Application Dismissed for NAFTA Chapter 11 Review

In Canada (Attorney General) v. SD Myers, Inc., on January 13, 2004, the Federal Court of Canada dismissed the application for court review of an investor-state arbitration award made against Canada under Chapter 11 of the North American Free Trade Agreement (NAFTA).

In November 1995, the US Environmental Protection Agency issued an enforcement discretion permitting SD Myers to import PCBs into the US, subject to certain conditions. The next day, the Canadian government issued a ban on the export of PCB wastes.

Myers brought a claim for damages against Canada before an arbitration tribunal under Chapter 11. Unlike other NAFTA provisions, Chapter 11 allows for remedies to individuals and businesses: it entitles an investor of a NAFTA party to submit to arbitration a claim that another NAFTA party has breached a provision of Chapter 11.

Before the ban, Myers had been developing its business in Canada through a Canadian company, SD Myers (Canada) Inc. It claimed that the Canadian company was its investment within the meaning of NAFTA and that by issuing the export ban, Canada had breached two Chapter 11 provisions—those relating to national treatment and minimum standard of treatment. The first provision requires that a NAFTA party treat investors of another party, and their investments, no less favourably than it treats its own investors and their investments, in like circumstances. The second requires that a NAFTA party treat investments of another party’s investors in accordance with international law, including providing fair and equitable treatment, and full protection and security.
The arbitration tribunal upheld Myers’ claim. It found that there was no legitimate environmental reason for the export ban, and that the motivation for the ban was protectionist. It awarded Myers more than $6 million in damages, plus $850,000 in costs.

Canada, supported by Mexico, which intervened, sought review of the decision by the FCC, in an application under the federal Commercial Arbitration Act. The Act, like many arbitration statutes worldwide, incorporates the UNCITRAL Model Law on International Commercial Arbitration. Canada alleged that Myers’ claim was beyond the scope of the tribunal’s jurisdiction, because Myers was not an investor and the Canadian company was not its investment within the meaning of Chapter 11. It also alleged that because Myers’ business involved cross-border trade in services, it was subject not to Chapter 11, but to Chapter 12 of NAFTA, which does not provide for private remedies. Canada also alleged that the tribunal dealt with matters beyond the scope of the submission to arbitration by misapplying the law concerning Canada’s Chapter 11 obligations. And finally, it alleged that the tribunal’s decision conflicted with the public policy of Canada.
Justice Michael Kelen dismissed the application. He held that the scope for review of an arbitral award under the Act is limited to the specific grounds set out in the Model Law. He then concluded that since Canada had failed to challenge the tribunal’s jurisdiction at the arbitration, as required by the rules governing the proceeding, it was barred from doing so on an application for review.

In the alternative, he considered the jurisdictional arguments raised by Canada and Mexico. He reasoned that the standard of review of any pure questions of law decided by the tribunal that determined its jurisdiction was correctness, and that the reasonableness standard applied to any jurisdictional issues involving mixed fact and law. Applying these standards, he concluded that the tribunal had committed no reviewable error. He observed that the relevant definitions in NAFTA were significantly broader than those in the comparable provisions of the Canada-US Free Trade Agreement, and must be given a purposive interpretation. He also rejected the attack on the tribunal’s award that was based on public policy, holding that this ground of review applies only where a decision breaches fundamental notions and principles of justice.

SD Myers, Inc. was represented by Torys LLP in Toronto, with a team that included John Laskin and John Terry; and by Appleton & Associates in Toronto, with a team that included Barry Appleton and Robert Wisner. The Attorney General of Canada was represented by Brian Evernden and Sylvie Tabet, Department of Justice in Ottawa. Mexico was represented by Thomas and Partners in Vancouver, with a team that included Christopher Thomas, QC, and J. Cameron Mowatt.