Property rights and regulatory innovation: Comparing constitutional cultures

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ARTICLE

Property rights and regulatory

innovation: Comparing constitutionalcultures

David Schneiderman*

This paper examines the relation between constitutional property rights and the

capacity of self-governing communities to engage in regulatory innovation. Throughthe lens of constitutional culture, property rights in Canadas constitutional order are compared with those in the United States. Thinking about constitutions in culturalterms aids in understanding the changes occurring in national constitutional systemsresulting from the constitution-like disciplines associated with economic globalization.In the Canadian case, constitutional culture helps us to locate a constitutional propertyright with some normative force that does not quite rise to the level of constitutionaltext. This attenuated right fits the conception of the Canadian state as being better able to handle problems of transition and to take measures for societal self- protection. To some extent, this capacity may be under threat, given the commitmentsof the North American Free Trade Agreement, and may move Canadian constitutionalculture further toward a U.S.-style limited government.

There exists . . . in democratic societies agitation without a precise goal; thereresigns a sort of permanent fever that is turned to innovation of allkinds, andinnovations are almost always costly.

Alexis de Tocqueville1

Constitutional property rules may hinder or frustrate transitions to a better

future, or even a more tolerable one. To what extent, then, do constitutionalproperty rights stand in the way of regulatory innovation? The question hasbeen posed by property theorists in terms of problems of transition 2 those,for instance, arising from regulatory adjustment of property rights in the faceof resource congestion. 3 Margaret Jane Radins use of transition refers to a

* Associate professor of law, University of Toronto, and visiting sabbatical scholar, Georgetown University LawCenter. An earlier version of this paper was presented to the Property Law Section of the American Associationof Law Schools meeting in Atlanta, Georgia (January 2004). I am pleased to acknowledge the assistance ofEmily Kirkpatrick and financial support of the Social Sciences and Humanities Research Council. Email:

[email protected] ALEXIS DE TOCQUEVILLE, JOURNEY TO A MERICA 202 (Harvey C. Mansfield & Delba Winthrop trans.,Yale Univ. Press 2000).2 Marc R. Poirier, The Virtue of Vagueness in Takings Doctrine , 24 C ARDOZO L. REV. 93, 179 (2000).3 Carol Rose, Property and Expropriations: Themes and Variations in American Law , 2000 U TAH L.REV. 1, 18, 23.

The Author 2005. Oxford University Press and New York University School of Law. 371All rights reserved. For Permissions, please email: [email protected], Volume 4, Number 2, 2006, pp. 371391 doi:10.1093/icon/mol009

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broader conception: The problem of transition to a better world, to the worldof our theories of justice, is the problem of politics. The transition never ends,she writes. 4

This paper is an inquiry into the relation between constitutional prop-erty rights and the capacity of self-governing communities to adapt tochanging social and economic circumstances. 5 Might these rights unrea-sonably disrupt the capacity to achieve what Alexis de Tocquevillecalled faux re parables? 6 This was one of the great advantages of demo-cracy in the early nineteenth-century United States, wrote Tocqueville: thecapacity collectively to change minds. 7 Tocqueville observed the restlessvolatility of the U.S. as it resulted in shifting majorities and the ceaselessalteration of existing laws. Often the consequence was defective or unreas-onable laws. 8 This is what Tocqueville meant, in the papers epigraph, bycharacterizing legislative innovation as being costly. This also was thegreat advantage of democracy, to obtain truth from experience. 9 We mightsay (though Tocqueville did not go so far) that the social condition of citizensin a democratic regime premised upon equal worth reasonably could beexpected to improve with regulatory innovation.

If constitutional rules can make regulatory interventions in the marketmore or less difficult, Canadian constitutional law is portrayed as enablingthe most intrusive forms of regulation, even those tantamount to expropri-ations. 10 As A. H. F. Lefroy put the Canadian formulation, in his classicconstitutional law text, once a law is passed by the appropriate level of government it is not competent for any Court to pronounce the Act invalidbecause it may affect injuriously private rights. 11 Constitutional law in theU.S., by contrast, often is portrayed as organized around solicitude toward

4 MARGARET JANE RADIN, REINTERPRETING PROPERTY 162 (Univ. Chicago Press 1993).5 See LINDA W EISS, THE MYTH OF THE POWERLESS STATE (Cornell Univ. Press 1998).6 Perhaps best translated as repairable mistakes. T OCQUEVILLE, supra note 2, at 339.7 Id. at 216.8 Id. at 222.9 Id . at 216. This is a good example of Tocquevilles ambiguous embrace of democracy, welldescribed by Holmes: He defended what to some extent he disliked, and he admired what tosome degree he feared. See Stephen Holmes, Both Sides Now , THE NEW REPUBLIC, March 4,2002, at 34.10 A.G. Canada v. A.G. Ontario, [1898] A.C. 700 (P.C.). According to Lord Herschell, the sug-gestion that the [federal] power might be abused so as to amount to a practical confiscation of property does not warrant the imposition by the Courts of any limit upon the absolute power of legislation conferred. Supra , at 713.11 A.H.F. L EFROY, THE LAW OF LEGISLATIVE POWER IN CANADA 279 (Toronto Law Book Pub. Co.18971898).

