or service and the risk of non payment remains with the principal; and
• the principal retains ownership of the product until it is sold to the customer.
Although agents may sometimes be responsible for warehousing and distributing the goods,
this is not usually the case. This is an arrangement more commonly reserved for distributors.
Figure 9.1 illustrates a typical agency relationship. The contracts that are negotiated by
the agent, Australian Technical Products, with the customer, Adelaide Communications, are
intended to be contracts between Markham Industries and the customer. The agent is simply the
facilitator. As long as the agent has negotiated the contract on behalf of its principal, Markham
Industries, within the scope of the authority given, Markham Industries will be bound by the
contract.
Actual Authority and Apparent Authority
In the eyes of the law, there are two different types of authority present in an agency relationship:
actual authority and apparent authority. These two types of authority coexist but come from different sources. The agency agreement will describe and define the actual authority given to the
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
Private International Law
FIGURE 9.1
Canadian Firm Appoints Australian Agent
Markham Industries, a Canadian firm currently exporting to Australia, decides to increase
its presence in Australia and appoint s Australian Technical Products as its agent.
Markham Industries
(principal)
Agency agreement
(actual authority)
(apparent
authority)
Negotiates
sales
agreement
Sales agreement
Adelaide
Communications
(t hird-party
cust omer)
agent- this is the source of the agent's real or actual authority. The customer is not a party to this
agreement, nor is he likely ever to see a copy or to be informed of its terms.
Apparent authority is part of the legal relationship between the customer and the principal and is created by the representation (expressed or implied), made by the principal to the
customer, that the agent is representing the principal. It is simply the authority that the agent
appears to have. This situation is clearly described by Lord Diplock in his reasons for judgment
in a famous case decided in England in 1964:
In ordinary business dealings the contractor at the time of entering into the contract can in the
nature of things hardly ever rely on the "actual" authority of the agent. His information as to the
authority must be derived either from the principal or from the agent or from both, for they alone
know what the agent's actual authority is. All that the contractor can know is what they tell him,
which may or may not be true. In the ultimate analysis he relies either upon the representation of the
principal, that is apparent authority, or upon the representation of the agent, ... that is, by permitting
the agent to act in some way in the conduct of the principal's business with other persons. By so
doing, the principal represents to anyone who becomes aware that the agent is so acting, that the
agent has authority to enter on behalf of the principal into contracts ... of the kind which an agent
so acting ... has usually "actual" authority to enter into. 1
Thus the principal will be bound by acts done by the agent that are within her apparent au thority, even if it exceeds the actual authority granted to the agent. If the principal has limited
the agent's authority in any way that is not usual in the industry, the principal should make sure
that any potential customers are informed of the limitation. Consider the scenario described in
Box 9.2.
Termination of the Agency Agreement
An agency agreement is automatically terminated on the death, dissolution, or bankruptcy of the
principal, or as otherwise provided in the agreement. When an agency agreement is terminated
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9 Legal Aspects of Different Foreign Market Strategies
BOX 9.2
277
Agent's Actual Authority Limited by Principal
Monster Road Equipment Inc, a Canadian company headquartered in Winnipeg, has been very successful in the Australian
market. Exports of its heavy road-building equipment have
been increasing at a very healthy rate. However, the constant
travel to Australia to attend to the marketing and sale of its
products has taken its toll on the marketing manager of Monster and is diverting too much time from the company's North
American operations and the development of other overseas
markets. Monster decides to appoint an agent in Australia so
that it can continue to expand its market in Australia while
reducing the need for its employees to travel there. Monster
identifies a suitable individual in Sydney, a Mr Foster. The average cost of a single unit of Monster equipment is Cdn$100,000.
Wanting to authorize Mr Foster to make contracts on Monster's behalf but not wanting to authorize him to make commitments that would unduly stretch the company's resources,
Monster decided to limit Mr Foster's authority to contracts having a value of less than Cdn$400,000 and that contain certain
provisions for the benefit of Monster. The agreement between
Mr Foster and Monster provided for these limitations.
Mr Foster had been Monster's agent for more than two
years, and the relationship had been very satisfactory to both
sides, w hen Mr Foster was approached by Outback Construction Co, which had just been awarded a contract to build a new
highway to Alice Springs. Outback required a number of specialized units to complete the job and negotiated a contract
with Mr Foster for eight units at a total cost of Cdn$824,000.
Mr Foster executed the contract on Monster's behalf, notw ithstanding that it did not comply with Monster's agency agreement w ith Mr Foster.
Mr Foster was delighted that he had obtained such a la rge
order, but Monster was already operating at peak capacity
and was unable to deliver the units to Outback on t ime. The
re sult was that Outback fell behind in its contractual o bligations to complete the new highway on time and sued Mon ster
for breach of contract- that is, failure to perform to agreed-on
deadlines. Monster defended the case on the basis that t here
was no contract, because Mr Foster had exceeded his actual
authority in agreeing to such a large order. Monster t ook the
position that Mr Foster was solely respon sible for the damages
for breach of contract because he knew about the limitation in
the agency agreement.
In this case, Outback would likely succeed in its claim for
damages against Monster, because Mr Foster was acting w ithin
his apparent authority and Monster had done nothing to inform Outback, as a third party, of the limitation of authority.
Monster would have a good chance of suing Mr Foster successfully for breach of a condition of the agency agreement, but Mr
Foster might not have the resources to pay a large judgment .
What do you think Monster could have done to avoid this
unfortunate situation?
by the parties, the principal must be sure that third parties are given notice, because without
actual knowledge of the termination of the agency agreement, third parties will be entitled to
assume the continued existence of the agency relationship and the principal may continue to be
bound on the basis of the agent's apparent authority.
Preparing the Agency Contract: Duties of Principal and Agent
In negotiating an agent's agreement, the duties imposed on the parties by the common law
should be borne in mind. The duties of the principal typically include
• paying the agent the fee agreed on, and
• reimbursing the agent for any reasonable expenses.
The duties of the agent include
•
•
•
•
obeying the lawful instructions of the principal,
keeping information obtained as an agent confidential,
regularly informing the principal of relevant or important developments,
maintaining the standards applicable to the performance of an agent in the particular
industry or sector,
• accounting for any goods or money belonging to the principal, and
• placing the principal's interests first in all transactions subject to the agency agreement.
© [2020) Emond Montgomery Publications. All Rights Reserved.
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Part II
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In addition, the agent is not normally free to delegate any of her duties to a third party unless
this is expressly permitted by the agency agreement.
The agency agreement should always be a properly drawn written contract stating the rights,
duties, and reasonable expectations of the parties. The most common sources of problems are
the following:
• the failure to consider the full effect of the provisions agreed to;
• the omission of important provisions; and
• the failure to define the relationship clearly, including, most importantly, the actual authority of the agent.
