Investor ordered by ICSID tribunal to pay Canadian government CAD 9 million following failed NAFTA claim

Mercer International Inc. v. Government of Canada, ICSID Case No. ARB(AF)/12/3

A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) constituted under Chapter 11 of the North American Free Trade Agreement (NAFTA) has reached the award stage. In a dispute initiated by U.S. company Mercer International Inc. (Mercer), the tribunal found in favour of Canada. As the successful party, Canada was awarded legal costs totalling CAD 9 million. The award was rendered in March 2018 and made public in May 2018 following redaction of commercial information.

Background and claims

Mercer is a corporation established under the laws of the State of Washington, United States. Through its Canadian affiliates, it owns and operates a pulp mill in Castlegar, in the Canadian Province of British Columbia (the Celgar mill).

The Celgar mill processes wood chips from local sawmills into pulp. This activity uses large amounts of electricity, purchased at prevailing rates from FortisBC, the local utility. In addition to generating pulp, the Celgar mill also produces a by-product that could be converted into biomass-based electricity.

Up until 2009, Mercer sold biomass electricity at rates that were much higher than the rate at which it purchased electricity. As such, profits from electricity sales partly cross-subsidized pulp operations. Following an alleged provincial policy shift, a new generator baseline was set for the Celgar mill. This was recorded in a 2009 electricity purchase agreement (EPA) between the Celgar mill and British Columbia Hydro and Power Authority (BC Hydro).

As a result of the new generator baseline, the Celgar mill needed to use all of its self-generated electricity before it could purchase electricity from FortisBC at the cheaper industrial rate.

According to Mercer, the result was that Canada had failed to provide Mercer non-discriminatory treatment and the minimum standard treatment under NAFTA. Mercer initiated arbitration against Canada in January 2012, claiming CDN 232 million in damages plus interest.

EPA claims are disputed under NAFTA’s time bar, but only those pertaining to a “relative standard” are dismissed

Canada’s first objection to jurisdiction hinged on Mercer’s delay in filing for arbitration. In particular, Canada disputed jurisdiction over claims arising from the EPA.

The tribunal observed that NAFTA Articles 1116(2) and 1117(2) provide that an investor “may not make a claim if more than three years have elapsed from the date on which the investor [or enterprise] first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor [or enterprise] has incurred loss or damage.”

The question was thus the exact date on which the investor and its affiliates first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that they had incurred loss or damage.

Citing the NAFTA decision in Grand River v. United States, Canada argued that the time bar began to run when the investor “by exercise of reasonable care or diligence […] would have known” (para. 6.10). For the investor, however, the time bar started to run only when its claim was “ripe,” that is, when the challenged measure actually took effect (para. 6.13). The tribunal relied on the date that the EPA took contractual effect—January 2009—and concluded that Mercer knew the implications of the new generator baseline by that date.

However, the tribunal found that the time bar began to run in January 2009 only for some of Mercer’s claims. Here, it distinguished Mercer’s claims that the EPA’s terms were arbitrary, unfair or unjust, which were standards that were not relative but instead assessable by the claimant immediately without need for a comparator, from claims “for what may broadly be described as ‘discriminatory treatment’, brought under any of NAFTA Articles 1102, 1103 and 1105. These are pleaded by the Claimant as relative standards” (para. 6.18).

The tribunal held that claims of the first type were time barred, but that claims of the second type depended on actual or constructive knowledge of at least one other BC pulp mill in like circumstances having received more favorable treatment. Ultimately, on the facts, the tribunal did not dismiss these claims as time barred.

More claims barred under NAFTA procurement carve-out

The second jurisdictional objection was that the claims of discriminatory treatment (in alleged breach of NAFTA Articles 1102 and 1103) pertained to procurement and were thus excluded. NAFTA Article 1108(7)(a) provides that such articles “do not apply to procurement by a Party or a state enterprise.”

The tribunal accepted that it should apply the ordinary meaning of the word “procurement” and that BC Hydro had procured electricity from the Celgar mill through the EPA. For the tribunal, it did not automatically follow that a specific provision in the EPA—namely, the generator baseline provision—was excluded from application of NAFTA Articles 1102 and 1103. However, upon further analysis, it found that the generator baseline provision was integral to the “procurement function” (para. 6.47) of the EPA and thus excluded from the tribunal’s jurisdiction.

Remaining discrimination claims fail

As a result of its findings on jurisdiction, the tribunal only had to consider a limited set of Mercer’s original claims of discriminatory treatment under Articles 1102 and 1103.

On the legal standard for finding discrimination, the tribunal clarified that the words “in like circumstances” in NAFTA Articles 1102 and 1103 referred to the treatment afforded to the investor vis-à-vis other investors. The tribunal accepted two self-generating pulp mills in British Columbia—the Skookumchuck Pulp mill and the Port Mellon mill—as ostensible comparators. The former is domestic owned while the latter was foreign owned.

On the facts, the tribunal found that the Celgar mill had not been discriminated against.

Discrimination is not covered by Article 1105

Mercer also sought to advance claims of discriminatory treatment, as distinguished from discrimination, under Article 1105 (minimum standard of treatment). The majority of the tribunal, however, was skeptical and found that the customary international law minimum standard could add nothing to the claimant’s search for compensation.

Arbitrator Orrego Vicuña indicated in a dissenting opinion that the prohibition of discriminatory treatment should be considered to be part of Article 1105. He relied on the findings of other investment tribunals, rather than citing opinio juris and state practice, to support this position.

Canada is awarded CAD 9 million in legal costs

The parties had criticized each other for mischievous conduct during the arbitration, but the tribunal characterized the events in question as innocent mishaps and delays brought about in part by a dispute that was complicated and difficult. No part of the tribunal’s decision on costs had any punitive element. Rather, the paramount factor for allocating legal costs was the success of the parties in the arbitration. The tribunal determined that Canada, as the successful party, should in principle recover its legal costs from Mercer. Although Canada had claimed legal costs of CAD 9,154,166.56, the tribunal found it reasonable to award CAD 9 million.

Notes: The tribunal was composed of V. V.  Veeder (chair appointed by the parties, British national), Francisco Orrego Vicuña (claimant’s appointee, Chilean national) and Zachary Douglas (respondent’s appointee, Australian national). The final award of March 6, 2018 is available at https://www.italaw.com/sites/default/files/case-documents/italaw9651_0.pdf

Matthew Levine is a Canadian lawyer and a contributor to IISD’s Investment for Sustainable Development Program.