NAFTA Trade Disputes

Canada is the country most frequently sued under NAFTA’s controversial Chapter 11 dispute settlement mechanism
NAFTA Trade Disputes

Canada is the country most frequently sued under NAFTA’s controversial Chapter 11 dispute settlement mechanism

The North American Free Trade Agreement (NAFTA), which came into force in 1994, provides an investor/state dispute settlement mechanism in Chapter 11. Foreign investors from Canada, the US and Mexico have the right to bring any of the three national governments before a NAFTA arbitration tribunal without first resorting to the country’s courts.

NAFTA included the dispute settlement process to protect US and Canadian investors against corruption in Mexican courts. In practice, however, Canada is the country most often targeted under the NAFTA mechanism.

A foreign investor can make a Chapter 11 claim under one or more of the following causes of action listed in the agreement:

  •  Article 1110 – expropriation, directly or indirectly, of the claimant’s assets; e.g., a government enacts an environmental measure with no real public policy purpose, does not follow due process or fails to pay fair compensation.
  •  Article 1102 – discrimination on the basis of the investor’s nationality.
  •  Article 1105 – minimum standard of treatment, i.e., treatment that is “fair and equitable” to the investor; this is a catch-all provision intended to ensure that legitimate expectations of investors are met.
  •  Article 1106 – performance requirements; in order for a company to make an investment or use its investment, it must meet minimum performance requirements (e.g., local content) set by the host government.

“In most of the claims made against Canada, the claimants have used a combination of provisions, the most common being Article 1105,” says Lawrence Herman, a partner at Herman & Associates LLP in Toronto.

The doctrine of stare decisis does not apply: all of the Chapter 11 arbitrations are at the same level. “Just because a panel hearing a previous case decided in a certain way doesn’t mean that if I’m appointed to a new panel, I have to follow that ruling,” says Darrel Pearson, a partner at Bennett Jones LLP in Toronto. “I should consider as a matter of law the principles that have been discussed in previous cases,” Pearson adds. “But it’s very easy for the subsequent panel to say the facts were different there and make their own decisions.”

Canada has been the defendant in Chapter 11 cases “to a greater extent than we might have expected,” says Pearson. The paramount explanation for this, he says, is that the strongest investment flows within the NAFTA bloc are from the US outward. “The sheer volume of investment favors cases taken against Canada and Mexico by US investors.”

Herman notes that it’s much easier for US investors to sue Canada than Mexico. “Canada and the US are English-speaking, common-law countries, whereas Mexico is a Spanish-speaking, civil-law country.” In addition, through Canada’s access-to-information laws, a US claimant “has access to a huge array of documents to support their case.” American companies, furthermore, are better capitalized and can afford litigation.

John Boscariol, a partner at McCarthy Tétrault LLP in Toronto, offers a third explanation for why Canada is most frequently sued under NAFTA. “The provinces may be intruding more into the economy in Canada than the [states] are in the US or Mexico. A lot of those Chapter 11 cases against Canada are challenges against provincial measures. The Canadian government is still responsible for defending or paying damages arising from these claims.”

Paul Lalonde, a partner at Dentons Canada LLP in Toronto, however, rejects the argument that NAFTA undermines the ability of governments to regulate foreign investors. “NAFTA has no ability to declare illegal or to reverse a government measure,” he notes. “It only provides that where those measures breach the very specific commitments of Chapter 11, the government may have to pay compensation to foreign companies that are harmed.”

Such a case – Clayton/Bilcon v. Government of Canada – was decided in March 2015, when a NAFTA panel ruled against Canada in a claim filed in 2008 by the Clayton family firm, Bilcon of Delaware Inc. Bilcon wanted to develop a quarry and a marine terminal in Whites Point, Nova Scotia, but was rebuffed in a federal-provincial environmental review.

The NAFTA panel found that Canada failed to treat Bilcon “in accordance with international law, including fair and equitable treatment and full protection and security,” in breach of Article 1105 (minimum standard of treatment), and failed to accord “treatment no less favorable than that it has accorded, in like circumstances, to ... its own investors,” in breach of Article 1102 (national treatment). Bilcon has said it will seek C$300-million in damages.

(Often a panel’s ruling is in two stages: the first decides whether there was a breach, and, if so, the second stage determines the damages. “Figuring out the damages can be such a complex burden,” says Lalonde, “that they want to sort out first whether they even need to deal with that by addressing the merits of the case.”)

A recent study by the Canadian Centre for Policy Alternatives (NAFTA Chapter 11 Investor-State Disputes to January 1, 2015 and its accompanying analysis, Democracy Under Challenge: Canada and Two Decades of NAFTA’s Investor-State Dispute Settlement Mechanism) found that more than 70 per cent of investor/state claims under Chapter 11 since 2005 have targeted Canada, and that the number of those claims has risen sharply.

During 1995‒2005, 12 cases were brought against Canada, while in the decade since there were 23. The 35 claims against Canada comprise 45 per cent of the total number of investor/state claims under NAFTA. That is significantly higher than the 22 challenges against Mexico or the 20 against the US.

Canada has lost or settled six claims, paying a total of C$170 million in damages, while Mexico has lost five cases and paid C$204 million. The US, meanwhile, has won 11 cases and has never lost a NAFTA investor/state case. There are currently seven claims outstanding against Canada, all by US companies.

“The vast majority of claims that are brought are either dismissed, settled or dropped without the payment of damages,” says Boscariol at McCarthys. “And in those cases where damages are awarded against Canada, it’s typically a small fraction of what’s being claimed.”