It is important that the principal maintain a relationship with the agent that is sufficiently
"arm's length" to ensure that the agent is an independent contractor and not an employee.
Care must be taken to ensure that the agent is responsible to the principal only for the end
result of its activities, not for the manner in which they are carried out. Extensive supervision
of the agent's activities may result in the agent being considered legally an employee, with the
consequent responsibilities (for example, income withholding, employment insurance, workers'
compensation) and the requirement of proper notice or severance on termination. In short, the
agent must be left free to manage his own business.
Special Protection for Agents in Other Countries
In Canada, the United States, and other common law countries, the parties are free to develop
the agency relationship as they wish within the framework of the common law and are, generally, unencumbered by legislation that limits their freedom of contract when those contracts are
properly structured. Nevertheless, principals should check any applicable legal requirements,
because legislation in certain jurisdictions may impose specific obligations or terms-for example, for compensation to agents when an agency agreement is terminated.
Principals who wish to enter into an agency agreement with an agent who is located in a
country other than Canada or the United States should exercise caution because many countries,
particularly those with civil law systems, have special laws to protect the agent, and these laws
will supersede any written contract entered into by the principal and agent. There are provisions
in a number of countries that grant the agent an indemnity if the contract expires or is terminated for reasons other than a default attributable to the agent. There are, however, other countries
that make no legal provision for compulsory payments to agents upon termination of an agreement. Registration of all agency contracts is required in certain countries.
For parties within the European Union (EU), the EU Directive on Self-Employed Commercial Agents is relevant.2 This directive is a minimum directive that sets the lower limits for each
EU member's national laws for protecting commercial agents.
In response to the difficulties created for international traders by the variations in national
laws governing agency relationships, the International Chamber of Commerce (ICC) has developed a model form, which is an attempt to find a balanced solution to the conflicting agency
rules in national states. This model form incorporates the prevailing practices in international
trade as well as the principles generally recognized by the domestic laws on agency. The model
form addresses questions of sales through the Internet, indemnity, arbitration, and the principles
of law generally applicable to agency contract.
Competent legal advice is recommended before entering into any agency agreement, particularly in civil law countries.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9
BOX 9.3
Legal Aspects of Different Foreign Market Strategies
279
Agency Agreement Checklist
Definition of specific important terms, such as "territory;'
"products;' "market segment;' "net selling price;' and
"commissionable accounts:'
Nature of the appointment: is it exclusive or non-exclusive? Where an appointment is exclusive, the principal
should consider provisions for the agreement becoming
non-exclusive if the agent fails to meet specified targets
or effort obligations.
Term (time period) of the agreement, including provisions for renewal.
Rights and obligations of both principal and agent.
Payment provisions, including the rate, the basis of computation, and when payment is due and payable.
Requirements for the agent's personnel: qualifications
and training.
The actual authority of the agent and a promise by the
agent not to hold itself out as having more authority
than the actual authority granted by the contract.
A non-competition covenant on termination of the
relationship. (This may not be enforceable in all juris-
dictions. The usual rule is that the covenant must be
reasonable in time and geographic area and not deprive
the agent of the right to earn a living.)
Termination for cause should be provided for and
defined. In the case of termination without cause, sufficient protection for the parties should be included (for
example, payments or a sufficient notice period). This is
particularly important wit h respect to payment of posttermination commissions. Termination for other reasons
should also be considered - fo r example, term inat ion
on one party becoming insolvent (these provisio ns may
not be enforceable in all circumstances) or termi nation
when the principal chooses to w ithdraw the product
from the market where the agent resides.
General clauses, such as those concerning confidentiality obligations, proprietary rights to improvements,
non-assignabil ity, limitations of liability, indem nities,
manner of giving notices, governing law, and d ispute
resolution. The parties should not neglect these important clau ses.
Checklist for Negotiating an Agency Agreement
Box 9.3 contains a check.list of important m atters to be considered when negotiating an agency
agreement. These matters should be fully explored by the parties, and the terms should be clearly
spelled out in the written contract.
Distributorship
Companies that wish to expand their presence into foreign markets may choose to appoint a
foreign intermediary to act on their behalf. As we have seen in the previous section, this can be
an agent. Sometimes, companies instead choose to appoint a distributor (establish a distributorship). The choice of whether to establish an agency or a distributorship is usually determined
by the type of business or industry. Agents are typically used when the principal wishes to or is
expected to have a direct relationship with the customer.
Distributorships are more common in the case of standardized goods, such as cars, appliances, and consumer products, and are often used where after-sales service and parts and a
permanent location are expected. In a distributorship, the distributor usually purchases goods
on its own account from the supplier for resale to customers. A distributor may have rights for
subdistribution and will often have a licence to use a brand name or a technology and the knowhow to install or service the product. Usually, the distributor will bear the obligation to deliver
the product and to take on the economic risk of payment to the supplier and non-payment by
the customer.
foreign intermediary: an individual or corporation resident in a foreign jurisdiction that conducts business on behalf of an individual or corporation that is resident elsewhere
distributorship: a fo rm of market entry whereby the foreign distributor purchases goods on its own account from the supplier for
resale to customers in its own (the distributor's) market
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The distributor is normally free to select its customers, determine pricing, incur expenses,
and control its operations. Normally, the distributor is not compensated by the supplier. It makes
a profit by selling the product at a price exceeding what it purchased it for from the supplier,
less any expenses incurred in bringing the product into the market (for example, importation
duties or transportation costs) and in selling it (for example, advertising costs). A distributor will
often provide installation and maintenance services for the product sold, but the manufacturer
normally provides the warranty.
Foreign Protective Legislation Affecting Distributorships
Just as many countries have enacted legislation to protect agents on termination, there is often
legislation protecting foreign distributors in two major areas: minimum notice requirements
and compensation for termination. Some of these provisions extend beyond termination to the
non-renewal of the relationship or the failure to renew. The philosophy behind the legislation
derives from the perception that foreign suppliers may take advantage of a distributor who has
no comparative advantage in negotiating the terms of the original distribution agreement. The
goal of the foreign supplier is the development of goodwill and a customer base in a country or
region for its products or services. Once the penetration of the market is at an acceptable level,
the foreign supplier may be tempted to terminate the distributor and move into the country or
region through an affiliate, branch, or subsidiary just at the point where the distributor was close
to realizing a return on its investment of time and money. This is perceived as unjust and, for this
reason, a common provision of the protective legislation is to prohibit a termination or failure to
renew unless "just cause" can be shown by the foreign supplier.
International Distribution Agreements and Competition Law
Canadian business people must be aware of the importance of the competition laws of the
country of distribution whenever they enter into a new distribution arrangement, whether as a
Canadian supplier to a distributor in a foreign jurisdiction or as a Canadian distributor of foreign products or services in Canada. Canadian competition law has provisions that may lead to
criminal charges when there is evidence of conspiracy or bid rigging and to regulatory enforcement when there is evidence of monopolization, price discrimination, price maintenance, predatory pricing, refusal to supply, exclusive dealing, or tied selling.