372 Intl J Con Law. Vol 4. No. 2 (Apr 2006) D. Schneiderman


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private property rights, 12 where individual and market freedoms triumphover competing conceptions of the public good. 13 Justice Antonin Scaliain Lucas, for instance, described a prohibition on building on vacant beach-

front property as amounting to a denial of all economically valuable useand, therefore, inconsistent with the historical compact recorded in theTakings Clause that has become part of our constitutional culture. 14

This account of property rights, Scalia maintained, best represents theunderstandings of [U.S.] citizens regarding the content of, and the Statespower over, the bundle of rights that they acquire when they obtain titleto property. 15

Gregory Alexander has taken issue with Justice Scalias historical accountin Lucas, arguing that there are competing conceptions of property one coulddraw out of the U.S. constitutional experience. 16 The market paradigmthemodel upon which Scalia drawsis merely one among them, though, admit-tedly, the long dominant conception. One might also take issue with Scaliassociological account: By what method was he able to divine public under-standings about constitutional property rights? I want to suggest, neverthe-less, that thinking about a constitution in cultural terms is a useful wayof tracking some of the changes occurring within and across national consti-tutional systems, particularly within Canada. By drawing on a cultural con-ception, we get a fix on the nature and scope of these rights in Canada andcan then contrast them briefly with those in the U.S. (the subject of section 2 of the paper).

The status of property rights has been identified as the primary legal dif-ference between Canada and the United States. 17 Yet interesting similaritiesin practice between the two regimes, emerging over time, may be overlookedin this quest for difference. Moreover, through a cultural lens, we are in a bet-ter position to trace the changing contours of Canadian practice as a result of the influence of the constitution-like regime of investment rules found in the

investment chapter of the North American Free Trade Agreement (NAFTA) the subject of section 3 of the paper. By attending to these differencesand similarities, we may better understand what, if anything, is distinctiveabout Canadas constitutional culture of property rights. As Canadians

12 See JENNIFER NEDELSKY, PRIVATE PROPERTY AND THE LIMITS OF AMERICAN CONSTITUTIONALISM : THEMADISONIAN FRAMEWORK AND ITS LEGACY (Univ. Chicago Press 1990).13 See WILLIAM J. NOVAK , THE PEOPLEs W ELFARE: LAW AND REGULATION IN NINETEENTH-CENTURYAMERICA (Univ. of N.C. Press 1996).14 Lucas v. S.C. Coastal Council, 505 U.S. 1003, 10251028 (1992).15 Id.16 See GREGORY S. ALEXANDER, COMMODITY AND PROPRIETY : COMPETING VISIONS OF PROPERTY INAMERICAN LEGAL THOUGHT (Univ. Chicago Press 1997).17 JOHN BRIGHAM , PROPERTY AND THE POLITICS OF ENTITLEMENT 136 (Temple Univ. Press 1990).

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compelling reasons will more likely give rise to a taking. 23 In the Canadiancase, constitutional culture helps us to locate a constitutional property rightwith some normative force, although it does not rise to the level of constitu-

tional text.Understood in this way, constitutional texts and constitutional doctrines

are merely part of the landscape that helps to make up constitutional culture.We can trace one version of this to Montesquieu. However, Weimar-eralegal theorist Hermann Heller (helpfully translated into English byDavid Dyzenhaus) comes closer to the idea of constitutionalism advancedhere: as a normatively formed being influenced by natural and culturalfactors. 24 What Heller calls the normed constitution is made up of customs, ethics, religion, tact, fashion, and so on 25 the whole naturaland cultural milieu, the anthropological, geographic, national, economicand social normalities. 26 For Heller, the content of the constitution was notmerely determined by text, nor by virtue of the standpoints and charact-eristics of its legislators, but also by citizensby the characteristics of thenorm addressees who observe them. 27 In this way, Heller understandsnorms as an integrated system of rules developed by the participantsthemselves, who cooperate in what Heller describes as a multiplicity of performances. 28

I am not thinking here merely of social attitudes (the stuff of quantitativeresearch) or only of political culture, concerned with public attitudestowards the political system and its various parts or the political orienta-tions that help political systems to function. 29 Nor will this be a search forlegal culture, an inquiry I associate with the ways in which legal processesfunction in institutions and society, 30 or an investigation of the beliefs and

23 Id. at 167.24

Hermann Heller, The Nature and Structure of the State , 18 CARDOZO

L. REV

. 1139, 11851186(David Dyzenhaus trans., 1996).25 Id . at 1187.26 Id . at 1191.27 Id .28 Id . at 1187. This formulation is not intended to encompass as broad a number of political, eco-nomic, and social institutions as John Rawlss basic structure, the elements of which wouldclaim to have a singular unity. See JOHN RAWLS , POLITICAL LIBERALISM 11, 202 (Columbia Univ.Press 1993). Nor is this formulation as shallow as Mark Tushnets thin constitution, used to

explain the general U.S. constitutional guarantees of equality and liberty, in contrast to the thickconstitution of detailed provisions and rules. See MARK V. T USHNET, TAKING THE CONSTITUTION AWAYFROM THE COURTS 911 (Princeton Univ. Press 1999).29 THE CIVIC CULTURE REVISITED 12 (Gabriel A. Almond & Sidney Verba eds., Little, Brown 1965).30 Lawrence M. Friedmann, Legal Culture and Social Development , 4 LAW & SOCY REV. 29, 34(1969).



