Clayton/Bilcon v. Canada

William Ralph Clayton, William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc. v. Government of Canada, UNCITRAL, Permanent Court of Arbitration (PCA) Case No. 2009-04

(Published in 2018 in International Investment Law and Sustainable Development: Key cases from the 2010s and on this website on October 18, 2018. Read more here.)

Award available at https://www.italaw.com/sites/default/files/case-documents/italaw4212.pdf

Keywords

Environmental regulation, environmental assessment, fair and equitable treatment, international minimum standard of treatment, legitimate expectations, procedural and substantive fairness, arbitrariness

Key Dates

Notice of Arbitration: May 26, 2008

Constitution of Tribunal: April 9, 2009

Award on Jurisdiction and Liability: March 17, 2015

Application to the Federal Court of Canada for Set Aside of the Award: June 16, 2015

Decision on Setting Aside the Award: May 2, 2018

Arbitrators

Bruno Simma (president)

Donald McRae (respondent appointee)

Bryan Schwartz (claimant appointee)

Forum and Applicable Procedural Rules

Permanent Court of Arbitration (PCA)

UNCITRAL Arbitration Rules (1976)

Applicable Treaty

North American Free Trade Agreement (NAFTA), Chapter Eleven, Investment

Alleged Treaty Violations

• Minimum standard of treatment
• Most-favoured-nation treatment
• National treatment

Other Legal Issues Raised

• Jurisdiction – Attribution
• Jurisdiction – Timeliness of claims

1.0 Importance for Sustainable Development

When the Bilcon v. Canada award was rendered in 2015, it came as a surprise, especially for those who considered that investment arbitration had shifted toward a better balance between public and private interests. Indeed, the approach taken by the Bilcon tribunal reminded critiques of the earliest investor–state disputes involving environmental matters when government and civil society were taken aback about the lack of deference shown by arbitral tribunals vis-à-vis governmental action to protect the environment.

The case involved the rejection of a project to develop and operate a quarry in Nova Scotia. After a preliminary approval, a Joint Review Panel was mandated to conduct an environmental assessment. In its final report, the Joint Review Panel recommended the rejection of the project. The significant and adverse environmental effect on the “community core values” were the main reason for the Joint Review Panel to reject the project.

The majority of the tribunal found that the process applied by the Joint Review Panel was in breach of the investors’ legitimate expectations, which were based on federal and provincial law as well as specific representations by government officials who repeatedly encouraged Bilcon to pursue the project. It is striking that in its assessment on the legitimate expectations, the tribunal does in no way take into account the broader public policy concerns or weigh the investor expectations against the objectives of sustainable development, including the protection of the environment. The tribunal also questioned the legality of the concept of “community core values.” In so doing, the tribunal applied an arguably inappropriate threshold in finding arbitrariness, and concluded that Canada breached the minimum standard of treatment under the North American Free Trade Agreement (NAFTA).

The Bilcon award feeds into the current debate on better balancing between investors rights and legitimate expectations on the one hand, and public policy interests on the other. The deference accorded to the investors’ expectations and the low threshold in finding arbitrariness goes in a problematic direction and certainly in the opposite direction of current reform trends. At the very best, the Bilcon award is a reminder that substantive investment rules need to be modified so that investment treaties more adequately respond to the demand for balanced treaties. In particular, the broad all-encompassing standards such as the minimum standard of treatment and fair and equitable treatment will continue to pose problems, especially if they continue to refer to terms such as arbitrariness and legitimate expectations.

A further implication of the Bilcon award has been underscored by the dissenting arbitrator, which is the issue of regulatory chill. The majority second-guessed the environmental assessment procedure under Canadian law. Such second-guessing arguably means a significant intrusion into the domestic legal system of a state and could lead to a chill on the operation of environmental review panels.As though aware of the controversial character of its own finding and its potential negative impacts, the majority of the tribunal added in an obiter dictumthat “[e]nvironmental regulations, including [environmental impact] assessments, will inevitably be of great relevance for many kinds of major investments in modern times” (para. 597). It continued to underline that “[t]he Laws of Canada and Nova Scotia, as well as the NAFTA itself, expressly acknowledge that economic development and environmental integrity can not only be reconciled but can be mutually reinforcing” (paras. 595–601). The tribunal shows through this obiter dictum that it is fully aware of the need to reconcile environmental protection and economic development through mutually supportive solutions. The reasoning and outcome of the case seems thus even more puzzling.

2.0 Case Summary

2.1 Factual Background

The Clayton family group (Messrs. William Ralph, William Richard, Douglas and Daniel Clayton)and Bilcon of Delaware (Bilcon) sought to invest in a quarry and a marine terminal in the Canadian province of Nova Scotia at Whites Point in Digby Neck (the project). In 2002 the investors entered into a partnership agreement with a Nova Scotia company, Nova Stone Exporters, to develop and operate the proposed project.