Competition laws in foreign countries cannot be assumed to be similar to those in Canada,
either as to their substantive provisions or as to the spirit with which they are enforced. The
amount of the penalties may be much higher than those in Canada and m ay come as a very
unpleasant shock to the poorly informed Canadian business.
The EU in particular has very strict provisions for the prevention of anti-competitive measures; enforcement can best be described as "enthusiastic;' and penalties can be very large by
Canadian standards. The case in Box 9.4 illustrates the risk.3
Licensing
What Is Licensing?
Some knowledge of intellectual property law rules is essential to understanding licensing,
because the essential purpose of most licence agreements is the grant of the right to use
intellectual property rights held by the licensor. In simplest terms, a licence is the right to
licence agreement: a contract in which the owner (licensor) of a right (usually intellectual property rights such as patents,
trademarks, or trade secrets) permits another party (the licensee) to manufacture and/or market the licensor'sproducts in return for
royalties, fees, or other forms of compensation
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BOX 9.4
Legal Aspects of Different Foreign Market Strategies
281
Case Highlight
Distributor Agrees to Export Ban in European Union
Case Name and Court
Parker Pen Ltd v Commission of the European Communities (European Court, 1994)4
sizeable quantities of pens to it in the Netherlands at t he lower
"export prices:'
Issue
Facts
Was the export ban a violation of EU competition law?
Parker Pen Ltd had established exclusive distributors in several
European countries. In an exclusive distribution agreement
with its German distributor, a Parker marketing director had inserted a clause prohibiting the distributor from exporting the
pens outside the territory assigned to it without Parker's written consent. The marketing director had inserted the clause on
his own initiative and apparently without seeking legal advice.
He had done so in order to prevent "parallel imports" of Parker
pens into territories in which Parker had agreed to give "exclusive" distribution rights to another party. (Parallel imports are
imports of identical goods, manufactured by the same manufacturer, but brought in through channels other than the official exclusive distributor for the territory.)
A would-be unofficial distributor of Parker pens based in
the Netherlands filed a complaint with the Commission of the
European Communities. It was unhappy because it had been
unsuccessfu l in persuading the German distributor to export
Decision
The Commission undertook an invest igation, conducting a hearing, and fined Parker ECU?00,000 (approximate ly
Cdn$1,204,000). The German exclusive d istributor was fined
ECU40,000 (Cdn$68,800) for having signed the exclusive distribution agreement that contained the export ban.
Analysis/Application
The Commission reasoned that European competition law
is clear on this point: export bans are always restrictions on
competition. A long line of case law existed on the topic and
"it was not possible for Pa rker to be unaware of this fact:•S
Furthermore, the Commission said it made no difference that
the clause was put into the agreement by a manager with no
authority to do so. The company was liable for infringing the
competition law.
use something that belongs to someone else. The owner of the right (the licensor) agrees to
refrain from enforcing its statutory and common law rights to prevent the other party (the licensee) from using the licensor's intellectual property so long as the licensee complies with the
conditions imposed by the licensor. Intellectual property is generally subject to statutory legal
protection, such as patents, trademarks, copyrights, or industrial designs, but may be protected
solely by common law and contract, as is the case with trade secrets and know-how.
Reasons for Licensing
One of the major advantages of a licensing agreement is the ability to establish a manufacturing base and/or a market for a product in a foreign country without any capital investment.
By finding a foreign licensee, a firm avoids the risk and expense of foreign direct investment. If
the foreign licensee has experience in manufacturing similar products, manufacturing capacity,
and an established marketing network, the arrangement can be very attractive for the Canadian
licensor.
Licensing agreements do not always involve a Canadian firm seeking a licence abroad. There
are many situations in which a Canadian manufacturer will seek a licence to manufacture and
sell in Canada a product that belongs to a foreign firm.
Potential Problems
What Intellectual Property Rights Does the Licensor Have in the Host Country?
Because most forms of intellectual property rights are derived from statutes, the licensor will not
generally have the same intellectual property rights in the foreign country that it has in its home
country. Although there are a number of conventions that allow for intellectual property rights
created in one country to be effective in another country, the protection of intellectual property
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such as patents and trademarks will require the licensor to take active steps to register the patents and/or trademarks in the foreign country. Licensors should obtain competent legal advice
in the host country to understand the rights it has. In circumstances where it does not have the
same intellectual property rights as in its home country, the licensor may need to rely on other
types of intellectual property rights, most often trade secrets and know-how, which it will then
attempt to protect through appropriate contractual provisions.
How Effective Is Intellectual Property Protection in the Foreign Country?
From the point of view of the licensor, the major risk associated with licensing is the loss of
control of the trade secrets relating to the technology and the resulting risk of establishing effective competition in the global marketplace. For less-developed countries, licensing is a means
of acquiring manufacturing knowledge relating to technology without having to wait years to
develop it. The attitude of the government of the licensee's country becomes very important
when the potential licensor is assessing the possibility of licensing arrangements abroad. The
first question should be, does the country have effective intellectual property laws and, if so, are
these laws fairly and effectively enforced? Some countries have adequate legislation protecting
intellectual property rights but fail to enforce them.
Foreign Country Approval Requirements
Some foreign governments assert their right to monitor all foreign licensing agreements to
ensure that they do not cause a drain on valuable foreign exchange. Licence agreements that
involve rights to beneficial and up-to-date technology are more likely to be approved than agreements that involve less-essential products, such as consumer products or products that have
become obsolete or outmoded in their home market. Regulatory schemes for technology transfer agreements can take the form of a requirement for prior approval, which means the licence is
not valid until approved; a requirement for registration of the licence; or simple notification. A
requirement for registration may mean that licences are available for public inspection. This can
involve a serious compromise of confidential information. Early consultation with local lawyers
is advisable for the Canadian firm intending to grant a foreign licence.
For persons considering acquiring a licence from a foreign firm to manufacture or sell in
Canada, there are few legal impediments. Canada has no regulatory scheme governing licensing
arrangements, and there are no requirements for registration or public disclosure.
Competition Law and Licensing
Businesses that are negotiating licensing agreements must also consider potential competition
law problems in the country of manufacture and distribution and the issue of disclosure of
confidential information as a part of the negotiating process. Each of these issues requires the
advice of competent counsel experienced in intellectual property or licensing law. Some of the
preliminary considerations will be discussed here.
Law for the Protection of Competition
Laws for the protection of competition can have the effect of curtailing the freedom of intellectual property owners to deal freely with their rights when imposing conditions on licensees.
