Ontario Court rejects US investors’ attempt to re-argue merits of NAFTA Tribunal’s decision to grant them less than 1.6% of their claim for compensation

By Dean Ehrlich, 1 December 2022

On 24 November 2022, the Ontario Superior Court of Justice dismissed an application by three US nationals and a US registered company (“the investors”) in which they sought the setting aside of the damages award made in their favour by a three-member tribunal constituted under Chapter 11 of the North American Free Trade Agreement (“NAFTA”).

In doing so, the Court rejected the investors arguments that – by only awarding them USD 7 million (or 1.59%) of their USD 440 million claim for compensation against the Canadian government – the NAFTA Tribunal “exceeded its jurisdiction, breached principles of natural justice and procedural fairness, and rendered an award contrary to the public policy of Canada.”

In her decision to dismiss the investors’ set aside application, however, Justice Jasmine Akbarali rejected the investors’ attempts to mischaracterise the harm they had suffered, explaining that “the [investors] repeatedly describe the loss as the failure to obtain permission to develop and operate the quarry. In fact, in the liability decision, the Tribunal held that the loss was the denial of the opportunity to have a fair environmental assessment process.”

According to Justice Akbarali, “the Tribunal’s approach to damages flowed from its finding, on a significant record and after a lengthy hearing, that the [investors] did not establish that it was probable they would have received permission to develop and operate the quarry.”

Whether a fair environmental assessment process would have led to approvals to operate the quarry as well as the proper calculation of damages were “hotly contested” in the proceedings before the NAFTA Tribunal.

The underlying dispute concerned the outcome of the Canadian government’s “federal-provincial joint review” of plans to develop a quarry on Digby Neck, in Nova Scotia. The investors had undertaken feasibility studies which estimated that the quarry would be capable of producing “high quality aggregate” for about 50 years.

In the end, however, the review recommended that federal and Nova Scotia Ministers of the Environment reject of plans to develop the quarry – despite acknowledging that there would be benefits from the quarry “in the form of long-term access to a major aggregate resource, economic development and diversification in the local economy, and job creation.”

It was the Canadian government’s decision to follow that recommendation that caused the investors to commence arbitration proceedings under Chapter 11 of the NAFTA.

In due course, the arbitration proceedings were bifurcated. In the jurisdiction and liability stage, a majority of the Tribunal determined that Canada had breached obligations owed to the investors under the NAFTA “by breaching its obligations under Article 1105 to treat the [investors’] investments fairly and equitably, and by breaching its obligation under Article 1102 to treat the [investors’] investments no less favourably than it has treated investments of its own investors.”

In doing so, the NAFTA Tribunal concluded that the environmental assessment process was flawed. It criticised the review for “considering, and placing a great deal of weight on, community core values in assessing the impact of the quarry project,” while simultaneously denying the investors “reasonable notice of the community core values approach taken” and the opportunity “to seek clarification and respond to it.”

Meanwhile, in the damages phase of the arbitration that followed, the Tribunal determined that while Canada’s breach of the NAFTA caused the investors to lose a chance to have a fair environmental assessment process, the investors had failed to discharge the burden of proof to establish that, but for the breach, they would have obtained the permissions to proceed with the quarry project.

Accordingly, a majority of the Tribunal rejected the investors’ claim for lost profits, and awarded damages in the amount of USD 7 million – a value based on the loss of a fair environmental assessment process.

In response, the investors sought the setting aside of the damages award pursuant to the Commercial Arbitration Code, which is based on the UNCITRAL Model Law on International Commercial Arbitration and grants courts limited powers to set aside an international arbitral award.

According to Justice Akbarali, it was common cause in the set aside proceedings that:

  • in reaching its determinations, the NAFTA Tribunal was bound to apply international law, and the NAFTA;
  • the NAFTA Tribunal directed itself to the appropriate articles and rules of international law;
  • the NAFTA Tribunal correctly identified the relevant principles of international law arising from jurisprudence; and
  • in answering the damages question, the NAFTA Tribunal was required to determine causation, and that the Tribunal had correctly articulated the applicable standard.

However, the investors persisted in claiming that the NAFTA Tribunal “acted outside its jurisdiction because it did not apply the correct standard of proof; rather, it applied a standard of proof that is unknown to international law which they allege was so high it was impossible for the applicants to meet.”

