NAFTA Energy Arbitrations
Gordon E Kaiser, Energy Arbitration Chambers
This is an extract from the fourth edition of GAR’s The Guide to Energy Arbitrations. The whole publication is available here.
The North American Free Trade Agreement (NAFTA) came to an end on 1 July 2020. After 24 years, it has been replaced by a new agreement called the Canada-United States-Mexico Agreement. The main impact as far as the energy sector is concerned was elimination of the famous Chapter 11 dispute resolution provision. Chapter 11 of NAFTA gave private investors the right to bring claims directly and unilaterally in the host country. This was unique at the time when the arbitration world was dominated by state-to-state proceeding.
Chapter 11 requires that the host:
must treat the foreign investor and its investments with ‘treatment no less favorable than it accords, in like circumstances, to its own investors’(Article 1102) or ‘to investors of any other Party’(Article 1103);
must provide investments with the better of the treatment accorded to its own investors or to the investors of any other Party (Article 1104);
must provide investments of investors with ‘fair and equitable treatment and full protection and security’ (Article 1105);
is prohibited from imposing certain trade-distorting performance requirements, such as requiring a given level of domestic content (Article 1106); and
must not directly or indirectly nationalise or expropriate an investment or take measures tantamount to nationalisation or expropriation, subject to various exceptions requiring fair market value compensation (Article 1110).
The state-to-state proceedings continue under the new agreement. The private action, however, is gone, although there are transition provisions. Investors harmed prior to 1 July 2020 have three years to bring the claim.
Chapter 11 has had a major impact on the energy sector in Canada. To put things in perspective, there have been 40 NAFTA decisions to date. Of those, 17 were against Canada, 11 were against the United States and 12 were against Mexico. Canada has managed to lose nine cases, Mexico has lost five, while the United States has lost none.
Of the 17 cases against Canada, the energy sector accounts for four, and three more are currently before tribunals. The purpose of NAFTA was to promote foreign investment. Certainly the Canadian energy sector was a major beneficiary. Canadian oil and gas exploration and pipelines are dominated by US investment.
The original NAFTA agreement was negotiated over five years. An agreement in principle was signed by President Reagan and Prime Minister Mulroney at the Shamrock Summit in Quebec City in 1985. It was called the Shamrock Summit because the two Irishmen treated their dinner guests to a fine rendition of the song, ‘When Irish Eyes are Smiling’. Twenty-four years later, when Prime Minister Trudeau and President Trump signed the new agreement in Buenos Aires, no one was singing.
One thing the Canadians and the Americans agreed on was that the Chapter 11 should be scrapped. Canada believed that it had lost too many NAFTA arbitrations. But both countries disliked the fact that foreign investors could use NAFTA to override domestic legislation that both governments believed was in the public interest. In October 2017, 230 law and economics professors asked President Trump to remove the Chapter 11 dispute resolution provision from NAFTA. That letter referred to Chief Justice John Roberts’ dissent in BG Group v. Republic of Argentina, claiming that NAFTA arbitration panels held alarming powers to review the laws and ‘effectively annul the acts of its legislature and judiciary’. NAFTA arbitrators, the Chief Justice said, ‘can meet literally anywhere in the world and sit in judgment on the nation’s sovereign acts’. The October 2017 letter reveals the concern.
Nowhere was this policy conflict clearer than in the Canadian energy sector, where the decisions of Canadian energy regulators and legislation enacted by provincial governments was constantly challenged by US investors.
In Mobil Oil, two American companies questioned a decision of the Canadian Newfoundland Offshore Board. Mobile first went to the Canadian courts. When that failed, they brought a NAFTA claim, in which they succeeded. In Mesa Power and Windstream Energy, American investors challenged the Ontario government’s administration of its feed-in tariff (FIT) programme, which was to used promote renewable energy. That resulted in the largest NAFTA award against Canada. In Mercer International, a US company filed a C$250 million NAFTA claim against Canada based on the actions of the British Columbia Utilities Commission and BC Hydro, a government-owned utility serving the entire province. Again the investors went to the Commission first. When that failed, they went to NAFTA and ended up with an award.