The United States and Canada appear to be moving in the direction of tougher competition law
enforcement, so caution must be exercised when designing agreements in North America. Some
of the areas to be aware of are
• arrangements in which the licensor and licensee make up more than 25 percent of the
market;
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9 Legal Aspects of Different Foreign Market Strategies
• exclusive licensing arrangements that prevent the licensee from using competing
technologies;
• agreements that tie the licensed technology or product to another product or products;
• arrangements that create "innovation markets"-that is, combine firms working at the
forefront of research and development in respect of particular technologies;
• agreements for non-use or suppression of protected technology;
• arrangements that corner a market through acquisition or restrictive licensing; and
• demands for grant-backs of improvement packages from the licensee.
Early Disclosure of Confidential Information
It is often necessary for the potential parties to the licensing agreement to exchange confidential
business and/or technical information to enable them to decide whether or not they will continue with the negotiations. The parties need this information to assess their potential corn patibility. It is essential that the terms of such a disclosure be agreed to in order to protect the
information from unauthorized disclosure and exploitation. The parties should be prepared to
have a customized non-disclosure agreement tailored for their specific situation and not use a
"precedent" confidentiality agreement, which may be designed for quite different circumstances.
It is recommended that the customized non-disclosure agreement describe the information
revealed and that the specific secrecy measures required be stated. The very common but relatively meaningless "X will use its best efforts to ensure the secrecy of the information" clause
should be avoided. The duration of the confidentiality requirement should also be stated. Some
examples of measures to ensure confidentiality are
• limitations on which employees and agents may have access to the confidential
information,
• physical security measures for areas where access may be gained to the confidential
information,
• security measures for electronic storage and transmission of data,
• controls over copying confidential information,
• the requirement to obtain confidentiality agreements with employees or agents who will
have access to the confidential information, and
• the obligation to return or destroy the information when it is no longer needed or when
the relationship is at an end.
Typical Licensing Situations
Like many legal contracts, licensing agreements may vary in their format, depending on the situation. Four common arrangements are presented below:
1. A Canadian firm has a product it wishes to have manufactured and sold by a licensee in
another country. If this is the Canadian firm's first experience with licensing, it should
take great care to enter the negotiations with a complete checklist, having considered
all factors important to the firm as well as any problems likely to arise. It is advisable to
involve an experienced licensing lawyer well before an agreement in principle is finalized because often no amount of ingenious drafting on the part of the lawyer will rescue
the firm from concessions or points ceded in earlier negotiations. It will also be necessary to consult lawyers in the licensee's country to ensure that the firm's interests are
protected and that local law has been complied with.
2. A Canadian firm wishes to negotiate with a potential licensee in another country, and
the Canadian firm has previously licensed others in other countries. In this situation,
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the Canadian firm will have the advantage of a previous agreement that suits its business. This previous agreement may be used as a "basis" for negotiation of agreements
in other countries, provided it is carefully reviewed to ensure that it is appropriate.
Amendments are made to reflect any variations in the arrangement between the parties
and any differences in the laws of the contemplated foreign country.
3. A foreign firm wishing to acquire a Canadian licensee presents a form, designated as a
standard form, to the Canadian firm and advises that there is little room for renegotiation of individual terms. In such a situation, the Canadian firm must satisfy itself that
a profitable and enforceable business arrangement is possible under such a standard
contract, which, once signed, will be binding. Again, care should be taken to ensure that
the agreement is reviewed by a Canadian lawyer familiar with licensing.
4. A foreign firm wishing to make an agreement with a Canadian licensor presents a version of a contract recently entered into in another jurisdiction. In this situation, there is
likely ample room for negotiation, and the Canadian firm should not be afraid to counteroffer with its own draft agreement based on its own requirements and legal advice.
A Checklist for a Licensing Agreement
Before entering into negotiations for a licensing agreement, you should know how the finished
agreement is likely to be structured. This will assist you in clarifying your negotiating goals, help
you review a draft agreement, and save you time and money when instructing your lawyers. A
typical licensing agreement will be divided into five main sections as described below.
Description of the Parties
A clear and correct description of the parties is very important. Corporate names should be written exactly as they are shown on incorporation documents. Remember that a corporate division
cannot be a party to a contract because, unlike a corporation, it is not considered a legal person.
It is important to ensure that you understand the entity with whom you are contracting. Often
times, a party will present an entity within its "corporate group" with which the other party may
not be familiar. It is incumbent on the other party to perform due diligence and ensure that it
knows who the unfamiliar party is and that this party has the ability to perform under the contract as well as the financial ability to satisfy any claims in the event that the contract is breached.
Recitals
This is the part of the agreement that often begins with "Whereas" and proceeds to describe why
the parties are entering into the agreement and what the agreement is intended to accomplish.
Recitals are useful to clarify the thinking of both parties and make the agreement easier for an
uninitiated reader to understand. Recitals have no legal effect unless they are later referred to in
order to clarify some uncertainty or ambiguity in the agreement.
Defined Terms
Although this section of the agreement may appear to be overly legalistic to the layperson, it is
an excellent way of simplifying a potentially complex document. For example, suppose that you
are licensing know-how that is in the possession of your company. It will be necessary to define
very carefully what that know-how consists of. This definition may be extensive- one paragraph
of text or more. A definition section enables you to define "know-how" only once and state that
every time the word is used, it refers back to the definition given. Once a term is defined in this
way, it must be consistently used. Other common examples of defined terms are "licensed product;' "licensed patent;' "licensee;' "gross sales;' and "term:' Defined terms should not contain
"operative provisions" but only definitions of the terms themselves.
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Chapter 9 Legal Aspects of Different Foreign Market Strategies
The Grant
The grant is the heart of the licence agreement-the very reason the parties are making an agreement. This should be the first operative clause of the agreement- the one that states what rights
are being granted. When negotiating this part of the licence agreement, the parties should ensure
that it includes provisions addressing the following issues:
• What is being licensed. The grant of rights should be explicit regarding what intellectual
property or other rights are the subject of the licence.
• Use restrictions. The parties may wish to restrict the use of the rights to a particular
type of product or industry. Another use restriction may require promising not to
do particular things with the property. For example, it is common in software licence
agreements for the licensee to agree not to decompile the software to gain access to the
source code.
• Territory. The grant of rights may be confined to a specific area. It is not uncommon that
different considerations may apply to geographical limitations on manufacturing, selling,
and sublicensing. Care must also be taken not to breach the antitrust laws of the licensor's
home jurisdiction.
• Exclusivity. The nature of exclusivity or non-exclusivity should be clearly spelled out. For
example, there may be an exclusive right to manufacture and a non-exclusive right to sell.
What about export sales? These questions should be addressed in order to avoid disputes
later.
• Sublicensing. Whether sublicensing will be allowed or prohibited should be stated.
