US investors have successfully used investor-state arbitration under the NAFTA when they have thought themselves wronged by the actions of governments in Canada or Mexico. But the United States itself has never lost a NAFTA investment arbitration. The United States’ record in NAFTA claims decided on the merits or on jurisdictional grounds is a perfect 9 wins and 0 losses. A number of those claims were ill-conceived, but others featured credible or even compelling claims (e.g.Loewen and Apotex).

A cynical but commonly-held view in arbitration circles is that arbitrators understand that the United States must not lose investment arbitrations because the political backlash, in particular from Congress, would imperil the US investment treaty program and possibly precipitate the demise of investment arbitration worldwide. That view has had currency at least since reports circulated of ex parte warnings by State Department officials to the US-appointed arbitrator in the Loewen case.

TransCanada PipeLines has now given notice last week that it intends to bring a NAFTA claim against the United States over refusal to permit the construction of the Keystone XL pipeline. This case has potential to fuel or put the lie to the cynicism that the investment arbitration playing field is tilted in the US Government’s favour.

There are compelling reasons to think that TransCanada’s claims might prevail. TransCanada contends that the Obama Administration caved to political pressure because it wanted to be seen as a leader on climate change. It therefore allegedly:

  • Disregarded its own findings that Keystone did not raise significant health, safety or environmental concerns;
  • Unreasonably delayed and arbitrarily denied approval of the project; and
  • Discriminated against TransCanada by applying different criteria to Keystone XL than it had to pipeline projects by other US and foreign investors in comparable circumstances.

TransCanada is represented by a top US law firm with a strong record in investment arbitrations. Its Notice of Intent is a well-crafted document that seems designed, among other things, to pre-empt criticism that TransCanada is using NAFTA Chapter 11 to circumvent environmental policy.

Keystone XL was already a lightning rod for controversy. The arbitration, if it proceeds, will be based on the most prominent and politicized events of any NAFTA case to date. At US$15 bilion, it will also be one of the largest investment arbitrations to date under any treaty. A ruling on the merits would require the tribunal to confront difficult questions about how far a government can go in basing regulatory decisions on starkly political calculations regarding important but collateral policy objectives. Likewise, the tribunal would also have to consider the extent to which regulatory decision-making can be influenced by foreign policy calculations.

If the arbitration goes ahead, which could be as soon as May of this year, it will be several years before an award is rendered.  Nevertheless, by issuing its Notice of Intent now, TransCanada seems to be positioning itself to move ahead quickly. If it does, it will be launching the most closely scrutinized arbitration in NAFTA history, not only because of the subject matter but also for whether US government conduct is held to the same standards under NAFTA as that of its treaty partners Canada and Mexico.