Windstream Energy LLC v. Government of Canada, PCA Case No. 2013-22
An arbitral tribunal under Chapter 11 of the North American Free Trade Agreement (NAFTA) has reached the award stage. Although dismissing the discrimination and indirect expropriation claims, the tribunal upheld the claim of failure to provide fair and equitable treatment (FET), and ordered Canada to pay damages and half of the investor’s legal costs, totalling over CAD28 million (roughly US$21.4 million).
Background and claims
The claimant, Windstream Energy LLC (Windstream), is a company constituted under U.S. laws. It was in the business of developing an offshore wind electricity generation project in the province of Ontario, Canada (Offshore Project).
In 2009, Ontario enacted a Feed-in-Tariff (FIT) scheme whereby a tender process was opened for independent renewable energy producers to sell into the provincial grid. Through the tender process, Windstream secured a FIT contract for the Offshore Project.
Following various permitting delays related to Windstream’s development activities, Ontario ultimately imposed a moratorium on offshore wind projects. The primary reason given for the moratorium was that additional scientific research was necessary. Meanwhile, other holders of FIT contracts were offered alternative opportunities to participate in Ontario’s clean energy sector, which were not offered to Windstream.
Windstream initiated arbitration in January 2013 and the tribunal was constituted in July 2013. Windstream’s principal claims were that the province’s conduct had fallen below the FET standard in NAFTA and had an effect that was tantamount to expropriation.
Tribunal dismisses indirect expropriation claim
For the tribunal, the determination of whether an indirect expropriation has taken place is in the first place a matter of evidence and thus a factual determination of whether an effective taking of property attributable to the state has taken place. This would be the case even if there has been no formal transfer of title, and even if the state has not obtained any economic benefit. In turn, the first step in determining whether an effective taking has taken place is to determine whether the investor has been substantially deprived of the value of its investment.
Having carefully reviewed the relevant evidence, the tribunal found that on the facts in the current case no expropriation had taken place. Among other relevant factors, the tribunal indicated that the FIT Contract was still formally in force and had not been unilaterally terminated by Ontario, and that the investor’s CAD6 million security deposit was still in place and had not been taken or rendered otherwise worthless because of any action taken by the province. It therefore could not be said that the investor had been substantially deprived of its investment.
Tribunal finds that administration of moratorium was unfair and inequitable
The parties disagreed on the content of the minimum standard of treatment set out in NAFTA Article 1105(1) as well as on how the content of that standard should be established.
In the tribunal’s view, it was for each party to support its position as to the content with appropriate legal authorities and evidence. In principle the content of a rule of customary international law, such as the minimum standard of treatment, could best be determined on the basis of evidence of actual state practice establishing custom that also shows that the states have accepted such practice as law (opinio juris). However, neither party had produced such evidence, and so the tribunal had to rely on indirect evidence to ascertain the content, such as decisions taken by other NAFTA tribunals.
Upon consideration of the indirect evidence provided by the parties, the tribunal noted that Windstream invoked the FET element but not the “full protection and security” element of NAFTA Article 1105(1). The tribunal therefore considered whether Ontario’s conduct was “unfair” or “inequitable” in accordance with the customary international law minimum standard of treatment, and recalled that this determination was best done not in the abstract, but in the context of the facts of the case.
The tribunal found nothing unfair or inequitable in the evidence related to Ontario’s decision to impose a moratorium on offshore wind development and the related process. It considered that, while government conduct leading up to the moratorium could have been more transparent and public opposition to offshore wind was present, these factors did not amount to a breach of NAFTA.
However, it found that the conduct of the province following the moratorium was more troubling. According to the tribunal, Ontario did little to address the scientific uncertainty and, most importantly, did little to address the legal and contractual limbo in which Windstream found itself after the imposition of the moratorium. The tribunal concluded that failure “to take the necessary measures, including when necessary by way of directing the OPA [Ontario Power Authority, a regulatory agency], within a reasonable period of time after the imposition of the moratorium to bring clarity to the regulatory uncertainty surrounding the status and the development of the Project created by the moratorium, constitutes a breach of Article 1105(1) of NAFTA” (para. 380).
Damages valuation based on comparable transactions
The tribunal determined the appropriate method of valuation in light of the project’s particular stage of development. It pointed out that, while it is common to use the discounted-cash-flow (DCF) method to value offshore wind projects, “it is not usually used for projects that have not yet reached financial closure, given the many risks and uncertainties surrounding such projects” (para. 474). In the circumstances, the tribunal considered that the project was best valued on the basis of the comparable transactions methodology.
Upon consideration of the evidence on comparable transactions—offshore wind projects in Europe—the tribunal observed a range of between 18 and 24 million euros as relevant to the valuation of Windstream’s project. It then considered potential adjustments, but concluded that the mid-point of the above range was appropriate, that is, 21 million euros. Based on the exchange rate of the date of the award, this was converted to CAD31,182,900.
However, the tribunal noted that Windstream was not entitled to compensation for the full value of its investment, which included a letter of credit that remained in place and the FIT Contract that remained in force. The tribunal then found that the above valuation must be discounted by CAD6 million to account for the letter of credit, but that the value associated with the potential reactivation or renegotiation of the FIT Contract was extinguished upon the issuance of the arbitral award.
The tribunal agreed with and noted the parties’ agreement with the principle in Article 42 of the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL) establishing that “[t]he cost of the arbitration shall in principle be borne by the unsuccessful party” (para. 512). This rule applied to legal costs, but not arbitrations costs, that is, the costs and fees of the tribunal and the Permanent Court of Arbitration (PCA).
In terms of the apportionment of legal costs, the tribunal recalled that Windstream had prevailed, and although only one of its four claims was granted, this was one of its two principal claims. Ultimately, the tribunal found it appropriate for Canada to reimburse half of Windstream’s legal costs. As regards arbitration costs, for the tribunal these effectively arose out of the parties’ arbitration agreement, and thus it was more appropriate that each of the parties cover half.
Notes: The tribunal was composed of Veijo Heiskanen (President by agreement of parties, Finnish national), R. Doak Bishop (claimant’s appointee, U.S. national), and Bernardo Cremades (respondent’s appointee, Spanish national). The final PCA award of September 27, 2016 is available at http://www.italaw.com/sites/default/files/case-documents/italaw7875.pdf.
Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.