• Title retention. It is advisable for the licensor to require a clause acknowledging that the
trade secrets and know-how that are the subject of the licence are valuable assets and
that any breach of the secrecy provisions by the licensee will render the licensee liable for
damages to the licensor.
Other Common Provisions
In addition to the grant of the licence, the contract should clearly set out all of the other arrangements and terms that the parties are expected to abide by as part of their relationship. The provisions in licence agreements usually address the following issues:
• Term . A licensing agreement is a long-term arrangement; however, some provision
should be made to establish a term. A common practice is to provide for an initial term
of a specific number of years and provide for one or more renewals unless, within some
specified period, one party gives notice to the other of its intention to terminate. Provision should also be made for automatic termination in the event of specific violations of
the agreement. Consideration should be given to the inclusion of minimum performance
requirements, which would give the licensor the right to terminate the license if minimum performance requirements are not met. Minimum performance requirements are
of particular importance in exclusive licence arrangements.
• Future improvements. A decision must be made as to who acquires the rights to future
improvements of the technology. The licensor may require a "flow-back" clause, which
requires that the licensee relinquish rights to any improvements it has made to the technology. If, on the other hand, the licensee negotiates to license its improvements in the
technology to the licensor, a "grant-back" clause will be required.
• Royalties. These are the periodic payments made to the licensor based on the use of the
licensed rights. The various ways of relating payment to use will vary considerably from
one industry to another. Some of the most common alternatives are royalties based on
percentage of sales, on production, or on net profit. Occasionally, royalties take the form
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•
•
•
•
•
•
•
of lump-sum payments. Once the appropriate base is determined, the parties must agree
on the royalty rate. Most licensors will open negotiations with a suggested rate based on
industry norms. When determining the royalty base, it may be necessary to establish a
point at which the product is considered manufactured or sold. Another common royalty
provision is an escalation clause tied to some published index. This is generally done to
account for inflation in multi-year licence agreements. Finally, and most importantly, the
currency of payment must be specified, and any necessary conversion formula should be
tied to an internationally recognized rate of exchange.
Protection of the licensed rights. Both parties have a common interest in protecting the
licensed rights against violations by third parties. The parties should be sure to discuss
their respective responsibilities in this area and provide for responsibility for expenses.
Confidentiality clause. The agreement should contain a clause stating that the licensee
agrees not to disclose the information, know-how, or trade secrets acquired from the
licensor and that the licensee will require any affected employee, sublicensee, or subcontractor to make a similar covenant of secrecy and confidentiality.
Quality control. Because the licensee's output is usually identified with the licensor's own
products and corporate name, care must be taken that the licensee maintains quality standards that are consistent with those of the licensor. Quality-control clauses may therefore
include obligations such as manufacturing the product in accordance with specifications
and directions supplied by the licensor; providing the licensor with samples for inspection; making any reasonable requested changes in manufacturing procedures or raw materials; and, most importantly, permitting inspection of manufacturing facilities by the
licensor.
Indemnities. The agreement should typically contain provisions whereby the licensor agrees
to protect the licensee against claims made by third parties in the event that the licensor
does not, in fact, have the rights it is purporting to grant under the agreement. Licence
agreements also generally contain provisions whereby the licensee agrees to protect the
licensor against claims made by third parties where the licensee has violated the terms
of the license. For example, if the licence is for rights necessary to manufacture a product
and the licensee does not manufacture the product in accordance with the licensed process,
the product will be defective. In these circumstances, a third party may bring a claim against the
licensor (whose trademark may be on the product) on the incorrect assumption that
the licensor is responsible for the manufacture of the defective product.
Limitations of liability . Licence agreements typically contain limitations on the ability of
either party to recover damages against the other party in the case where the other party
has breached the agreement. These provisions can be highly complex and typically contain specific legal language to be effective. As a result, it is advisable to seek the advice of
an experienced licensing lawyer in interpreting these provisions.
Language. The language in which the licensed property is to be provided should be specified. Trademarks licensed in a foreign jurisdiction usually need to be translated into the
local language, and the licensor should ensure that both the English language version
and any translation are available for registration. If the licence is for computer software, it
may be necessary to translate programs and supporting documentation. Licences are fre quently prepared in two languages. For this reason, there should be a provision that one
version in a particular language, say English, will be the official version and will prevail in
the case of conflict.
A ssignability . The parties should address the question of whether the licensee may freely
transfer the licence to another party. Often, the parties will reach a compromise whereby
the agreement cannot be assigned without the licensor's consent but that consent will not
be unreasonably withheld.
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Chapter 9 Legal Aspects of Different Foreign Market Strategies
• Settlement of disputes. Parties should ensure that a choice of law is included, and a Canadian licensor may wish to include a choice-of-forum clause in favour of its own jurisdiction or of another acceptable jurisdiction. The parties must also decide whether disputes
will be settled through a court process or through arbitration. If arbitration is chosen, the
place for the arbitration and the arbitral rules that will apply should also be specified.
Schedules
Schedules are useful devices for simplifying an agreement by separating out such technical or
complicated information as technical specifications, royalty escalation formulas, or minimum
sales scales. A schedule may also be called an appendix or exhibit. Care should be taken that any
attached schedule is properly incorporated into the agreement. It is not uncommon for initial drafts
of schedules to be inconsistent with or in direct conflict with the terms of the main agreement. This
is typically a result of schedules being prepared by individuals other than those who completed
the main body of the agreement. Care should be taken to make sure all portions of the agreement,
including the schedules, are consistent and fit together as a single, complete document. In complex
agreements, parties often include a clause that indicates which portion of the agreement will take
precedence in the event of a conflict (for example, the main body over any schedule).
Franchising
Franchisi ng is a form of licensing in which the franchisor grants to the franchisee the right to
use a trademark or logo provided that strict quality standards are maintained and the business
is run in the manner and style prescribed by the franchisor to ensure that the business conforms
to the franchisor's corporate image. In addition, it is typical in franchising relationships for the
franchisee to be required to purchase certain products from the franchisor for use in the franchise. Franchising seldom involves significant patent law or a transfer of technology in the true
sense. Typically, almost every aspect of the business is controlled by the franchisor to preserve
strict uniformity among franchisees and the original business. The franchisee, however, owns
the individual franchise and risks her own capital.
Characteristics of a Franchise Agreement
A franchisor will require strict control over every aspect of the franchisee's business. Failure
to comply with any of the detailed requirements for the conduct of the business may carry the
penalty of termination. Agreements are usually for a fixed term during which the franchisee will
expect to recover his original investment and make a profit. The question of renewal is an important one, and the franchisee will wish to negotiate to secure favourable renewal rights. Reten tion of the franchise may be conditional on the franchisee meeting certain sales quotas. The
franchisee will want exclusive rights within a certain geographical area, whereas the franchisor
may be reluctant to commit so fully to one franchisee. Royalties, as in pure licensing agreements,
are generally tied to sales.