In Lone Pine Resources, a US-based exploration company launched a claim against the province of Quebec’s decision to suspend oil and gas exploration under the St Lawrence River. This case is still before the tribunal. Another case still before a tribunal is Westmoreland Coal. Here a US company brought a C$470 million claim relating to the Alberta government’s decision to eliminate the generation of electricity by coal. The investor is not questioning the legislation but the lack of compensation it received.
Canadians have also used the NAFTA Chapter 11 provisions to advance their own interests. The most famous claim and the largest in history was the C$15 billion claim TransCanada brought against the United States when former President Barack Obama refused to grant TransCanada a permit to build the Keystone XL pipeline. That claim was withdrawn when President Trump was elected. In his first day on the job, President Trump granted the essential presidential permit to TransCanada. A Presidential permit was required for Keystone XL because the pipeline crossed an international boundary. That challenge is not over. There is a presidential election coming in November. The front runner, Joe Biden, has indicated he will cancel Keystone XL if elected. Stay tuned.
Ultimately, the question is whether the removal of Chapter 11 creates problems for the Canadian energy industry. This important question is addressed in the Conclusion. There is good news and bad news. It depends on what kind of investor is involved. Is it a Canadian investor or a US investor? Is the investment in Canada or the United States? Before turning to these questions, it is useful to review the NAFTA arbitrations in the Canadian energy sector to date.
The energy arbitrations
There have been four NAFTA decisions dealing with the Canadian energy sector to date, and three more are under way. They all involve claims by US investors challenging the decisions of Canadian energy regulators or energy legislation enacted by provincial governments. They include decisions by the Canada Newfoundland Offshore Petroleum Board to change its regulations, the British Columbia Utilities Commission to set electricity pricing, an Ontario government decision not to grant onshore wind contracts, an Ontario government decision to suspend offshore wind programmes, a decision by the Quebec government to ban fracking under the St Lawrence River and a decision by the Alberta government to eliminate the generation of electricity by coal. These are all decisions by provincial governments or their energy regulators. Under NAFTA, the government of Canada is required to defend. If Canada loses, Canada sends the bill to the province.
Mobil Oil Corporation
In August 2007, two US companies, Mobile Investment Canada and Murphy Oil Corporation, filed a NAFTA claim for C$60 million against Canada. The two US companies were partners in an offshore drilling project off the coast of Newfoundland, which was regulated jointly by the federal government and the province through the Canada Newfoundland Offshore Petroleum Board.
To obtain a licence to drill, the companies had been required to submit proposals to the Board to approve their development plan. That plan included commitments regarding research and development. The Board provided guidelines, none of which required specific expenditure amounts. The Board had changed this practice in 2004 and introduced new guidelines with specific expenditure targets. The claimants objected to the new guidelines, arguing that they represented a fundamental shift in regulation that undermined the project. Mobile first went to the courts. When that failed, Mobile brought a NAFTA claim. In May 2012, a tribunal majority found that Canada had violated NAFTA Article 1106. Three years later, the tribunal ordered damages of C$132 million. A set-aside application by Canada was dismissed by the courts.
Mobile brought a second claim for future damages relating to the 2012–2015 period, which was not covered in the original award. Despite Canada’s objections that the second claim was barred by the three-year time limit under NAFTA and the doctrine of res judicata, the panel allowed the claim to proceed. The parties subsequently extended the damage period to 2036, the date when the Mobile Oil projects in Canada would end. The parties then reached a settlement. It was incorporated into a consent order issued by the tribunal on 4 February 2020, granting further damages of C$35 million.
Mesa Power Group
The decision of the NAFTA panel in Mesa Power involved claims under Article 1105 of NAFTA. In September 2009, the Ontario Minister of Energy directed the Ontario Power Authority (OPA) to create the FIT programme, which established the eligibility criteria, the criteria for evaluating applications, the deadlines for commercial operation and the domestic content requirements. Those were originally set at 25 per cent but were increased later to 50 per cent. The domestic content requirements were subsequently challenged under another regulatory regime.