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to the level of cultural norm. The origins for this lie, in part, on a sharedcommon law tradition. In a 1912 address to the Iowa State Bar Association,Ontario Justice William Renwick Riddell maintained that, [i]n Canada,

nobody at all is afraid that his property will be taken from him, it never is, inthe ordinary case. 33 This was because, Riddell claimed, Canadians sharedwith Americans what he called a common commitment to justice to allunder the law. 34 These common roots prompted the constitutional historianW. P. M. Kennedy to liken Canadas unwritten common law constitution tothe written constitutional limitations in the United States: We profess tofind most emphatically in the common law what you profess to find in yourconstitution. 35

The British common law, from which Canadians derive theirprinciples of property law, 36 mandated that statutes interfering with privateproperty rights be strictly construed, and that any doubts or ambiguitiesfound in statutory language be construed against the legislature and infavor of property owners. 37 This common law presumption gave rise tothe supposition that legislatures were not inclined to confiscate propertywithout making their intentions plainly manifest. The common law rule of statutory interpretation, in contrast to the constitutional rule, can be overrid-den by a legislature when its intention to do so is made clear and plain. In acountry such as Canada, then, there is no constitutional requirement thatproperty taken by the state be for a public purpose and that it be accompaniedby the provision of just compensation.

Why this reluctance to bind the state to constitutional limitationsassociated with property rights? Some explanation for the absence of robustconstitutional protection can be traced back to the ideological origins of the Canadian state. Though Canada has been described by Louis Hartz asa society where Lockean liberal values predominated, just as they didin the United States at its origin, 38 the two constitutional orders diverged in

their orientations toward the role of the state. Though he does not associateone or the other with either North American regime, Louis Hartz identifies

33 Justice W. R. Riddell, The Constitutions of the United States and Canada , 32 C AN . L. TIMES 849(1912).

34 Id . at 870.35 W.P.M. K ENNEDY, SOME ASPECTS OF THE THEORIES AND WORKINGS OF CONSTITUTIONAL LAW 17(Macmillan 1932).

36 See BRUCE H. ZIFF, PRINCIPLES OF PROPERTY LAW (3d ed. Carswell 2000).37 SIR PETER MAXWELL, ON THE INTERPRETATION OF STATUTES 388400 (3d ed. Sweet & Maxwell1896).38 See LOUIS HARTZ , THE LIBERAL TRADITION IN A MERICA 59 (Harcourt Brace Jovanovich 1955) and THE FOUNDING OF NEW SOCIETIES: STUDIES IN THE HISTORY OF THE UNITED STATES , LATIN A MERICA, SOUTHAFRICA, CANADA AND A USTRALIA (Louis Hartz ed., Harcourt, Brace & World 1964).



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two sides to the Lockean argumenta defence of the state that is implicit,and a limitation on the state that is explicit. 39 We might say that Americanconstitutional design emphasizes the second side of Locke. This is a design

that facilitates limited government through the checking mechanisms of federalism, the separation of powers, and the Bill of Rights. 40 The Canadiansystem usually is described as more authoritarian, with an emphasis onorder, and less democratic, with an emphasis on paternalism, 41 and sopicks up on the first side of Locke. The presence of a viable social democraticleft in Canada has been attributed to this authoritarian traditionwhat hasbeen called the Tory touch: a collectivist strain which enabled discussionof collectivist solutions to the problems posed by modernity. 42 This frag-ment of Toryism nurtured both a right- and, later, a left-wing politics. Social-ism, according to the so-called Tory-touch thesis, was contained as apotential in the original political culture, as it fit, to a certain extent, withTory ideas already present. 43

Much debate has ensued over the presence and influence of theTory touch, 44 and it has suffered critical blows from which it is not likely torecover. S.F. Wise shows, for instance, that loyalists escaping to Canadafrom the American Revolution were conservatives in the name of liberalindividualism and not in the name of collectivism. 45 Peter J. Smith and JanetAjzenstat 46 suggest that the Tory touch be expunged and replaced, under theinfluence of the work of J.G.A. Pocock and others, 47 with a version of civichumanism. A republicanist discourse, it is argued, appealed to notions of common good and civic virtue in the conduct of political life and was apredominant force in mid-nineteenth-century preconfederation Canada. 48 It

39 HARTZ , supra note 38, at 59.40 CASS SUNSTEIN, THE PARTIAL CONSTITUTION 23 (Harvard Univ. Press 1993).41 SEYMOUR MARTIN LIPSET, CONTINENTAL DIVIDE: THE VALUES AND INSTITUTIONS OF THE UNITED STATESAND CANADA 4344 (Routledge 1990).42 See HARTZ , supra note 38, at 34.43 Gad Horowitz, Conservatism, Liberalism, and Socialism in Canada: An Interpretation , 32 C AN. J.ECON. & POL. SCI. 143 (1966).44 H.D. Forbes, Hartz-Horowitz at Twenty: Nationalism, Toryism and Socialism in Canada and theUnited States , 20 C AN . J. POL. SCI. 287 (1987).45 See S.F. W ISE, GODs PECULIAR PEOPLES: ESSAYS ON POLITICAL CULTURE IN NINETEENTH CENTURYCANADA (McGill-Queens Univ. Press 1993).

46 Peter J. Smith & Janet Ajzenstat, Canadas Origins: The New Debate , 1:2 N ATL HISTORY 113, 115(1997).47 See J.G.A. P OCOCK, THE MACHIAVELLIAN MOMENT: FLORENTINE POLITICAL THOUGHT AND THE ATLANTICREPUBLICAN TRADITION (Princeton Univ. Press 1975).48 Peter J. Smith, The Ideological Origins of Canadian Confederation , 20 C AN . J. POL. SCI. 1 (1987) and Louis-George Harvey, The First Distinct Society: French Canada, America and the Constitution of



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is the presence of this discourse that helps to explain the distinctive Canadianresponse to the problems posed by the impact of markets, they argue. 49 It isdifficult, however, to account for these differences through the lens of repub-

licanism, as appeals to civic virtue were more pronounced at the founding of the U.S. Constitution and virtually absent in Canada in 1867. 50 Conseq-uently, the thesis seems largely derivative of intellectual developments fromelsewhere. 51

Another, more fruitful line of inquiry is an institutionalist one. ElizabethMancke identifies the genesis for the Canadian strong state in the desire of colonial administrators to involve themselves directly in the governing of the British North American colonies. This is in contrast to the developmentof self-government in the United States, where settlement by British colonistspreceded the arrival of state institutional apparatuses. The institutionalfoundations for the strong state present in Canada, Mancke argues, wereembraced in later constitutional developments, leaving room for the develop-ment of political ideologies (like a viable social democratic left) otherwisearrested in the U.S.