There is generally considered to be an inequality of bargaining power between a franchisor
and a franchisee in the negotiation of the franchise agreement. As a result of this perceived
inequality, various provinces and states have enacted statutes that are intended to protect fran chisees from what were considered to be the worst practices of unscrupulous franchisors. For
example, in Ontario, the Arthur Wishart Act (Franchise Disclosure), 20006 (the Act) mandates,
among other things, that the franchisor may be required to provide a disclosure document that
franchising: asystem used by businesses to distribute or market their productsor services in domesticand international markets;
one company, the franchisor, grants another company, the franchisee, the right to sell its products or servicesinaspecified location
and to use the franchisor's trademarkor product name, business systems, and expertise
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contains specific information about the franchise no less than 14 days before the franchise agreement is signed. The Act also imposes an obligation of fair dealing on both parties in their performance and enforcement of the franchise agreement. Fair dealing includes the obligation to
act in good faith and in accordance with reasonable commercial standards.
Joint Venture Agreements
Various Forms of lnterbusiness Association
A joint venture is essentially an agreement reached between or among separate business entities
for collaboration on a joint project or new entity. This agreement creates an ongoing arrangement for the purpose of achieving the objectives of the joint venture. This agreement must be
differentiated from agreements that are merely contractual undertakings to work together on a
common project. As the demands of international business become more complex, the range
of business relationships developed by the continuous ingenuity and flexibility of entrepreneurs
and their lawyers continues to increase. Terms to describe these business relationships, such as
"strategic alliance;' "business network;' and "virtual corporation;' have likewise developed. These
terms to some extent defy exact definition because they are used by different commentators in
different ways. Each business relationship is, by its nature, constantly changing, whether the
flexibility is dictated by the demands of different types of business, different parts of the world,
or differing sizes and needs of individual businesses themselves.
Any discussion of joint venture relationships should include a consideration of other forms
of "partnering" in which individual firms can retain the advantages of independence and entrepreneurial control while gaining access to resources possessed by other firms. These contractual
arrangements include the following:
• Cross-licensing. This is an arrangement whereby firms agree to license some or all of their
proprietary technologies to each other for use in each other's products, manufacturing
process, or business.
• Joint marketing, distribution, and sales agreements. These are very common and are probably the form of alliance most vulnerable to attack based on domestic anti-competition
legislation.
• Alliances or business networks. These arrangements allow small- and medium-sized
enterprises to combine their resources and skills to build critical mass to achieve corn petitive advantage in scale, scope, and speed. These organizations do not normally create
a new corporate entity, although members sometimes purchase small amounts of equity
in each other. Members usually remain independent and often compete with one another
outside the alliance or network.
• Consortiums. These are arrangements in which an umbrella association takes on a part
of the business of several "partners" and is usually limited to achieving the completion
of one large project. A consortium may be simply a contractual arrangement, or it may
actually be a multi-party joint venture.
Remember that these forms of business relationships are constantly changing and that the
line between one type of business relationship and another can become blurred. There are as
many forms of strategic business cooperation as there are businesses and commercial reasons
to cooperate, and the forms are limited only by the imagination and ingenuity of the partners.
Various observers have predicted that, in business in the near future, managers will either be
part of an alliance or competing with one.
joint venture: a legal arrangement, which may take the formeither of ashort-term partnership or of anew incorporated entity,
whereby thepersons(individuals, groupsof individuals, companies, or corporations) jointly undertake atransaction for mutual profit
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9 Legal Aspects of Different Foreign Market Strategies
Common reasons for entering into business alliances include:
• to expand market presence-one partner may have access to a market and the other(s) a
product or service for that market;
• to share or develop technology to keep pace with global competition;
• to combine strong company attributes, such as expertise in marketing, export market development, research and development, strategic management, training, production, and
financial expertise in acquiring venture capital; and
• to pool financial resources to take a project or venture into a new market.
Negotiation of a Joint Venture
What makes a joint venture successful? One experienced international trade consultant
described his benchmarks for success as
•
•
•
•
•
•
•
open and frequent communication,
a well-established hierarchy,
a predetermined dispute-resolution mechanism,
realistic expectations on both (all) sides,
complementary strengths and weaknesses of partners,
able management of the alliance, and
non-competition between the partners.7
A joint venture agreement is not an arrangement to be entered into lightly or hastily. Theimportance of careful partner selection cannot be emphasized too strongly. Like marriage, a joint
venture is easily entered into, but extrication from the resulting relationship can be painful and
expensive. Careful and thorough planning and a willingness to anticipate and discuss potential
problems should help the parties avoid some of the pitfalls awaiting the unwary and the impatient. Potential partners must make sure that, in their enthusiasm to see the enhanced business
possibilities of an alliance, they fully understand the increased risks involved and ensure that
liability for the increased risk is clearly recognized and fairly spread between the parties. While
initial enthusiasm for the arrangement usually causes the parties not to want to talk about potential pitfalls, any agreement should carefully spell out how to unwind the relationship and what
the consequences of that unwinding are.
Preliminary Documentation
At some stage in the negotiations, the parties may wish to exchange a document setting out
their high-level arrangements with each other. We will refer to this as a memorandum of
understanding or MOU. An MOU may clarify the purpose of the arrangement and give comfort to the parties, but it is only an agreement to agree- not a binding contract. For example, an
agreement by the parties to conduct a feasibility study may well be binding, but the common
corollary- that if specified results are obtained, a joint venture agreement will be signed- is not
usually enforceable.
memorandum of understanding (MOU): a legal document describing a bilateral agreement between parties; expresses a
convergence of will between theparties, indicating an intendedcommon line of actionrather than alega l commitment; in domestic
law, it is simply alener of intent and generally fallsshort of creating acontractual relationship; in international law, it represents less
commitment and more flexibility thanatreaty because the usual ratification rules do not apply, leaving countries freer to managethe
domestic issuesraised by international agreements
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An MOU is often used for the following purposes: to bar either company from entering into
negotiations with other firms and thereby to ensure that the parties' interests are sufficiently
aligned to justify the time and expense of negotiating a formal business relationship (parties
would usually set out that this provision is binding); to set a timetable for completing negotiations; and/or to provide a basis of comparison for the final legal agreement. Prior to entering
into discussions regarding an MOU, there is often the need to have a confidentiality agreement
before essential information is released. Unlike the MOU, the confidentiality agreement will be
a binding contract.
Types of Joint Ventures
The two major types of joint venture are the equity joint venture and the contractual joint
venture.
The equity joint venture is one in which each party becomes an equity holder in an entity
formed specifically to conduct the joint venture business. The entity can take a number of forms,
including a corporation, a partnership, a limited partnership, or a limited liability company. In
the discussion that follows, we will refer to the joint venture entity as a corporation.