The proposed project required a permit and approvals to conduct blasting operations. From 2003 onwards, it underwent a lengthy environmental assessment (EA) jointly conducted by the governments of Canada and Nova Scotia. After the two governments realized that the project raised widespread public concern and potentially significant adverse environmental effects, the EA was referred to a Joint Review Panel (JRP). Such JRPs can be mandated through an agreement between the federal government and authorities from another jurisdiction, including provinces, according to the Canadian Environmental Assessment Act (CEAA).

Nova Scotia entered into an agreement with the federal government (Canada–Nova Scotia Agreement) setting out the guidelines and scope of the JRP’s review of the project. The JRP had to objectively assess any adverse effects the project may have on the environment and assess possible mitigation measures. The JRP’s mandate also included an assessment of the effects on the human environment and traditional lifestyle, values and culture.

In its final report, the JRP recommended the rejection of the project because it would have significant and adverse environmental effect on the “community core values” of Digby Neck. At the end of 2007, the Nova Scotian and Canadian governments rejected the project on these grounds.

2.2 Summary of Legal Issues and Award

Following the rejection of the project, Bilcon initiated arbitration against Canada. Bilcon alleged that the environmental regulatory regime of Canada and Nova Scotia was applied to its project in an arbitrary, discriminatory and unfair manner.

A majority of the tribunal found Canada liable for having breached the minimum standard of treatment obligation under NAFTA Article 1105(1). On the one hand, it held that the JRP process breached the investor’s legitimate expectations, which were based on federal and provincial law and specific encouragements by government officials. On the other hand, it found the JRP process to be arbitrary in creating a new standard of assessment, that is, the “community core values” standard. The tribunal also found a breach of the national treatment standard under NAFTA Article 1102, in that the JRP evaluation used more stringent criteria than those imposed on Canadian investors in like circumstances.

Professor McRae, the arbitrator appointed by Canada, issued a dissenting opinion. He disagreed with the findings on the minimum standard of treatment. In his opinion, even if Canada had breached its proper laws, this fact could not amount to an international breach of NAFTA Article 1105(1). McRae also disagreed with the majority’s finding on the violation of the national treatment standard.

The tribunal deferred the calculation of damages; the investors have initially claimed USD 300 million. The decision is pending at the time of writing.

In June 2015, the government of Canada applied to the Federal Court of Canada to have the NAFTA tribunal decision set aside on the grounds that it “contains decisions on matters beyond the scope of the submission to arbitration” and that it contradicts Canada public policy. On May 2, 2018, the Federal Court dismissed the application of Canada. The judge held:“I accept that the majority’s Award raises significant policy concerns. These include its effect on the ability of NAFTAParties to regulate environmental matters within their jurisdiction, the ability of NAFTA tribunals to properly assess whether foreign investors have been treated fairly under domestic environmental assessment processes, and the potential ‘chill’ in the environmental assessment process that could result from the majority’s decision.” Despite this the federal court judge was unable to set aside the decision due to the court’s very limited ability to review arbitration awards.

3.0 Select Legal Issues

3.1 Minimum Standard of Treatment: Significant deference to the investor’s stated expectations

In assessing whether Canada had violated the minimum standards of treatment, the majority of the Bilcon tribunal followed the formulation of the international minimum standard by the Waste Management[1] tribunal (paras. 442–445). According to Waste Management, “the minimum standard of treatment of fair and equitable treatment is infringed by conduct attributable to the State and harmful to the claimant if the conduct is arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety” (para. 442). The majority of the Bilcon tribunal further emphasized that the current international minimum standard had evolved to provide greater protection than that under the Neer case, pursuant to which an international breach was limited to “outrageous” state conduct (para. 444).

Bilcon had argued that its legitimate expectation to operate the quarry had been frustrated. According to Bilcon, those expectations arose from extensive encouragement of Nova Scotia officials. The investors also expected that the project would be assessed in accordance with Canadian law. The majority followed the investor’s argument stating that the Waste Management test requires the examination of specific representation made by the host state on which an investor relied to its detriment. The majority found that Nova Scotia officials made such specific representation and that the general investment promotion materials and policy statements of Nova Scotia showed that Bilcon has been clearly and repeatedly encouraged to pursue the project. The majority also found that Bilcon had legitimate expectations that Canadian law would be properly applied but that this was ultimately not the case. The approach of the majority of the Bilcon tribunal signals that an identified breach of domestic law by a host state can amount to a breach of legitimate expectations.

In his dissenting opinion, McRae argued that whether Nova Scotia officials encouraged the investment and, thus, created “legitimate expectations” is irrelevant for the assessment of the NAFTA standard because representations by state officials could create no legitimate investor expectations beyond the default expectation of compliance with domestic law. Thus, Bilcon’s only legitimate expectation could have been that Canadian law would be properly applied. According to McRae it was not settled whether there was in fact a breach of Canadian law. At any rate, he stressed that the mere fact that an investor alleges a breach of national law cannot amount to a breach of the NAFTA standard (para. 36 of the dissenting opinion).