The FIT programme offered 20-year power purchase agreements with the OPA, under which the generator was a guaranteed a fixed price per kilowatt hour for electricity delivered to the Ontario grid. Contracts were available for projects located in Ontario that generated electricity exclusively from renewable energy. Applicants also had to establish that the project could be connected to the electricity grid through a distribution system or transmission system. That proved to be a particular problem for Mesa Power.
In 2011, Mesa Power Group, a US corporation owned by Texas oil tycoon T Boone Pickens, filed a C$775 million claim against Canada relating to the province of Ontario’s policy of awarding power purchase agreements under the Ontario FIT programme for the supply of renewable energy. Mesa claimed that Canada adopted discriminatory measures, imposed minimum domestic content requirements and failed to provide Mesa with the minimum standard treatment, in violation of NAFTA’s investment provisions. In the end, the tribunal dismissed all of Mesa’s claims and ordered Mesa to bear the cost of the arbitration and a portion of Canada’s legal costs of nearly C$3 million.
Mesa argued that the reason it did not receive any FIT contracts was that the programme was mismanaged and Mesa was discriminated against when Ontario granted unwarranted preferences to two other applicants. Windstream turned on the legitimacy of the moratorium issued by Ontario to defer all offshore wind generation and the conduct of the Ontario government following the announcement of that moratorium.
The OPA launched the FIT programme in October 2009. During the first round of contracting, it reviewed 337 applications and granted 184 contracts for a total of 2,500MW of capacity. The second round took place in February 2011. Forty FIT contracts for a total of 872MW were issued. The third round took place in July 2011, resulting in 14 contracts totalling 749MW.
Mesa Power filed six applications under the FIT programme but was unsuccessful in all three rounds of contracting. The problem was that all the MESA projects were located in Bruce County. To obtain a contract, all applicants had to demonstrate that they had the right to connect to the transmission system. Mesa was unable to obtain transmission connection because of the transmission constraints in Bruce County.
Mesa argued that the failure to acquire transmission access was because of flaws in the contracting process and preferences granted to two other parties, namely NextEra Energy, Inc (an affiliate of Florida Light and Power) and a Korean consortium led by Samsung. Mesa argued that this conduct amounted to a breach of Article 1105(1) of NAFTA.
Before the tribunal could determine whether Canada had failed to grant Mesa Power fair and equitable treatment, the tribunal had to define that term. The panel relied on the often quoted standard set out in 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 – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. In applying this standard it is relevant that the treatment is in breach of representations made by the host State which were reasonably relied on by the claimant.
The tribunal in Mesa Power went further, stating:
On this basis, the Tribunal considers that the following components can be said to form part of Article 1105: arbitrariness; ‘gross’ unfairness; discrimination; ‘complete’ lack of transparency and candor in an administrative process; lack of due process ‘leading to an outcome which offends judicial propriety’; and ‘manifest failure’ of natural justice in judicial proceedings. Further, the Tribunal shares the view held by a majority of NAFTA tribunals that the failure to respect an investor’s legitimate expectations in and of itself does not constitute a breach of Article 1105, but is an element to take into account when assessing whether other components of the standard are breached.
The tribunal rejected all three claims by Mesa that Canada had breached the fair and equitable treatment provisions of Article 1105 of NAFTA. The tribunal also rejected the allegation that the OPA had mismanaged the programme and did not treat all applicants fairly, noting that the OPA had retained an independent monitor to administer the FIT programme.
The tribunal next discounted the charge that NextEra had met with government officials, noting that this was common practice in the industry and there was no evidence of any preference. NextEra was given access to transmission facilities in Bruce County at one point, but apparently Mesa was also offered the opportunity.
The most contentious part of the Mesa allegations were related to the Korean consortium agreement. Mesa had argued that the agreement between Ontario and the Korean consortium unfairly diminished the prospects for other investors, including Mesa, that were already participating in the renewable energy programme by setting aside transmission capacity for the Korean consortium that was intended for FIT applicants. Mesa also argued that Ontario was less than transparent in negotiating the agreement, and issued inaccurate and incomplete information. Canada responded that there was nothing manifestly arbitrary or unfair when a government enters into an investment agreement that grants advantages to an investor in exchange for investment commitments.