The important characteristic of this form is that, once the joint venture corporation is formed,
it has its own life, and the relationship of the parties is governed not only by their joint venture
agreement but by the corporation's formation documents and all law relating to corporations.
This must be borne in mind during negotiations and when giving instructions to lawyers who
may be incorporating a new entity; it is easy to end up with two different sets of rules governing
directors, meetings, and casting votes due to inconsistencies between the joint venture agreement and the formation documents of the new corporation established for the joint venture.
The contractual or unincorporated joint venture is one in which each party retains its own
corporate identity and the relationship between the joint venturers is defined entirely by the joint
venture agreement they have entered into. This situation is more analogous to a partnership, and
it must be remembered that, like a partnership, there is no limited liability for the joint venturers
and that each joint venture partner may risk being bound by the acts of the other joint venture
partner.
Companies or joint venturers who are anxious to be responsible for only a portion of the
venture must beware clauses or joint venture entities that result in joint and several liability (that
is, all the joint venturers being jointly liable for all liabilities of the joint venture).
Drafting the Joint Venture Agreement
The joint venture agreement should define the form that the joint venture will take and set out
the contributions of the parties, their participation in the profits and losses, and the management
BOX 9.5 Rogers Communications (Rogers) and Bell Canada Inc
(Bell) Form an Equity Joint Venture, lnukshuk Wireless Inc
In 2005, two aggressive competitors, Rogers and Bell, formed a joint venture and established another company called lnukshuk Wireless Inc (lnukshuk). 8 Rogers and Bell could not individually provide Internet connectivity across Canada; this was particularly so in the rural communities. lnukshuk
was established to pool the resources of the two telecommunications companies and split the $200
million in costs of building the infrastructure necessary to extend a network for wireless Internet connectivity in 45 major cities and more than 120 rural communities.9 Bell and Rogers had equal stakes
in lnukshuk.10 Pursuant to the agreement, the network was operated jointly, but the marketing arm
of Rogers and the marketing arm of Bell bought capacity from lnukshuk, each at the same price, whi le
competing in the market for customers. lnukshuk was dissolved in 2013.
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9 Legal Aspects of Different Foreign Market Strategies
structure of the joint venture, as well as the means of adding new joint venturers, voluntarily
or involuntarily removing a joint venture, terminating a joint venture, and disposing of a joint
venture's assets after dissolution. The valuation of the contribution of the parties is often contentious, particularly when dealing with partners in planned economies. Some common issues
between the joint venture partners include the following:
• Control. This is likely to be the predominant issue between the parties. Although the
parties may envisage "shared control;' this concept is difficult to bring into successful
practice. Mechanisms for exercising shared control must be carefully thought out and
fully understood by both parties. The issue of control can arise at different levels of
decision-making. A distinction can be made between day-to-day operations, short-term
policy decisions, and longer-term general policy. In a case where the law of a host country
requires 51-percent local ownership, the risk presented by loss of control can be reduced
by spreading the local investment among many investors.
• Licensing and transfer of intellectual property rights. Transfer of technology is often the
major reason for a joint venture, and the clauses that relate to this should be considered just as carefully and completely as if the licensing agreement were between parties
with an arm's-length relationship. Copyrights, trademarks, and patented and unpatented
technology are among the most difficult assets to valuate. How intellectual property is
valuated may have important tax implications, particularly for ventures with foreign
partners.11
• Capital requirements and distribution of earnings. The parties should address the issue
of additional direct equity contributions that may be required in the future. A limitation for future funding can be negotiated, together with a provision as to the consequences should either party fail to make its contribution. The parties should also
make sure they have the same ideas about distribution of earnings. They may wish to
include a minimum distribution policy or predetermined distribution policy in the
joint venture agreement. This advice is consistent with lessons learned by experienced
joint venturers.
• Deadlock. The parties should address the possibility of a deadlock situation in an "equal"
joint venture situation. They may wish to provide for one person to have a casting vote
in deadlock situations. It is possible that this position could be alternated between the
parties or vested in a "neutral party:' More drastic methods of dealing with deadlock are
the buyout by one partner, the introduction of a new party, or the winding up of the joint
venture.
• Arbitration. The parties may wish to specify arbitration in the case of a dispute rather
than resort to the courts of either jurisdiction.
Antitrust and Competition Law Considerations
Because joint ventures are, by definition, collaborative activities between or among potential
or actual competitors, they are likely to have significant competition law implications. Businesses contemplating sizable strategic alliances should ensure that their plans are reviewed by
counsel knowledgeable in competition law before the arrangement is allowed to proceed too
far into firm commitments. This advice is now also applicable to emerging larger economies,
which are now developing antitrust measures more comparable to those of the Canada, the US
and the EU. China, for example, has now passed its Anti-Monopoly Law, 12 which provides for
a comprehensive system of competition law. Thus far, merger control is the most enforced of
the various forms of monopoly conduct. To date, China has imposed structural behavioural
conditions on merging parties, as illustrated in Box 9.6, and has also prohibited a merger, as
illustrated in Box 9.7.
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BOX 9.6
Private International Law
Case Highlight
Conditions Imposed on Merger in China
Case Name and Court or Tribunal
InBev Anheuser-Busch (PRC Ministry of Commerce, 2008) 13
Facts
Anheuser-Busch proposed a merger with Zhujiang Brewery
and also with Tsingtao Brewery. The merged entity was contemplating acquiring interests in Chinese Resources Snow
Breweries and Beijing Yanjing Brewery Co.
Issue
Did the proposed merger and the proposed acquisition of
interests in two more Chinese breweries violate Chinese law
prohibiting a merger that may have the effect of eliminating or
restricting competition?
Analysis/Application
Decision
It was decided that the plans could affect competition in the
domestic beer market in the future, although there was no evidence of such an effect at the time. China's Ministry of Commerce (MOFCOM) imposed conditions restricting the extent
of Anheuser-Busch's shareholdings in Zhujiang and Tsingtao,
and Anheuser-Busch was prohibited altogether from acquiring
an interest in the Snow and Beijing breweries.
BOX 9.7
The case is interesting, because MOFCOM's conditions were
pre-emptive in nature, imposed to prevent potential future
concerns over loss of competition.
Case Highlight
China Prohibits Proposed Merger
Case Name and Court or Tribunal
Decision
Coca-Cola, Huiyuan Merger (PRC Ministry of Commerce, 2009)14
The merger was ruled to be a threat and was prohibited.
Facts
Analysis/Application
Coca-Cola proposed a merger with Huiyuan, a large juice
manufacturer in China.
The Ministry of Commerce saw the potential "portfolio power" of
the merged entity and was particularly concerned about CocaCola's ability to extend its dominance from the carbonated-softdrinks market to the juice market, which would threaten the
survival of small- and medium-sized j uice companies in the PRC.