Manckes work helps to explain why the capacity for strong-state actionwas facilitated by earlier constitutional designs in 1791 (creating Upper andLower Canada) and 1840 (resulting in the fusion of the two Canadas) andemerged out of the framework of 1867 (resulting in the confederation of the four colonies). The Canadians at confederation were by no means uninhi-bited democrats (though the franchise was quite expansive when comparedto U.S. and English practices). Yet the constitutional architecture they devisedleft government largely unchecked and politics open to dialogue aboutalternative futures 52 more so, perhaps, than the American constitutionalanalogue. The framers design left Canadian legislatures largely unconstra-ined and with few constitutional limits, other than those carried over fromcolonial times, such as the royal power of reservation and disallowance. 53

1791, in CANADA s ORIGINS : LIBERAL, TORY OR REPUBLICAN? (Janet Azjenstat & Peter J. Smith eds.,Carleton Univ. Press 1995).49 Azjenstat & Smith, supra note 46, at 118.50 See GORDON S. WOOD, THE CREATION OF THE A MERICAN REPUBLIC (Univ. N.C. Press 1969).51 As Gordon Stewart notes, the mainstream reform movement best characterized by theBaldwin family, remained committed to monarchy, hierarchy, and executive control of patronage," characteristics that exemplify what has been called court ideology and not those

of civic humanism. G ORDON T. STEWART , THE ORIGINS OF CANADIAN POLITICS: A COMPARATIVEAPPROACH 28 (Univ. B.C. Press 1986).52 CHARLES TAYLOR , RECONCILING THE SOLITUDES: ESSAYS ON CANADIAN FEDERALISM AND NATIONALISM 59(McGill-Queens Univ. Press 1993).53 W.P.M. Kennedy, The Nature of Canadian Federalism , in ESSAYS IN CONSTITUTIONAL LAW 49(Oxford Univ. Press 1934).



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equality. 60 Property law theorists have identified the ways in which thecommonwealth idea has lived on, though they have not talked about thecommonwealth idea as such. Laura Underkuffler, for instance, distinguishes

between two competing conceptions of property, the common conceptionand the operative conception of property in law. 61 Under the first, asin Scalias version, property rights are likened to a locked box protectedfrom unwieldy and untrustworthy collective forces. 62 Property is protectedfrom transition except in the most dire and unequivocal of circum-stances. 63 Under the second, operative conception, one envisageschange as part of the idea of property. 64 Though constitutional law in theU.S. usually is associated with the common conception, it is the operativeconception that usually resolves takings disputes in the U.S. SupremeCourt. 65 Marc Poirier, therefore, describes constitutional property rights inthe U.S. as a set of social practices that renegotiate property, and at thesame time a rhetoric of absolute property that denies this is going on. 66 Itis an institution, writes Carol Rose, packed with disruptions that practicallyamount to expropriations. 67

So the first side of Locke (a defence of the state that is implicit) 68 thatone ordinarily associates with Canadian constitutional design also hasbeen dominant in the resolution of U.S. constitutional disputes. Both Canadaand the U.S. have, at times, shared in this nineteenth-century under-standing of transition, where, as Hurst describes it, change is valuedmore than stability, and stability is most valued where it helped to create aframework for change. 69 At stages in their constitutional development,then, Canada and the U.S. have shared an understanding of propertyrights (common law or constitutional) that valued the release of publicand private energy in furtherance of the development of new nationaleconomies.

The dominant version of constitutionalism in the U.S., nevertheless,

plays a significant constraining role in imagining paths to alternative futures.

60 ALEXANDER, supra note 16, at 12, and Rose, supra note 3, at 5862.61 See LAURA S. UNDERKUFFLER, THE IDEA OF PROPERTY : ITS MEANING AND POWER (Oxford Univ. Press2003).62 Id . at 40.63 Id . at 46.64 Id. at 48.

65 Id . at 52.66 Poirier, supra note 2, at 93, 103.67 Rose, supra note 3 at 5.68 HARTZ , supra note 38, at 59.69 HURST , supra note 54, at 24.



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presuppositions, the Supreme Court of Canada recently emptied the guaran-tee of any independent force. The Court declared that The Bill of Rightsdoes not protect against the expropriation of property by the passage of

unambiguous legislation. 77Although expropriation legislation in each of the Canadian provinces and

at the federal level governs the taking of real property, there is nocompensation in these statutory schemes for so-called regulatory takings.Limitations of use or reduction in the value of property through regulationwill not give rise to a statutory requirement of compensation. Onlyconfiscation, 78 which amounts practically to an acquisition, 79 will giverise to statutory compensation. On facts almost identical to Lucas a prohibi-tion on buildings and structures on environmentally sensitive beachfrontpropertythe Nova Scotia Court of Appeal noted that Canadian law hadtaken a fundamentally different path than U.S. law on the subject. 80 Thecommon law rule remains as a backstop in the case of regulations that gotoo far and only in cases where there is an absence of a clear and plainstatutory pronouncement that compensation is not to be provided. 81 If consti-tutional property rights in the U.S. recognize the transformative adaptabilityof the state, the Canadian practice might be viewed as more forthright aboutthe states expected role in both facilitating markets and redistributingwealth.