There were two points of dissent in Mesa made by the Honourable Charles N Brower. Canada had argued that its obligations under Articles 1102 and 1106 of NAFTA did not apply because the investment under the FIT programme was procurement under Article 1108. The majority concluded that the FIT programme did constitute procurement and dismissed the claims under Article 1102. Judge Brower dissented from the finding that the FIT agreement constituted procurement.
Judge Brower did agree with the majority that any breach of Article 1105 should be defined by the test in Waste Management, which required a finding of gross unfairness, complete lack of transparency and lack of due process leading to an outcome that offends judicial propriety. The majority, however, did not believe that the evidence supported that conclusion. In addition, the majority found that states should be given a high level of deference in deciding how to regulate their affairs. Judge Brower dissented from that finding, stating that Canada had breached Article 1105 by the ‘grotesque’ preference given to the Korean consortium:
The nub of what I see as Ontario’s, hence Canada’s, violation of Article 1105 is that it torpedoed the Feed-In Tariff (‘FIT’) program as offered at large, including in relation to Claimant’s Arran and TTD projects, to the extent of the 500 megawatts (‘MW’) committed to the Korean Consortium on 17 September 2010 in implementation of the Green Energy Investment Agreement. . . . Up until then Claimant’s projects, as well as all other FIT applicants, had been competing for capacity that had been 500 MW or greater. Moreover, – and this can only be characterized as grotesque – as it actually happened, the Korean Consortium was thereby enabled to acquire low-ranked FIT applicants in order to fill its allotted 500 MW, thereby jumping clear losers in the FIT Program over higher-ranked, but ultimately unsuccessful FIT applicants, due to the reduced available megawattage. This effectively stood the FIT Program on its head, turned it upside down. Thus the Government of Ontario acted arbitrarily, grossly unfairly, unjustly, idiosyncratically, discriminated against the FIT applicants and in favor of the Korean Consortium, and acted with a complete lack of transparency and candor.
Windstream Energy
In October 2012, Windstream Energy filed a claim against the government of Canada in the amount of C$475 million. Following a 10-day hearing in February 2016, a panel of three arbitrators issued an award of C$26 million, resulting from Ontario’s decision in 2011 to suspend all offshore wind development.
The panel accepted Windstream’s argument that the government’s decision frustrated Windstream’s ability to obtain the benefits of the 2010 contract it had signed with the OPA.
In November 2009, Windstream had submitted 11 FIT applications for wind power projects, including an application for a 300MW 130-turbine offshore wind project near Wolfe Island in Lake Ontario. The OPA offered Windstream a FIT contract in May 2010, which Windstream signed in August of that year. Under the contract, the OPA would pay Windstream a fixed price for power for 20 years. In total, the contract was worth C$5.2 billion.
During this period, the Ontario government was conducting a policy review to develop the regulatory framework for offshore wind projects, including a proposed 5km shoreline exclusion zone. The policy review ceased on 11 February 2011, when the government of Ontario decided to suspend all offshore wind development until further research was completed.
The main ground for the Windstream claim was that the Ontario decision was arbitrary and was based on political concerns that the wind contracts would increase electricity rates. Windstream argued that the government really had no intention of pursuing scientific research. Canada, in response, said that Ontario was entitled to proceed with caution on offshore wind development and that NAFTA does not prohibit reasonable regulatory delays.
Windstream made a number of claims under NAFTA. The most important (and the only one that succeeded) was a breach of Article 1105(1) (the minimum standard of treatment provision), which reads: ‘Each Party shall accord to investments of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.’
In finding that there was a breach, the tribunal questioned whether the real rationale for the moratorium was the need for more scientific research. Just as important was the tribunal finding that Ontario made little, if any, efforts to accommodate Windstream, and seemed to deliberately keep Windstream in the dark. This is best set out in the decision at paragraphs 366 and 367:
The Tribunal notes that following the signing of the FIT Contract on 20 August 2010, the position of the Government of Ontario grew gradually more ambiguous towards the development of offshore wind. Thus, while the Government appears to have envisaged still in August 2010 that the relevant regulatory framework, including the setback requirements, would be in place possibly . . . its position started changing in the fall of 2010. This change appears to have coincided with the receipt and analysis of the information generated through the EBR posting of 25 June 2010, which indicated an increasing resistance to the development of offshore wind. . . . It does not appear from the evidence that the various options that were being considered and the related concerns were communicated to Windstream, either at the meetings between the government officials and Windstream representatives or otherwise. On 10 December 2010, Windstream delivered a force majeure notice to the OPA, effective from 22 November 2010, stating that MNR’s failure to proceed with the permitting process, in particular the site release process, and MOE’s failure to take steps to implement its policy proposal to create an exclusion zone, had prevented Windstream from progressing the Project in accordance with the FIT Contract.