The biggest payout by Canada in a Chapter 11 case occurred in 2010 when the federal government agreed to pay AbitibiBowater C$130 million to settle the pulp and paper company’s claim that Newfoundland and Labrador (NL) expropriated its timber and water rights. The company had sought C$500 million. (Although AbitibiBowater – which is now Resolute Forest Products – has its headquarters in Montréal, it is incorporated in Delaware, so could proceed under NAFTA as a foreign investor.)

When the company closed its Grand Falls-Windsor mill in 2008, it asserted rights to sell its assets, including certain timber-harvesting licenses and water-use permits. These permits had been granted contingent on production.

The NL provincial government justified its repatriation of those resource rights on the grounds that AbitibiBowater had violated its contract with the province. “The Canadian government concluded that NL’s argument was so flimsy that it preferred to settle rather than put that issue to a tribunal,” says Lalonde.

Canada, however, has had some significant victories in Chapter 11 arbitrations. In 2007, Canada won a seven-year dispute with US courier service UPS. The US firm sued Canada for C$230 million, claiming that Canada Post had an unfair advantage because it used the public postal system to support its own courier business.

UPS contended that Canada Post’s courier services, such as Express Post and Priority Courier, draw on an infrastructure of sorting facilities, mailboxes and post offices that private firms had to provide for themselves. UPS’s claim that it suffered discriminatory treatment relative to Canada Post was rejected by the NAFTA panel.

“The case addressed fundamental issues of how the government of Canada interacts with its Crown corporations,” says Lalonde, including the issue of whether Crown corporations benefit from subsidies that have a discriminatory effect under Chapter 11. “That was a really important case that Canada won.”

More recently, Canada won in Detroit International Bridge Company v. Government of Canada. The owner and operator of the Ambassador Bridge, a toll bridge linking Windsor and Detroit, unsuccessfully challenged the Canadian government’s project to build a competing span across the Detroit River — the Gordie Howe International Bridge.

The existing crossing between Ontario and Michigan is unique — trans-national transportation infrastructure that is owned by a private investor, Michigan’s Manuel Moroun. In a claim filed in 2010, his Detroit International Bridge Company (DIBC) alleged breaches of Articles 1102, 1105 and 1110 and sought damages of “not less than $1.5-billion.” In a ruling released in April 2015, the Chapter 11 panel dismissed DIBC’s claim, saying NAFTA did not have jurisdiction over the matter.

“I thought the claim was far-fetched to begin with,” says Herman. “It was never contemplated that a government infrastructure project that didn’t expropriate any property would be subject to a NAFTA claim. But when there’s a process that says, ‘You can sue, you’ve got a cause of action,’ it opens the door to those actions.”

Canada has suffered some controversial defeats, such as in the 2000 ruling in S.D. Myers Inc. v. Government of Canada. American company S.D. Myers successfully challenged Canada’s ban on exports of hazardous PCB waste from Canada to the US.

The export ban was intended to comply with the Basel Convention on the Control of Trans-boundary Movements of Hazardous Wastes and their Disposal. The NAFTA tribunal, however, decided that the ban violated Chapter 11, in that it was designed to favor Canadian waste companies. It awarded $6 million to S.D. Myers.

The case raised concern that investors could use Chapter 11 to pressure governments to weaken environmental measures, including curbs on the transport of hazardous waste. The tribunal acknowledged that Canadian officials had legitimate concerns about whether exports of PCB waste from Canada to the US would comply with the Basel Convention and about the impact on Canadian PCB disposal capacity if the US were suddenly to close its border to PCB imports. Nevertheless, the tribunal’s decision discounted the public policy rationales for the PCB export ban.

The tribunal’s ruling was controversial in other respects: it adopted an expansive definition of investment; the only investment made by the corporate claimant was a loan to a Canadian company, Myers Canada, that was not owned by the claimant.

The tribunal also awarded damages to the claimant simply for loss of anticipated market share in Canada; the tribunal did not explain how the investor’s expectation of business in Canada could have been met despite the eventual closing of the US border to PCB imports.

Two current cases under Chapter 11 are being closely watched by international trade lawyers.

In Eli Lilly and Company v. Government of Canada, the global pharmaceutical company is challenging how Ottawa has implemented patent protection. “If it’s successful, it will have significant ramifications on how drug patents work in Canada,” says Lalonde. The Indiana-based company in 2012 sought C$500 million against the Canadian government, after Canadian courts invalidated two of its drug patents.

The courts ruled Eli Lilly’s applications failed to meet the standards needed to issue a new drug patent. Lilly argues Canadian courts have been “retroactively” applying a new, tougher standard for patents since 2005. A Canadian government filing said that Eli Lilly “now seeks to have this Tribunal misapply NAFTA Ch. 11 and transform itself into a supranational court of appeal.”

“Eli Lilly is appealing to a NAFTA panel a decision made by the Supreme Court of Canada,” says Herman, “and that is a novel development.” He is concerned about the Chapter 11 process being extended beyond its intended scope. “The concept was to deal with egregious government measures that were arbitrary and unfair. It was not thought that investment arbitration would be used to challenge judicial decisions.”

In Lone Pine Resources Inc. v. Government of Canada, the claim arises from a moratorium on shale gas exploration (fracking) legislated by the Québec government in 2012 and the nullification of permits previously granted to Lone Pine and other oil and gas investors. “We’re not challenging the moratorium,” says Pearson, whose law firm acts for Lone Pine. “We’re simply challenging the expropriation of rights with no compensation.”

The company, headquartered in Calgary but incorporated in Delaware, is one of many major natural gas companies affected by Québec’s moratorium. Winning a NAFTA case against Québec’s fracking policy would be “an uphill battle,” says Herman, since the policy has a legitimate purpose, and does not appear to discriminate against foreign firms.