This is not to say that the Canadian government has seen fit to intervenein the market in ways that would have been impossible in the UnitedStates. Governments in Canada have been rather modest in terms of their capacity for regulatory innovation. But it is also the case thatCanada has been able to maintain a reasonably resilient social welfare statein the face of integrationist pressures associated with economic globalization.If Canadians earn roughly 20 percent less than Americans, they expend4 percent more of their GDP on public spending in areas of health, education,

pensions, and welfare.82

Proposals to limit the capacity of the Canadianstate to regulate and temper the negative effects of economic globalization,then, should be viewed as fundamentally at odds with this constitutionalculture.

77 Authorson v. Canada (Attorney General), [2003] 2 S.C.R. 40, para. 51.78 R.J. Bauman, Exotic Expropriations: Government Action and Compensation , 52 T HE ADVOCATE561, 574 (1994).79 Mariner Real Estate Ltd. v. Nova Scotia (Attorney General), [1999] 68 L.C.R. 1.80 Id .81 A.G. Canada , supra note 10.82 Daniel Drache, Integration Without Convergence? The North American Model of Integration , 8 C AN-ADA W ATCH 63, 64 (2000).



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Though the Mexican regime of property rights is not the subject of thispaper, 83 it should be noted that property rights there are, in contrast to theCanadian case, the subject of constitutional protection in article 27. 84 Indi-

vidual property rights, however, are bounded by the collectivist principlethat property serves a social function. This is related to the earlytwentieth-century notion that private property was justifiable only to theextent that it served the public good and could be restricted to that end. 85

Article 27, for this reason, also recognized indigenous land rights, and itconstrained the land-holding entitlements of and the remedies available toforeign nationals (the so-called Calvo clause). 86 Article 27 was credited,therefore, with having laid down the constitutional basis for Mexicos stronginterventionist state. 87 In the run-up to Mexicos accession to NAFTA, indi-genous land right protections and restrictions on foreign ownership wereboth relaxed, the former precipitating the Zapatista National LiberationArmy uprising on the eve of NAFTAs coming into force. Takings, neverthe-less, remain governed by article 27, which permit expropriations if donefor a public purpose and with compensation. The requirement to providecompensation has been ratcheted up, by statute, to reflect NAFTAsmore stringent requirement of payment of full market value, in funds fullytransferable, and immediately realizable. 88 One member of Mexicos Houseof Representatives (Alfonso Rivera Dom nguez) admitted during debate overthis bill that the new compensation requirement had been precipitated bythe NAFTA text and that negotiators regrettably had compromise[ed] exante the amendment we have before us today without informing the Mexicanpeople . . ..89 What might be called constitution making through the backdoor is the subject of the next part.

83

The Mexican property regime is discussed in more detail in Schneiderman, Default Convergence:Human Rights and Fundamental Freedoms in North America , in NORTH AMERICAN POLITICS: GLOBALIZA-TION AND CULTURE (Radha Jhapan et al. eds., forthcoming Broadview Press).84 Gloria L. Sandrino, NAFTA Investment Chapter and Foreign Direct Investment in Mexico: A Third World Perspective , 27 V AND . J. TRANSNATL L. 259 (1994), and Jorge Vargas, NAFTA, The ChiapasRebellion, and the Emergence of Mexican Ethnic Law , 1 CAL. W. I NTl L.J. 13 (1994).

85 LEON DUGUIT, MANUEL DE DROIT CONSTITUTIONNEL (3d ed. 1918).86 Manuel R. Garcia-Mora, The Calvo Clause in Latin American Constitutions and International Law ,33 M ARQ. L. REV. 205 (1950).

87 NORA HAMILTON , THE LIMITS OF STATE AUTONOMY: POST-REVOLUTIONARY MEXICO 63 (Princeton Univ.Press 1982).88 Schneiderman, supra note 83.89 Mexico, Report of the Legislative Process attached to the decree of publication of the Law of Expropri-ation , in 10 Dec. 1993 O FFICIAL FEDERAL GAZETTE (1993). I am grateful to Rodrigo Garcia Galindofor translation of this passage from Spanish into English.



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3. Cultures in transition?As the Mexican case suggests, NAFTAs investment chapter may be bringing

about a variety of changes. NAFTA, of course, is merely one piece of a larger,interlocking, transnational legal framework protecting and promoting for-eign investment. Similar legal disciplines can be found in bilateral investmenttreaties (BITs)over 2,099 BITs have been completed to date involving over175 countriesin regional trade agreements, such as NAFTA and the Euro-pean Energy Charter Treaty, and at the multilateral level in the agreement onTrade-Related Investment Measures (TRIMs). Plans for a proposed Free Tradeof the Americas Agreement, intended to expand NAFTAs reach to includethe entire western hemisphere, however, have run into some roadblocks.

