Federal – court dismisses jurisdictional challenge to NAFTA tribunal majority’s consideration of domestic law – #067

In Canada (Attorney General) v. Clayton, 2018 FC 436, Madam Justice Anne L. Mactavish held that a NAFTA tribunal majority’s consideration of domestic law was either a factual finding or part of the factual matrix on which the majority considered the host state’s breach of customary international law.  In considering the domestic legal framework and the host state’s non-compliance with that law as facts on which it could determine whether investors had received unequal treatment without justification, Mactavish J. held that the majority had stayed within the scope of the submission to arbitration and did not exceed its jurisdiction. 

The underlying dispute arose from a project pursued by Respondents which involved developing a basalt quarry, processing facility, ship loading facility and marine terminal in a community adjacent to the Bay of Fundy, Nova Scotia (the “Project”).  Respondents included one U.S. corporation and four (4) U.S. citizens who owned or controlled a subsidiary corporation Bilcon of Nova Scotia (“Bilcon”) (“Investors”).

Project was subject to two environmental assessment regimes, the Canadian Environmental Assessment Act, S.C. 1992, c. 37 (“Federal Act”), and the Nova Scotia Environment Act, S.N.S. 1994-95, c. 1 (“Provincial Act”) which the federal and provincial governments decided to harmonize under a Federal-Provincial Joint Review Panel (“JRP”).

Both the Federal Act and the Provincial Act and their regulations required the JRP to consider the Project’s environmental effects with each legislative overlay defining the ‘environment’ or ‘environmental’ terms in broad manners so that the JRP was mandated and free to consider adverse and positive impacts on biophysical, socio-economic and human environments.  The JRP’s report issued on October 22, 2007 after three (3) years of work (the “’Report”).  The Report recommended against permitting the Project to proceed, concluding that the Project was likely to cause significant adverse environmental effects.  In addition to biophysical and socio-economic effects, the JRP based its recommendation on how the Project would “undermine the community-driven economic development planning and threaten an area recognized and celebrated as a model of sustainability by local, regional, national and international authorities” and was “inconsistent with may government policies at local, provincial and national levels”.

Following the release of the JRP, in November 2007, Nova Scotia issue a decision denying permission for the Project to proceed.  The federal government followed suit in December 2007.

The Investors filed a February 5, 2008 Notice of Intent to refer a claim for damages to arbitration under the investor-state dispute resolution provisions of Chapter Eleven of the North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, Can. T.S. 1994 No. 2, 32 I.L.M. 289 (“NAFTA”).

The Investors later issued a May 26, 2008 Notice of Arbitration under NAFTA, claiming damages for Canada’s breaches of Article 1102 “National Treatment”, Article 1103 “Most-Favored Nation Treatment”, and Article 1105 “Minimum Standard of Treatment of NAFTA”.

The Investors claimed that the JRP had applied Canada’s environmental regulatory regime in a an arbitrary, unfair and discriminatory fashion, that the evaluation standard applied by the JRP to assess the environmental impact was beyond the JRP’s mandate under Canadian law and  that Nova Scotia’s and the federal government’s reliance on the JRP’s flawed environmental assessment to refuse approval of the Project breached Articles 1102, 1103 and 1105.

The three-member panel issued a March 17, 2015 award on jurisdiction and liability (the “Award”).  All three members agreed that the Tribunal had jurisdiction but divided on whether the federal government was liable for breaches of any of its NAFTA obligations.  The majority found that the federal government breached Articles 1102 and 1105. The Tribunal held that the JRP was part of the federal government’s apparatus, that the JRP exercised elements of governmental authority and that its actions had been adopted by the federal government as its own.  (A further hearing on the quantum was scheduled for February 2018.)

The majority focused on two (2) of the JRP’s actions:  its reliance on the concept of “community core values” to recommend that the Project be allowed to proceed, and its approach to the issue of mitigation.  The majority acknowledged in its Award that the Tribunal was required to apply customary international law in order to determine whether the actions of the JRP breached Article 1105.

To identify the minimum standard of treatment required by customary international law, the majority considered LFH Neer and Pauline Neer (USA) v. United Mexican States (1926), 4 RIAA 60 at pp. 61-62,  Glamis Gold Ltd. v. United States of America, UNCITRAL Award, 8 June 2009 at para. 435 and Waste Management, Inc. v. United Mexican States, (ICSID), Case No. Arb(AF)/00/3, Award, 30 April 2004  at para. 444.  The majority cautioned against expecting or accepting that a breach of Article 1105 be reduced to a “single arbitral formulation”:

– Neer articulated the standard as one which rose to “bad faith, to willful neglect of duty, or to an insufficiency of governmental action so far short of international standards that every reasonable and impartial man would readily recognize its insufficiency”;

– Glamis Gold required that the evidence demonstrate “a gross denial of justice, manifest arbitrariness, blatant unfairness, a complete lack of due process, evident discrimination, or a manifest lack of reasons”.  The majority did note that NAFTA tribunals had tended to move away from the Glamis Gold articulation in recent years and towards a more robust protection for investors; and,

– Waste Management set “a high standard” to reach a breach of Article 1105, one that is “arbitrary, grossly unfair, unjust or idiosyncratic” but not reaching “the level of shocking or outrageous behaviour”.