Justice Akbarali rejected this contention, finding “that the question of the application of the correct standard of proof is not a true question of jurisdiction,” reasoning that “if the incorrect application of a correctly identified legal principle is a jurisdictional question, the court would, in effect, be embarking on a correctness review of arbitral decisions, something it ought not to do.”

As a consequence, Justice Akbarali found even though the distinction between an error that is jurisdictional in nature, and an error made within jurisdiction “is so fine as to be manipulable,” the NAFTA Tribunal did not exceed its jurisdiction. “It did not apply an impossible standard of proof. Rather, it correctly applied international law to the facts of this case” while the investors, for their part, failed to prove that obtaining approval to develop and operate the quarry was probable, the justice explained.

As for the investor’s claim that the NAFTA Tribunal “denied them their right to fully present their case when it denied the applicants the ability to file two rejoinder reports from their experts,” Justice Akbarali rejected it on the basis that the investors “did not do what they could have done [at the time] to address whatever prejudice they believed arose from Canada’s reply expert reports.”

In this regard, Justice Akbarali explained that the NAFTA Tribunal’s “Procedural Order No. 1” had required the parties’ reply and rejoinder “to contain only evidence that is responsive to the other disputing party’s last preceding submission.” According to the investors, however, “Canada’s reply and rejoinder included expert evidence that was responsive to the expert evidence contained in the applicants’ first submission, and as such, Canada improperly split its case.”

But, rather than seeking leave to respond to points raised in Canada’s reply shortly after the receipt of that submission, as would be standard practice in arbitral proceedings, Justice Akbarali found that the investors “engineered the problem that was facing the Tribunal – less than a month before the damages hearing was to commence – through their choices.”

In doing so, the justice highlighted the fact that the NAFTA Tribunal even offered the investors the chance to move to strike any evidence they believed was unfairly placed in the record by Canada, however, they failed to take advantage of it.

“Had the [investors] taken advantage of it,” Justice Akbarali explained, they “could have addressed the unfairness they now allege.”

As a result, Justice Akbarali held that the NAFTA Tribunal “cannot be said to have conducted itself in a manner ‘sufficiently serious to offend our most basic notions of morality and justice.’ Nor can it be said that the Tribunal’s conduct in so doing was so serious that ‘it cannot be condoned’ under the law of Canada.” So, the justice rejected the investors' claim that the NAFTA Tribunal had breached principles of natural justice and procedural fairness.

That left only the investors’ contentions that the damages award “conflicts with the public policy of Canada” remaining.

Here, Justice Akbarali immediately put paid to any reliance by the investors on the arguments that (i) the Tribunal exceeded its jurisdiction; and (ii) that the Tribunal breached procedural fairness by denying them the opportunity to file their two reply expert reports.

Instead, the Justice focused on the investors’ sole remaining argument that “the award is patently unreasonable, clearly irrational, totally lacking in reality, and a flagrant denial of justice.”

It was here that Justice Akbarali honed in on the core of the deficiency in the investors’ set aside application, explaining that “many of the applicants’ criticisms arise because of how [the investors] describe the injury that caused their damages. The [investors] repeatedly describe the loss as the failure to obtain permission to develop and operate the quarry. In fact, in the liability decision, the Tribunal held that the loss was the denial of the opportunity to have a fair environmental assessment process.”

With this matter clarified, Justice Akbarali, held that there was “nothing perverse or contrary to morality about the Tribunal’s causation findings. Moreover, its damages analysis flows from its conclusions about the nature of the loss, and causation that were proven in this case. There is nothing perverse about calculating damages from the date of the breach given the Tribunal’s finding on causation… To the extent its reasons considers hypothetical scenarios, that is a necessary reality of the “but for” causation analysis.”

As a consequence, Justice Akbarali concluded that the investors had “failed to establish any basis on which the arbitral award ought to be set aside as contrary to public policy. The decision to assess damages for the loss of the chance to have a fair environmental assessment process, rather than for the loss of the right to operate a quarry for 50 years is not morally repugnant. The conclusion that the applicants did not prove that it was probable they would have obtained the right to develop and operate a quarry is not morally repugnant. The choice of date from which to assess damages is not morally repugnant. The Tribunal’s damages decision was not arrived at in a manner that is contrary to our notions of morality and justice.”

 

 

URL: https://taobserver.com/news/301/ontario-court-rejects-us-investors-attempt-to-re-argue-merits-of-nafta-tribunals-decision-to-grant-them-less-than-16-of-their-claim-for-compensation