Investment Docket Getting More Crowded

In our last e-LERT in June, we noted that traditional Canada-US cross-border trade disputes – dumping and subsidy complaints – were very much on the wane. On the other hand, there was a remarkable increase in the number of NAFTA investment disputes by American investors against Canada. We predicted that investment disputes would be the focus of bilateral actions in the years ahead. We predicted that more and more of these investment claims would be against provincial laws and regulations as opposed to federal measures.

These predictions have been borne out. Since our last e-LERT, three more NAFTA claims have been filed against Canada by US investors. One concerns the federal government’s plan to construct a second international bridge at Windsor-Detroit. The others concern the Ontario government’s environmental measures, one of which targets the Ontario Green Energy Act.

Detroit River International Bridge

The Ambassador Bridge is the only bridge at the Windsor-Detroit border crossing. The entire bridge is owned by the Detroit International Bridge Company (“DIBC”), a private company controlled by a US citizen, Manuel (“Matty”) Moroun. How one of the world’s largest border crossings in terms of volume and value of trade became private property is a long story, going back to decisions made by Ottawa and Washington in the 1920s.

Whatever its history, because the bridge is privately-owned and a monopoly to boot, all access, transit and infrastructure improvements are under the control of its private owner. Because the structure of the bridge has deteriorated and because of increased traffic and security reasons, the Canadian and American governments decided some time ago to construct a second Detroit River bridge that would be a joint public project called the Detroit River International Crossing (“DRIC Bridge”).

Mr. Maroun and his company have aggressively fought these efforts at the legal and political level and in the media for years, the latest salvo being a NAFTA claim, alleging that Canada is in breach of its NAFTA obligations by discriminating against DIBC and by failing to accord its owners “fair and equitable treatment” as required under international law. DIBC asserts that “Canada’s objective is to use the DRIC Bridge – or the threat of the DRIC Bridge competing with the Ambassador Bridge – to drive down the value of the Claimant’s investment and facilitate a future acquisition, either through a purchase of the bridge or an attempted expropriation of the Canadian half of the bridge”.

As we pointed out in previous memos, these NAFTA arbitrations are not for the faint of heart. The cases are hard fought and take several years to conclude. NAFTA history shows that claimants trying to overturn regulations enacted for legitimate public purposes, even where the value of investments is impacted, have generally failed in their attempts. Governments, whether in Ottawa, Washington or elsewhere, don’t like being taken to court and devote large resources in defending these claims. One assumes that Ottawa will fight these arguments with all the resources at its disposal.

Ontario Environmental Measures

An increasing number of NAFTA investment claims have been targeting provincial measures. While NAFTA binds Canada at the federal level and allows investors to claim against Canada as a whole, provincial measures can be the subject of those claims if alleged to be contrary to Canada’s NAFTA obligations. As an example, when the government of Newfoundland and Labrador expropriated the provincial assets of AbitibiBowater, a US-owned corporation, the US owner brought a NAFTA claim against Canada as a whole.

Two new NAFTA notices that have been filed against Ontario's environmental regulations. One is by the US parent of St. Mary’s Cement Inc., arguing that the denial of quarry permit by the Ontario government was discriminatory, unfair and motivated by political considerations in breach of the NAFTA’s fair and equitable treatment obligations.

The second concerns the Green Energy Act and denials of access to the feed-in-tariff (FIT) for a number of wind power projects in southwestern Ontario owned by the claimant, the US corporation Mesa Power Group. Mesa Power argues that the changes in regulations for granting access to the electricity grid and in the awarding of wind power contracts led to a decline in value of its projects under the FIT program and contravened Canada’s NAFTA obligations.

Mesa Power has also raised larger issues. It argues that Ontario’s “buy local” requirements under the FIT program plus the $7 billion preferential contract for FIT access awarded to Samsung C&T of Korea contravenes Canada’s NAFTA obligations for fair, equitable and non-discriminatory treatment and against local content requirements. The local content part of the claim corresponds to the separate World Trade Organization dispute against Canada filed by Japan and joined by the European Union.

Long Row to Hoe

The two claims against these Ontario measures are in preliminary notices required under NAFTA rules. These are not the formal arbitration notice that invokes the legal process. Those are made in a subsequent step after a further 90-day period after the preliminary notices are filed. In some NAFTA cases, there is no follow-through and the claims wither on the vine. In others, the claimant proceeds to invoke the legal process and the process starts.

We expect that in each of the two cases against Ontario, the US claimants will file their formal arbitration claims. In the DRIC Bridge case, the official notice of arbitration starting formal proceedings against Canada was filed in April 2011.

There are long, complicated and expensive rows to hoe in these NAFTA claims. That’s not only because respondent governments fight these cases vigourously but also because of the procedural complexities and the complicated substantive legal issues involved. Unless the parties reach a negotiated settlement – which is always possible - each of these cases will be continuing for several years before a decision is rendered. We expect that the WTO dispute over Ontario’s Green Energy Act to be decided well before that.