In addition, the majority approached its analysis by identifying what would be insufficient to trigger a breach of the minimum standard of customary international law.  The majority observed that NAFTA tribunals required more than a mere breach of domestic law, procedural unfairness, an imprudent exercise of discretion or even an outright mistake.

Though the majority also agreed with the Investors that their reasonable expectations were a factor to consider in determining whether a host state had breached the standard, any encouragements to participate in the host state’s economy in the present case were subject to compliance with federal and provincial environmental laws.

The majority concluded that the Investors had relied, to their detriment, on those encouragements by investing significant resources to the environmental assessment process and attempting to have the Project meet the applicable legal requirements for the protection of the environment.

The core of the majority’s reasoning concerned its conclusion that the JRP acted in an arbitrary manner by creating a new standard of assessment, referred to as the “community core values” without notice to Bilcon and by allowing that standard to have a predominant effect on the JRP’s Report.  To reach that conclusion, the majority held that the JRP’s approach was at odds with the law and policy under the Federal Act, inconsistent with the objectives of NAFTA and incompatible with Article 1105.

Regarding Article 1102, the majority concluded that the legality of the JRP’s actions under applicable Canadian domestic law was key to it finding the federal government in breach as this provision measures treatment of investors against treatment afforded to similarly-situated Canadian investors and investments.  By examining how other ‘like’ projects were subject to environmental assessment, the majority held that the Investors were not given the expected and legally mandated application of the standard applicable to the Federal Act, effectively denying the investors the national treatment in breach of Article 1102.

Canada applied under article 34(2)(a)(iii) the Commercial Arbitration Code (the “Code”), being Schedule 1 to the Commercial Arbitration Act, RSC 1985, c 17 (2nd Supp) (the “CAA”).  Section 5(4)(a) of the CAA stipulates that its provisionsm and those of the Code, apply to challenges to arbitration commenced under Article 1116 of NAFTA.  The Code is based on Model Law on International Commercial Arbitration as adopted by the United Nations Commission on International Trade Law on June 21, 1985.

34(2) An arbitral award may be set aside by the court specified in article 6 only if:

 (a) the party making the application furnishes proof that: …

 (iii) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration, or contains decisions on matters beyond the scope of the submission to arbitration, provided that, if the decisions on matters submitted to arbitration can be separated from those not so submitted, only that part of the award which contains decisions on matters not submitted to arbitration may be set aside;

Alert to the uncertainty as to the exact standard of review to apply to NAFTA tribunal awards, Mactavish J. relied on Mexico v. Cargill, Incorporated, 2011 ONCA 622 which she characterized as both a recent appellate-level Canadian decision in a NAFTA context as well as being relied on by both parties as being a correct statement off the applicable standard.  The Cargill issued its reasons when considering Ontario’s International Commercial Arbitration Act, RSO 1990, c I.9 (“ICCA”), Mactavish J. accepted to follow its reasoning when considering a review under CAA’s the Code as both the CAA and the ICAA used identical language and were both based on the UNCITRAL Model Law.

Cargill determined that the NAFTA tribunal “must interpret the grant of authority correctly or its action will be found to be ultra vires or to constitute a wrongful decline of jurisdiction” which meant that “the tribunal had to be correct in its determination that it had the ability to make the decision it made”.  The issue of “jurisdiction” is therefore limited to the narrow sense of whether the tribunal had the authority to make the inquiry and to decide a particular matter.  Cargill cautioned that courts should interfere only “sparingly” and that the caution is “magnified” in the international commercial arbitration context.

The courts must identify a question of “true jurisdiction” and, even then, avoid straying advertently or inadvertently into the merits of what was decided.  Mactavish J. then identified a three (3) question structure suggested by Cargill for a reviewing court’s approach:

What was the issue that the Tribunal decided?

Was that issue within the submission to arbitration made under Chapter Eleven of NAFTA?

Is there anything in NAFTA, properly interpreted, that precluded the Tribunal from making the award it made?

Mactavish J. cited four (4) cases which had followed Cargill:

Attorney General of Canada v. Mobil et al., 2016 ONSC 790 at paras 37-39; Consolidated Contractors Group S.A.L. (Offshore) v. Ambatovy Minerals S.A., 2017 ONCA 939 at paras 28-32; Newfoundland and Labrador v. ExxonMobil Canada Properties, 2017 CanLII 56724 at paras 111-12; and, SMART Technologies ULC v. Electroboard Solutions Pty Ltd, 2017 ABQB 559 at paras 71-77.