In earlier work, I have suggested that NAFTA and the international invest-ment rules regime of which it is a part have constitution-like features. 90 Therules and institutions constitute a strategy of what John Elster calls precom-mitment 91 by means of which future generations are bound to certain, pre-determined rules that frame political practice. Like constitutions, they aredifficult to amend, include binding enforcement mechanisms together with judicial review, and oftentimes are couched in the language of domestic con-stitutions. Tantamount to a bill of rights for investors, the regime entitlesinvestors to sue state parties for damages before international trade tribunals

for violations of investment protections.Though investment treaties such as NAFTA incorporate an ensemble of

disciplines, I focus here only on NAFTAs takings rule. The rule prohibitsexpropriations and nationalizations, both direct and indirect, as well as meas-ures tantamount to expropriation and nationalization. The classic candidatecaught by this prohibition is, of course, the acquisition of title to propertyby the state. Such takings have greatly diminished in number and, it mustbe admitted, pose little threat to investors in the post-1989 economic environ-ment. 92 Rather, what is of concern here are not outright takings of title butregulatory takings of the sort caught by the Fifth and Fourteenth Amend-ments to the U.S. Constitution. Regulatory changes that go too far, in Justice Oliver Wendell Holmess famous words, are intended to be caught bythis rule. 93

90 David Schneiderman, NAFTAs Takings Rule: American Constitutionalism Comes to Canada , 46 U.TORONTO L.J. 499 (1996) and David Schneiderman, Investment Rules and the New Constitutionalism ,25 L AW & SOC. INQUIRY 757 (2000).91 See JOHN ELSTER, ULYSSES UNBOUND (Cambridge Univ. Press 2000).92 Thomas Walde & Stephen Dow, Treaties and Regulatory Risk in Infrastructure Investment , 34(2) J. OF WORLD TRADE 1 (2000) and Rudolf Dolzer, Indirect Expropriations: New Developments? , 11N.Y.U. E NVTL. L.J. 64, 65 (2002).93 See generally Pennsylvania Coal v. Mahon, 260 U.S. 393 (1922).



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Tocqueville noted two sorts of instability in political institutions. The firstaffects secondary laws; the other shakes the very bases of the constitutionand attacks the generative principles of the laws. He encountered the first in

the U.S; Americans frequently change the laws, but the foundation of theconstitution is respected. 94 His home audience of France had been experien-cing the second sort of instability for almost forty years. 95 NAFTAs takingsrule certainly is intended to target revolutionary activity of the second sort,but it also, interestingly, is intended to target more-reformist measures of the sort that Tocqueville both worried about yet also identified as the sourceof enduring strength in a democracy.

The prohibition on regulatory takings has been invoked by investors inorder to challenge reformist measures of the first type, that is, those thatwould impair a variety of different investment interests. There are reportsthat a proposed public auto insurance plan in Ontario and the cancellationof contracts to transfer public property into private hands (Torontos PearsonAirport) triggered threats of NAFTA disputes. 96 I have written about majorU.S. tobacco companies threatening to challenge Canadian federal govern-ment proposals mandating the plain packaging of cigarettes sold in Canada. 97

More recently, U.S. tobacco producer Philip Morris threatened to sue Canadafor banning the use of the words light and mild on cigarette packagessold in Canada. 98 NAFTAs takings rule likely chilled the government of New Brunswick in its plan to adopt a public auto insurance scheme in theprovince. Auto insurance rates were a principal election issue in 2003, andthis prompted Premier Bernard Lord to create an all-party committee toconsider appropriate legislative responses. The committee recommendedthat the province adopt a public auto insurance plan, in spite of evidencefrom the Insurance Bureau of Canada and a commissioned legal opinionthat U.S.-based private auto insurers could seek compensation for the takingof their investment interests under NAFTA. 99 The government decided to

94 TOCQUEVILLE, supra note 1, at 382. For more on this distinction between change and revolu-tion, see M EYERS, supra note 55, at 31.95 ALEXIS DE TOCQUEVILLE, JOURNEY TO A MERICA 169 (George Lawrence trans., J.P. Mayer ed., YaleUniv. Press 1959).96 The former threat arose under the earlier incarnation of the rule in the Canada-U.S. Free TradeAgreement, which did not entitle investors to sue directly but, rather, through the intermediary of the investors home state.

97 Schneiderman (1996), supra note 90.98 Stephen Chase, Tobacco Firm Warns Mild Cigarette Ban May Violate NAFTA , THE GLOBE ANDMAIL, March 16, 2002, at A6.99 New Brunswick Select Committee on Public Automobile Insurance, 2004a. Final Reporton Public Automobile Insurance in New Brunswick, available at www.gnb.ca/legis/business/committees/reports/2004auto/report-e.asp.



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pursue an alternative course of action, though without specific reference toNAFTAs potential chilling effects. 100

Recent panel rulings, regarding various disputes, have told us a bit more

about NAFTAs takings rule. 101 A great variety of interests are protected byinvestment rulesnot only property owners but those who hold expectationsunder contract, even shareholders. We also know that takings will includenondiscriminatory regulations (measures that do not target foreign investorsbut that are facially neutral) and, oddly enough, even measures fallingwithin an exercise of a states so-called police powers. 102 So long as a meas-ure has the effect of depriving owners of a significant part of the use orreasonably-to-be-expected economic benefit of property, it will be character-ized as a compensable taking. 103 Moreover, the characterization of NAFTA asconstitutional has been accepted by at least one panel member in the S.D.Myers case. 104 Bryan Schwartz, in a separate opinion, describes trade andinvestment agreements like NAFTA as having an enormous impact on pub-lic affairs in many countries. Schwartz goes on to liken these agreements toa countrys constitution, for they restrict the ways in which governmentscan act and they are very hard to change. These panel decisions in NAFTAdisputes confirm that the investment protection provisions of NAFTA havethe effect of prohibiting state behavior considered excessive by trade tribunals,where excessive is defined as a measure that substantially impairs invest-ment interests, even if unintentionally, indirectly, and only partially.