Issue
Was this a threat to competition in the PRC?
Outsourcing
Outsourcing is a newer form of business structure that is particularly relevant in a globalized
business world where the greatest economic growth is in trade in services. Although outsourcing is not, strictly speaking, a strategy for entering a foreign market, it is included in this chapter
because it does represent a common form of increased business activity in foreign countries and
is important for many businesses engaged in the global marketplace.
outsourcing: the practice of companies contracting to have services performed by external third parties that can perform them
morecheaply andefficiently, rather than performing them internally
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9
BOX 9.8
Legal Aspects of Different Foreign Market Strategies
Sun Life Financial Outsources Some Underwriting to India
Sun Life Financia l has embarked on a major expansion of its life insurance business in India and in
addition has opened a service and technology centre in Bangalore, where local Indian managers will
oversee IT services and some underwriting (evaluating people who are applying for insurance coverage) for the Canadian insurance market. Sun Life, which also operates an outsourcing centre in Ireland,
has stated that the decision to outsource more of its IT and insurance administrative functions to India
was motivated more by time than by cost, despite the fact that India's labour market is young, highly
skilled, and inexpensive. Given the time difference between the two countries, it is possible to work on
a file in Canada during the day and then pass it on to the Indian operations, where it can be handled
during the night. Sun Life points out that this division of labour can flow in both directions, enabling
the Canadian office to help the Indian office with underwriting assignments during busy periods.
Source: Sinclair Stewart, "Sun Life Tests Underwriting in India," The Globe and Mail (u pdated April 22, 2018), on line:
< https://www.theg lobeand ma i l.com/report-on-busi ness/ sun-1 ife-tests-u nderwriting-in-i ndia/ a rticle182533 5 7I>.
Understanding Outsourcing: The Global Supply Chain
Outsourcing of services globally is commonly understood as a practice of companies sending
service functions to a third party, usually abroad, where they can be done more cheaply or efficiently. For many years, organizations have had core, mission-critical aspects of their business,
such as manufacturing or accounting, performed by others. Technology now makes it possible
for a broader range of services to be provided by others and in foreign jurisdictions. A range of
services-including human resource management, information technology operations, backoffice operations, call-centre functions, medical diagnostics, stock market research, and software
development and support-can be delivered around the world, with significant benefits to the
service outsourcer in terms of cost and time. One example of this is Sun Life Financial's decision
to develop a project in India, described in Box 9.8.
As the Sun Life situation suggests, Canada benefits both ways from the current trend to outsource services to other countries. Canada is not only an outsourcer but is also a provider of
outsourcing services and is an attractive destination for companies because of its proximity to
the United States and its lower costs, stable government, and well-educated, mainly Englishspeaking population.
The practice of outsourcing is not without controversy, as seen in the US election campaign
of 2016, where both presidential candidates indicated they were opposed to outsourcing and one
candidate indicated that they would stop all outsourcing (although without indicating how that
would be accomplished).
Legal Aspects of the Outsourcing Arrangements
Major Considerations
Two major considerations that a firm must bear in mind in structuring an outsourcing transaction are the protection of intellectual property and the protection of privacy of personal data.
Intellectual Property Rights of the Outsourcer
In most cases of outsourcing, a key component of the process is allowing the supplier access
to legally protected rights such as copyright, patents, trademarks, trade secrets, and industrial
designs. The issue of moral rights must also be respected by the supplier (see the discussion in
Chapter 8). The outsourcer must pay particular attention to how the supplier will handle the
rights it is given access to. Contractual provisions obligating the employees of the supplier to
comply with the supplier's commitments with respect to intellectual property, including with
respect to protection, usage, and assignment of rights in newly created intellectual property,
must be included, and, if any subcontracting is to be done by third parties or by affiliates of the
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supplier, there must be an obligation that they also be covered by agreements protecting the
intellectual property rights of the outsourcer.
Protection of Personal Information
Canadian law, both federal and provincial, requires companies to protect personal information.
The Personal Information Protection and Electronic Documents Act (PIPEDA) 15 is federal legislation that applies to the private sector across Canada and restricts the collection, use, and disclosure of personal information. As of October 2018, seven provinces (Quebec, British Columbia,
Alberta, Ontario, New Brunswick, Newfoundland and Labrador, and Nova Scotia) have privacy
laws that are substantially similar to PIPEDA. Generally, this legislation protects the privacy of
individuals with respect to personal information held by companies and institutions (certain of
the provincial statutes concern personal health information custodians) and provides individuals with a right of access to that information. These legislative requirements must be honoured
by Canadian companies even when data is being processed out of the country.
The Process of Establishing an Outsourcing Arrangement
When considering outsourcing arrangements, the usual parameters of thorough preparation for
negotiations and entering into a contract apply. These include developing the business case for
the outsourcing clearly and carefully to ensure that the reasons for outsourcing are explored and
understood and that the required parameters for success are clearly established. The case must be
founded on business reasons and must be vetted and approved by all constituents in the organization. The appropriate team should be assembled to manage the contracting process and, more
importantly, the ongoing governance of the process. The outsourced service must be rigorously
defined, and detailed operational, functional, and technical specifications must be prepared at
the outset. In some cases, a company will be transferring assets and employees to an outsource
provider, which makes the arrangements even more complicated. Because every outsourcing
situation is different, using a standard form contract or following another company's template
is not likely to provide a firm with supportive, viable legal arrangements. It is important to
realize that the structuring of an outsourcing arrangement can be extremely complex, requiring
contracts not only with the outsourcing supplier, but also with third parties to cover situations
where people are transferred or other pre-existing contractual arrangements are affected. There
may also be tax issues. It is important to bear in mind the rule relating to privity of contractthat is, you cannot create obligations with third parties without making a direct contract with
them. This is also important when you are addressing the issue of the privacy obligations of the
outsourcer.
The Request for Information
A request for information (RFI) from potential outsource providers is the usual starting point
for most companies embarking on outsourcing. The goal of the request is to expand the information about outsource providers, help the firm understand its options and the various methods to
structure the arrangements, and help narrow the field of candidates to ensure the best supplier is
identified. The firm that decides on a single source without comparing it to others risks choosing
a less suitable supplier and loses the bargaining advantage of a competitive procurement.
The Request for Proposal
Once the company has narrowed down a list of suppliers, it sends a request for proposal (RFP)
to each. The RFP is the document that describes what a company wants to outsource and what it
is seeking from the supplier. The RFP often contains the form of contract that the successful supplier will be required to enter into with the company. Caution must be exercised in embarking
© [2020) Emond Montgomery Publications. All Rights Reserved.
Chapter 9 Legal Aspects of Different Foreign Market Strategies
on this process in Canada. The outsourcer must ensure that the terms of the RFP are the final
terms, because our law creates