She distinguished Teal Cedar Products Ltd. v. British Columbia, [2017] 1 SCR 688, 2017 SCC 32 as having been a decision taken under B.C.’s Arbitration Act, RSBC 1996, c 55 which provides for appellate review on a question of law.  The CAA and the Code do not offer the same jurisdiction to the courts.

Before Mactavish J., the federal government argued that the majority had exceeding its jurisdiction by basing its analysis and determination of liability on whether the government complied with Canadian domestic law instead of international law. It pointed to the majority’s comments that the JRP’s assessment was a fundamental departure from the methodology required under federal and Nova Scotia law and that the Investors had not been treated in a manner consistent with Canada’s own laws.  It further argued that NAFTA tribunals were not appointed to sit in appeal of decisions taken under a host state’s domestic law or to accept simple illegalities or domestic shortcomings in authority to breach the requirements of customary international law.

The Investors argued that the majority simply used the Canadian law as part of the factual matrix in which the customary international law was applied and that whether the majority applied the correct legal test to the facts is not a true question of jurisdiction.  The Investors argued that the federal government was attempting to re-argue the merits of the dispute and ‘mischaracterize’ the majority’s reasoning as jurisdictional issue.  The Investors submitted that the majority’s reasoning did not rest on a domestic law but on the international law principles in Articles 1102 and 1105.

Mactavish J. resisted the federal government’s presentation of the majority’s reasoning.

It is evident from a fair reading of the majority’s reasons as a whole that the central question that it decided was whether Canada’s conduct in relation to the environmental assessment and approvals process for the Project and its treatment of the Investors breached its obligations under Articles 1102, 1103 and 1105 of NAFTA.

Mactavish J. then examined the submission to arbitration and determined that the issue decided by the majority was contained in the submission.  The discussion of domestic law was only incidental to the main issues and did not constitute an excess of jurisdiction.

In her analysis, she agreed with the parties that NAFTA tribunals do not sit in review of decisions made with the host states and that NAFTA claims are unquestionably to be decided under international law.  That said, questions of compliance with domestic law can be material and relevant as part of the factual matrix underlying the NAFTA dispute.

Mactavish J. reviewed the scope given to domestic law and considered how the majority approached allegations of its breach and the extensive evidence adduced by the parties.  She concluded that the breach was relevant as part of the facts relied on by the majority and not the legal test against which liability was exclusively measured.

[144]  The requirements of Canadian environmental law and Canada’s compliance or noncompliance with those requirements were thus put squarely in issue by the parties before the Tribunal. They were, moreover, expressly within the submission to arbitration of the Investors’ claim for damages resulting from Canada’s alleged breaches of its NAFTA obligations. Consequently, I am satisfied that the majority did not exceed its jurisdiction since it did not address an issue that was not within the submission to arbitration made by the Investors under Chapter Eleven of NAFTA.

 [145]  There was, moreover, nothing in the words of the relevant Articles of Chapter Eleven of NAFTA or in the interpretation of those words in the FTC Note that precluded the Tribunal majority from making findings as to Canada’s compliance or non-compliance with the requirements of its domestic environmental laws incidentally to its finding of liability under Articles 1102 or 1105 of NAFTA.

 [146]  While Canada takes issue with the majority’s findings regarding Canada’s non-compliance with the requirements of Canadian environmental law, it is not open to this Court, sitting on an application to set aside an Award under Chapter Eleven of NAFTA, to review the merits of the Tribunal’s decision and to second-guess its findings, as any error that the Tribunal may have made in this regard was not jurisdictional in nature.

Mactavish J. determined that nothing in NAFTA prevented the majority from making the award.  She also returned to the accepted limits of review by a court which cautioned courts from intervening in decisions made by consensual, expert and international arbitration tribunals.  The court is not to examine the merits.  She held that an assessment of the facts of a case goes to the merits of the award and does not involve a jurisdictional question.   See paras 148-183.

Mactavish J. summarized arguments raised by various interveners but disregarded them as they effectively expanded the issues before the court and were not appropriate for intervention.  See paras. 184-197.

In concluding, Mactavish J. held that the federal government had failed to fit its application within the limits of article 34(2)(a)(iii) of the Code and dismissed its application.

[199]  While there may be many reasons to criticize the Award of the majority, its decision ultimately turned on its conclusion that the flaws that it found to have occurred in the JRP process meant that Canada had not satisfied its obligation to provide the Investors with fair and equitable treatment as contemplated by Article 1105 of NAFTA, and its finding that Canada’s treatment of the Investors was discriminatory, differing from the treatment that would be accorded to similarly-situated Canadian investors, without justification for that differential treatment having been established. These findings are either factual in nature, or involve the application of the law to the facts as they were found by the majority. Most importantly, they are within the four corners of the Submission to Arbitration. They do not, however, pertain to jurisdictional issues.