Others dispute the potential chilling effects of NAFTAs takings rule onregulatory innovation; they maintain that too few claims have beenregistered and only a handful of panel decisionsmostly cautiousin regard to the takings issuehave been issued, so that it is not feasibleto make any claim about NAFTAs effects. 105 Admittedly, only a few

100 Steven Shrybman & Scott Sinclair, Public Auto Insurance and Trade Treaties , 5:1 B RIEFING

Papers, available at www.policyalternatives.org/documents/National_Office_Pubs/brief5-1.pdf (2004).101 The following paragraph is drawn from David Schneiderman, Taking Investments Too Far:Expropriation in the Semi-Periphery, in GOVERNING UNDER STRESS: MIDDLE POWERS AND THE CHALLENGEOF GLOBALIZATION 218 (Marjorie Griffin-Cohen & Stephen Clarkson eds., Zed Books 2004), wherethe NAFTA rulings are discussed in more detail.102 Pope & Talbot, Inc. and the Government of Canada, Interim Award, 2001 (13) W ORLD TRADE& ARB. MATERIALS 19, para. 96 (June 26, 2000).103 Metalclad Corporation and the United Mexican States, 2001 (13) W ORLD TRADE & ARB.

MATERIALS 47, para. 103 (2001).104 S.D. Myers, Inc. v. Government of Canada, 40 I NTL LEGAL MATERIALS , 1408 (2001).105 Julie Solway & Jeremy Broadhurst, Whats in the Medicine Chest for Chapter 11s Ills? , 36 C AN.BUS. L.J. 388, 395 (2002) and Michael Hart & William Dymond, NAFTA Chapter 11: Precedents,Principles and Prospects , in W HOSE RIGHTS? THE NAFTA CHAPTER 11 D EBATE 128, 155 (Laura RitchieDawson ed., Centre for Trade Policy & Law 2002). I address these arguments in more detail in



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NAFTA rulings have been released, with only one panel finding a taking(the Metalclad case), yet one already can discern some of the constitution-like parameters of the takings rule. 106 Moreover, the question of NAFTAs

chilling effects cannot be determined merely by counting up the few casesdecided to date. In order to take stock of NAFTAs effects, what is required,instead, is an audit of government policy, as it has been developed in thebowels of the departments of health or the environment or transportation,at both national and subnational levels. This work remains to be done. Tobe sanguine about the effect of NAFTAs takings rule, for reasons alreadyoutlined, is not justified.

This is made even more evident by recent trade policy developmentsin the United States and Canada. Vicki Been and Joel Beauvais note thatthese NAFTA panel rulings have interpreted the rule in ways that signific-antly exceed U.S. takings protections, such that the rule threatens totake on a life of its own. 107 The breadth of the takings rule sufficientlyalarmed Congressional leadership that it directed the modification of tradeand investment treaty practices in the Trade Promotion Authority Act of 2002. The act mandates that foreign investors receive no greaterrights than those that are available to U.S. investors under the U.S. Constitu-tion. 108 The debates within Congress reveal clearly that this standard of

Schneiderman, Constitution or Model Treaty? Struggling Over the Interpretive Authority of NAFTA, inTHE MIGRATION OF CONSTITUTIONAL IDEAS (Sujit Choudhry ed., forthcoming 2006).106 Schneiderman, supra note 101. Since the completion of this paper, a NAFTA tribunal releasedits ruling in Methanex v. United States of America (2005), available at www.state.gov/documents/organization/51052.pdf. The panel read the takings rule narrowly and deniedMethanexs claim that a California regulation banning the use of the fuel additive MTBE in gaso-line sold in the state was tantamount to an expropriation. The tribunal found that as a matter of general international law, a non-discriminatory regulation for a public purpose, which is enactedin accordance with due process and which affects, inter alia, a foreign investor or investment isnot deemed expropriatory and compensable unless specific commitments had been given by theregulating government to the then putative foreign investor contemplating investment that thegovernment would refrain from such regulation. Id. at pt. IV, ch. D, para. 7. This narrow readingshould be contrasted with broader formulations offered by earlier panels discussed above. Seesupra notes 101104. None, however, form binding precedent as would opinions of a high court.Thus, later panels will have to sift through these conflicting interpretations for guidance.107 Vicki Been & Joel C. Beauvais, The Global Fifth Amendment: NAFTAs Investment Protections and the Misguided Quest for an International Regulatory Takings Doctrine , 78 N.Y.U. L. R EV. 30, 37, 128(2003).108

The act recognizes that U.S. law on the whole provides a high level of protection for invest-ment and that among the principal negotiating objectives of the U.S. is to ensure that foreigninvestors in the U.S. are not accorded greater substantive rights with respect to investment pro-tections than United States investors in the United States, and to secure for investors rights com-parable to those that would be available under United States legal principles and practice.x 2102(b)(3). To that end negotiators should seek to establish standards for expropriation andcompensation for expropriation consistent with United States legal principles and practice. Id.