3.2 Minimum Standard of Treatment: The issue of “community core values”

In assessing the minimum standard of treatment, the majority of the tribunal followed this line of reasoning by the claimant that the conduct of the EA was unfair and arbitrary due to the fact that the JRP report introduced the term “community core values,” which is not as such mentioned in any statute, regulation or guidelines of Nova Scotia or Canada (para. 503). In short, the reasoning suggests that deviating from national law meets the threshold of arbitrariness. In its application of the Waste Managementstandard, the majority found that “community core values” was an arbitrarily applied standard without legal authority. The majority stressed that this novel standard played the most prominent role in the assessment even though the meaning of this standard appeared to be unclear (paras. 505–506). The award stated four possible meanings: first, “community core values” could refer to the local community’s majority opinion of whether the project should be accepted or rejected; second, it could mean values espoused in local policy statements and documents (press releases, action plans); third, the community’s right to determine for itself rather than allowing the local and national government to make the ultimate decision on the project; or lastly, the term could signify “community DNA” as meaning the community’s traditions and lifestyles that distinguish it from other communities.

The majority of the Bilcon tribunal found that irrespective of its actual meaning, the “community core values” standard went beyond the JRP’s mandate (para. 535). The majority also held that the JRP report did not propose any mitigation measures which was contrary to the JRP’s mandate. This failure prejudiced the investor, in the majority’s view. Finally, the majority found that Bilcon lacked reasonable notice of this approach and thus concurred that Bilcon had been denied a fair opportunity to know about the new standard and how to meet and to address it (para. 543).

As mentioned, the JRP had a mandate to identify human environment effects. The question thus arose whether the term “community core values” was really a novel or extra-legal term. According to McRae, the term “community core values” used by the JRP was merely a restatement encapsulating the various human environmental effects the project can have and these components fell indeed under the JRP mandate. Human environmental effects can refer to elements such as the historical use of the area, fishing, eco-tourism, the quality of life, air and water, and the health of the community. He underlined that the JRP report also concluded that Bilcon failed to provide adequate analysis of the human environmental effects of the project on local communities.

The majority’s interpretation of the international minimum standard of treatment is significant in several ways. First because it points to the potential lack of expertise of investment arbitrators regarding environmental law and the functions of an EA review panel. Second, it also demonstrates the lack of deference on behalf of the majority vis-à-vis the host state’s legislation on environmental protection and its application through host state institutions and processes.

3.3 National Treatment

Another interesting aspect of the Bilcon award is how the tribunal analyzed the national treatment standard under NAFTA. The majority found that the EA procedures imposed on Bilcon constituted a treatment less favourable than Canadian investors in like circumstances received. The majority rejected Canada’s argument to restrict comparators to investments or investors to those that, like Bilcon, were undergoing a JRP review or those projects with significant opposition from a local community. The majority held that the broad language in Article 1102 of NAFTA and NAFTA’s general objective to increase investments signified that the range of comparators should be broader. In comparing the assessment procedures of a number of similar mining projects, the majority found that projects were not evaluated in terms of “core community values” and thus received more favourable treatment (para. 696). This type of broad interpretation of national treatment will make it difficult for governments to take into account specific environmental and societal differences of projects without being found in breach of the national treatment provision.

3.4 Potential Implications for National Environmental Review Processes

McRae cautioned that the majority’s award risks chilling national environmental review processes that focus on impacts to the human environment, because such processes could potentially result in a claim for damages under NAFTA. Furthermore, he highlighted that a failure to comply with Canadian law by a review panel would now become the basis for a NAFTA claim and allow a claimant to bypass the domestic remedy under Canadian law. According to Professor McRae, such intrusion into domestic jurisdiction will create a chill on the operation of environmental review panels (para. 48 of the dissenting opinion). The majority included additional observations on the award, pointing out that a NAFTA tribunal must be sensitive to possible “regulatory chill” including environmental regulatory chill. Thus, it is interesting to note that the majority reiterated that the circumstances of the case were very specific and exceptional and should therefore not result in a general regulatory chill on environmental matters.

The extent to which there will be a regulatory chill is difficult to assess at this point. However, the Bilcon award, even though rendered in 2015, follows the line of earlier investor–state disputes in which the arbitrators do not take into account non-investment issues or do so insufficiently. This runs counter to the progress that has been made in the last years in shifting arbitrators’ attitudes toward non-investment issues within investment arbitration and underscores the threat that investment arbitration poses to a state’s regulatory space.

Note

[1] Waste Management, Inc. v. United Mexican States (“Number 2”), ICSID Case No. ARB(AF)/00/3. Retrieved from http://www.italaw.com/cases/1158