Federal Court ruling sparks renewed criticism of NAFTA investor-state dispute resolution

The Lawyer’s Daily | 7 May 2018

Federal Court ruling sparks renewed criticism of NAFTA investor-state dispute resolution

By Cristin Schmitz

A Federal Court ruling in favour of an American company that is seeking millions in damages from Canada has prompted environmental groups to renew their calls for Ottawa to push to scrap the NAFTA Chapter 11 investor-state dispute resolution system during the ongoing free trade renegotiations with the United States and Mexico.

So far, the federal government has not said whether it plans to appeal the May 2 judgment of Federal Court Justice Anne Mactavish in A.G. Canada v. Clayton et al. 2018 FC 436 — a ruling which leaves Canada on the hook to pay Bilcon of Delaware a yet-to-be rendered NAFTA arbitration tribunal award on damages that could be up to half a billion dollars, according to some reports.

Global Affairs Canada spokesperson John Babcock said Ottawa is reviewing the judge’s 70-page decision, which was restricted to narrow jurisdictional issues and could not deal with the merits of the case. “Canada is also awaiting the tribunal’s award on quantum of damages, which will likely not be issued before the end of 2018,” Babcock told The Lawyer’s Daily.

Justice Mactavish dismissed the Attorney General of Canada’s motion to set aside, on jurisdictional grounds, a majority NAFTA tribunal decision in 2015 holding Canada liable for damages to Bilcon, whose initial damages claim was for $101 million but is reportedly now much higher. (Damages remain under reserve with the same NAFTA tribunal in proceedings that were bifurcated between liability and damages.)

In her reasons dismissing the government’s application, Justice Mactavish concluded that Canada’s application to set aside the tribunal’s liability award could not succeed as the tribunal errors Canada alleged “do not involve true questions of jurisdiction. What Canada takes issue with are findings of fact made by the tribunal majority, or its application of the law to the facts as it has found them. In the absence of a true jurisdictional error on the part of the tribunal, this court has no power to intervene.”

The NAFTA arbitral award was made on the basis that Canada violated its own federal and provincial environmental assessment laws, and did not accord procedural fairness to Bilcon, when that company was denied governmental permission in 2007 (based on what Bilcon said was a flawed environmental assessment) to build a basalt quarry and marine terminal on the Nova Scotia coast at Whites Point, adjacent to the Bay of Fundy.

The Conservative federal and provincial governments of the day turned thumbs down on Bilcon’s proposal after a joint federal-provincial environmental review recommended against the proposed project because of the adverse impact it would have on the people, communities and economy of Digby Neck and Islands, who are dependent on the sensitive terrestrial and marine ecosystems of the region, which include breeding grounds for endangered right whales and other species at risk.

Bilcon’s proposed project included a 152-hectare quarry, where basalt would be blasted, crushed, washed and stockpiled, as well as a 170-metre long marine terminal where bulk carrier ships of up to 230 metres long could dock. Bilcon proposed to ship 40,000 tons of stone from Whites Point to the U.S. each week (two million tons annually) for 50 years.

Rather than seeking to judicially review the environmental joint review panel’s process and report, or moving to challenge the federal and provincial governments’ decisions in Federal Court or in the Nova Scotia courts, in 2008 Bilcon referred a claim for damages to arbitration under the investor-state dispute resolution provisions of Chapter 11 of NAFTA.

In the Attorney General of Canada’s motion in Federal Court to set aside the tribunal’s liability award, the federal government argued the tribunal made its decision on matters beyond the scope of the submission to arbitration (contrary to NAFTA), and is in conflict with the public policy of Canada, contrary to articles of the Commercial Arbitration Code, as enacted and set out in the Schedule to the Commercial Arbitration Act.

Lisa Mitchell, a lawyer and executive director of intervener East Coast Environmental Law, said the Bilcon case demonstrates why Canada should seek to throw out Chapter 11 during current NAFTA negotiations.

“I think when you’re dealing with the legal system in Canada, Mexico and the United States, that investors don’t need Chapter 11,” she explained. “They should just use the domestic remedies within the country because you have sophisticated legal systems.”

Mitchell said the ruling sends a chilling message, that “even when the Canadian government makes good decisions to protect our environment, there’s a chance a NAFTA tribunal could swoop in, decide our environmental laws are ‘unfair,’ and force Canada to pay hundreds of millions of dollars — leaving Canadian taxpayers on the hook and the environment at risk.”

In a prepared statement, University of Ottawa law professor Amir Attaran, co-counsel for the intervener Ecojustice, said “as environmentalists, our worst fears have been confirmed that NAFTA can override Canada’s right to protect its own environment. This decision points to the extreme urgency of killing Chapter 11 investor-state dispute resolution in the NAFTA renegotiation.”

Attaran argued that since NAFTA tribunals are only supposed to decide questions of NAFTA law “the NAFTA tribunal in this case went outside its realm of expertise to rule on a matter of Canadian law, and now Canadian taxpayers are on the hook for half a billion dollars to a single company. That’s enough money to pay the salaries of at least 7,000 nurses or teachers for one year. There is clearly a problem with NAFTA and its investment protection chapter.”

Counsel for Bilcon did not respond to a request for comment by press time.

Canada has indicated it is seeking to reform/update Chapter 11 so that it ensures governments have an “unassailable right to regulate in the public interest” without being successfully sued under Chapter 11.

A recent study by the Canadian Centre for Policy Alternatives, a left-wing think tank, says that as of January, Canada has been sued 41 times under the investment provisions in NAFTA — more than either Mexico or the U.S. Among the decided or settled cases, Canada also has the worst win/loss track record. It has lost eight and won nine, and has paid out more than $219 million in damages and settlements, plus another $95 million in unrecoverable legal costs, the think tank said. The U.S. has never lost.

The day after the Federal Court’s decision was handed down, Green Party leader Elizabeth May asked Prime Minister Justin Trudeau in the Commons whether he would agree “that it is time to work with the United States in these renegotiations and get Chapter 11 out of NAFTA?”

He responded, in part: “we will continue to advance an agenda that seeks to improve NAFTA. … We will vigorously pursue and defend Canadian interests, but we will not be negotiating in public. We are looking for a good deal for Canada, one that will continue to make North America competitive for years to come.”