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investment protection, even if not the case earlier, is drawn directly from theU.S. constitutional experience. The office of the U.S. Trade Representative(USTR) has modified investment treaty language in recent agreements

with Singapore, Morocco, and Chile (in letters of exchange, for instance) toreflect more accurately U.S. Supreme Court jurisprudence, particularly, thecriteria outlined in the Penn Central .109 The U.S.Australia free trade andinvestment agreement omitted entirely an investorstate dispute mechanism;instead, investors must seek recourse for breaches of investment disciplinesthrough the agency of their home state (the traditional practice under inter-national law). 110

The text of the letter exchanged between the U.S. and Singapore indicates,among other things, that the takings rule covers both direct expropriation,through nationalization or through the formal transfer of title or outrightseizure, and indirect expropriation, by means of an action or series of actions having an effect equivalent to direct expropriation. The finding of an indirect expropriation requires a case-by-case, fact-based inquiry thatconsiders, among other factors, the economic impact of the measure, theextent to which it interferes with distinct, reasonable investment-backedexpectations, and the character of the government actionmirroringcriteria applied by the U.S. Supreme Court in Penn Central. 111 The fact thata states measures may have an adverse effect on the economic value of aninvestment, standing alone, does not establish an indirect expropriation.Except in rare circumstances, the letter concludes, nondiscriminatoryregulatory actions by a Party that are designed and applied to protectlegitimate public welfare objectives, such as public health, safety, andthe environment, do not constitute indirect expropriationsa carvingout of traditional exercises of the police power in the U.S. Suffice it to saythat the USTR, here, has attempted to capture the messy andinconsistent but constituent elements of the Supreme Courts jurisprudence

on takings. This modification of the investment treaty takings rule,then, amounts to a restatement of U.S. constitutional law as appliedin the realm of foreign relations. As if to underscore the intimaterelationship between Canada and the U.S., in the realm of trade policy andforeign relations, the Canadian government responded by issuing an

109 See generally Penn Central Transportation Co. v. New York City, 438 U.S. 104 (1977).110 For a discussion of other problematic aspects of the U.S.-Australia free trade agreement, seeLINDA W EISS, ELIZABETH THURBORN & JOHN MATHEWS , HOW TO KILL A COUNTRY : AUSTRALIAs DEVASTAT-ING TRADE DEAL WITH THE UNITED STATES (Allen & Unwin 2004).111 Penn Central , supra note 109, at 124 and U.S. Trade Representative, Letter of Exchange (May 6,2003), available at www.ustr.gov/assets/Trade_Agreements/Bilateral/Singapore_FTA/Final_-Texts/asset_upload_file58_4058.pdf.



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annex to its model treaty similar in most respects to the new U.S. treatylanguage. 112

The problem with investor rights, then, as construed under the dominant

understandings of the U.S. Bill of Rights, is that they render more difficultregulatory innovation. New social policy initiativeswhether they mightconcern the environment, land use, health care, or labor standards, andwhether they be wise or foolish measuresare imperiled under the capaciousnormativism of investor rights. We might recall Karl Polanyis idea of thedouble movement, in this context, namely, the ability of society to takeself-protective measures. Although the nineteenth century saw the spreadof markets all over the world, Polanyi notes, there arose a correspondingnetwork of measures and policies . . . integrated into powerful institutionsdesigned to check the action of the market relative to labor, land andmoney. 113 What arose, in other words, were political movements andinstitutions intent on mediating the deleterious effects of rapacious capital-ism, what Ruggie calls embedded liberalism. 114 It is this capacity totake self-protective measures beyond the status quo that is threatened bythe constitution-like property rules found in investment treaties such asNAFTA.

NAFTA dispute panels appear to have internalized these concerns and aresensitive, apparently, to the possibility that a strict application of the rule willundermine public acceptance of the investment rules regime. In his separateopinion in the S.D. Myers case, Schwartz noted that there was a reasonableargument the Canadian governments policy of temporarily prohibiting thecross-border traffic of PCB waste amounted to an expropriation underNAFTA. 115 Yet, it would make no practical difference if the governmentaction were labeled an expropriation as the award of damages likely wouldbe the same. Moreover, a finding that there was an expropriation mightcontribute to public misunderstanding and anxiety about both this decision

and the wider implications of the investment chapter of NAFTA.116

In lightof these and other considerationsthe deprivation not being sufficientlylasting enoughit was best to refrain from characterizing the measure asa taking.

112 Foreign Affairs Canada, annex B.13[1] Model Foreign Investment Protection Agreement , avail-able at www.dfait-maeci.gc.ca/tna-nac/documents/2004-FIPA-model-en.pdf.113 KARL POLANYI, THE GREAT TRANSFORMATION 76 (Octagon Books 1957).114 JOHN GERALD RUGGIE, CONSTRUCTING THE WORLD POLITY: ESSAYS ON INTERNATIONAL INSTITUTIONALIZA-TION (Routledge 1998).115 S.D. Myers , supra note 104, Separate Opinion para. 218.116 Id . at para. 222.



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4. ConclusionWe may fairly conclude that Canadians have secured a constitutional

culture of property that has kept rights open to constant redefinition andreevaluation. 117 One might characterize this as a constitutional culture of openness; the sort of constitutional regime, in many ways, that Tocquevilleboth feared and favored, in which social change was viewed as an implac-able fact. 118 This capacity for unceasing alteration and innovation, how-ever, may be coming to an end. Though it probably is too early to tell forcertain, NAFTAs takings rule may have the effect of aiding in the shift of Canadian constitutional culture further in the direction of limited govern-ment and a U.S.-style takings jurisprudence. This suggests that Canadas dis-

tinctive constitutional culture is under threat. The question is whetherCanadian constitutional culture is sufficiently durable to resist the pressuresof conformity in an age of narrowed possibilities and reduced expectations.

117 Jennifer Nedelsky, Should Property Rights be Constitutionalized? , in PROPERTY LAW ON THE THRESH-OLD OF THE 21st C ENTURY 417, 428 (G.E. Van Maanen & A. Van Der Walt eds., Maklu 1996).118 Holmes, supra note 9.



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Documents

Property rights and regulatory innovation: Comparing constitutional cultures