Investment Disputes Roll Along

Chapter 11 of the North American Free Trade Agreement allows private investors from the US and Mexico to bring binding arbitration against Canada for allegations that a Canadian law – including one enacted by a Canadian province – contravenes obligations under the Agreement.

These disputes continue to fascinate us, with no end to interesting twists and turns, as events over the last year or so bear out. The record shows that investors face an uphill battle, not only in months of procedural wrangling and delays but in the high costs in bringing these cases forward.

NAFTA investment disputes are not for the faint of heart.

The Sky Is Not Falling

When these NAFTA provisions were under negotiation in the 1990s, there were exaggerated arguments by some that Chapter 11 would allow deep-pocketed American investors to attack Canadian laws enacted for legitimate policy objectives of consumer protection, education, health care, social services, environmental protection, you name it.

These fears were grossly over-stated. In fact, the record to-date shows that investors have tended largely to lose, failing miserably in efforts to wrest large sums from the Canadian government. Where these claims have not been dismissed, others have been settled, withdrawn or are withering away without being pursued.

The Scorecard

To update our previous scorecard in 2010, there are six pending NAFTA arbitrations cases against Canada. Three are slowly moving to the oral argument stage. Three are in the initial stages only, or involve minor compensation claims such as a $5 million claim involving salmon fishing licenses.

Of the cases that have been completed, only two resulted in damage awards against Canada, for a total of some $7 million, a pittance when compared with the hundreds of millions originally claimed. Four cases have been thrown out, including a $160 million claim by UPS against the operations of Canada Post and a $100 million claim by the US company Chemtura Corp against Canada’s ban of certain pesticides.

Canada has settled three investment claims, one involving Ethyl Corporation, where the settlement was for $11 million; a second involving AbitibiBowater, where the settlement was $130 million; and a third involving Dow AgroSciences where the settlement was $2 million. It would be wrong to include these settlements in totalling up successful investment claims. The $130 million AbitibiBowater settlement, for example, was for property expropriated by Newfoundland and Labrador. The fact that some amount of compensation was owed was never questioned by either the federal government or the Province.

The scorecard to date, then, is that only some $7 million NAFTA investment awards have been made against Canada by NAFTA tribunals. Three cases were settled but most have been either dismissed or are not being pursued, a far cry from the sky-is-falling type of arguments that were made when the NAFTA was concluded.

Lessons About Dithering

The Centurion Corporation is an illustration why these NAFTA disputes are not for the faint of heart. Having filed a claim for $160 million in 2009, Centurion dithered and delayed in prosecuting its case. It failed to pay the $100,000 deposit required to start the proceedings, a reminder that all costs of NAFTA arbitrations are borne by the parties.  After months of reminders by tribunal but no deposit having been made, in August 2010 Canada succeeded in having the arbitration terminated. The Tribunal awarded $43,000 in costs and disbursements against Centurion. This illustrates that NAFTA cases require a commitment of significant money, quite apart from the legal fees involved.

Looking Back - Why Were Cases Lost?

This is the big question. There are two kinds of answers. The first, which is a cautious lawyer-like response, is that each case is different and the results have to be looked at in terms of the precise legal arguments in relation to the precise set of facts. So the reasons why investors lost these NAFTA cases are fact-specific and each case is unique and can’t be summarized in one or two sentences.

But there is another response. Because NAFTA arbitration panels are composed of seasoned experts in international law, they won’t be easily convinced that Canada – or any other NAFTA party for that matter – breached treaty obligations. Simply having a disagreement with a NAFTA government over this or that is not enough. There must be a clear and convincing breach of the treaty. Meeting this challenge will always be a tough one for the investor. Not insurmountable, but tough - very tough.

Looking Forward – Will the Trend be Reversed?

Even with Canada coming out way ahead in these investment disputes (as in similar NAFTA awards decisively favouring the US government), there are three cases moving ahead and – while some time away from a formal hearing - should be carefully watched because of the importance of the issues:

Clayton/Bilcon v Canada, where US investors are claiming $188 million in compensation as a result of alleged discrimination in a federal-provincial  environmental assessment that resulted in refusal of permission to open a basalt quarry and marine terminal in Nova Scotia;

Gallo v Canada, where a US investor is claiming $355 million as a result of an alleged expropriation through Ontario’s refusal to approve a proposed land-fill site in Northern Ontario; and

Mobil Investments and Murphy Oil v Canada, in which two US companies are claiming $60 million and alleging breach of NAFTA obligations as a result of performance guidelines issued by the Canada-Newfoundland Offshore Petroleum Board.

Whether any of these three cases will reverse the trend remains to be seen. While each of the claimant/investors has raised sound legal arguments, there is no guaranty they’ll be enough to carry the day. NAFTA arbitration panels have shown themselves to be very demanding.