The tribunal concluded at paragraph 380:
The Tribunal concludes that the failure of the Government of Ontario to take the necessary measures, including when necessary by way of directing the OPA, 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. It was indeed the Government of Ontario that imposed the moratorium, not the OPA, so it cannot be said that the resulting regulatory and contractual limbo was a result of the Claimant’s own failure to negotiate a reasonable settlement with the OPA. The regulatory and contractual limbo in which the Claimant found itself in the years following the imposition of the moratorium was a result of acts and omissions of the Government of Ontario, and as such is attributable to the Respondent. The Tribunal therefore need not consider whether the conduct of the OPA during the relevant period must also be considered attributable to the Respondent.
There was a further claim by Windstream that Ontario had violated Article 1102 of NAFTA by granting Windstream less favourable treatment than was accorded to other entities in similar circumstances. It was argued that the treatment of Windstream was less favourable than the treatment Ontario granted to TransCanada.
Both TransCanada and Windstream were parties to power purchase agreements with the OPA that guaranteed a fixed price for electricity. Both contracts were terminated. However, when Ontario terminated the TransCanada contract, Ontario awarded TransCanada a new project and compensated it for the costs of the cancellation. In contrast, Ontario failed to do the same for Windstream following the offshore moratorium.
The tribunal rejected Windstream’s argument, noting that Article 1102 deals with national treatment and most-favoured nation treatment. However, the tribunal concluded that TransCanada was not in like circumstances. Unlike TransCanada, Windstream had a FIT contract for offshore wind.
There is no question that the TransCanada project was different from the Windstream project. TransCanada had a contract with the OPA to build a gas generation plant in Mississauga, near Toronto. The local residents were not happy with this, and the Liberal government cancelled the project in the heat of the provincial election. To keep TransCanada happy, the OPA negotiated an agreement that reimbursed TransCanada for its costs and issued a new contract in another area.
The circumstances were different and so was the government’s response. In TransCanada, there was extensive negotiation, whereas in Windstream there was none. The tribunal concluded that the two projects were totally different and, therefore, did not result in like circumstances. TransCanada does not even provide renewable energy, which is the basis of all FIT contracts.
Accordingly, the tribunal ruled that the moratorium and related measures did not apply to TransCanada in the first place. TransCanada was not affected by the moratorium on offshore wind. Moreover, the tribunal ruled that the moratorium was not applied in a discriminatory manner because it resulted in the cancellation of all offshore wind projects. Windstream had the only contract for offshore wind and, therefore, the tribunal concluded that it could not agree that Windstream had been treated less favourably than other developers of offshore wind.
Mercer International
In 2012, Mercer International, a US company, filed a C$250 million NAFTA claim against Canada. The claim related to the company’s investment in a pulp mill located in Castlegar, British Columbia. The mill also operated an energy generation facility fuelled by biomass, which qualified as renewable energy under British Columbia regulation.
The claim related to actions by BC Hydro, a government-owned utility, that provided electricity to most of British Columbia and that regulated the distribution of electricity in that province. A second utility, Fortis, provided electricity to a small portion of the province, including the Mercer pulp mill in Castlegar.
The central issue was that Mercer was engaged in the arbitrage of power and BC Hydro and the British Columbia Utilities Commission (BCUC) took steps to prevent it. Mercer required a significant amount of electricity for its own use at its mill. For some time, Mercer was allowed to purchase that electricity from Fortis at low cost-based rates. At the same time, Mercer was able to sell the renewable electricity generated at its facility using biomass at market rates.
Mercer alleged that BC Hydro and the BCUC through their joint action had a created new regulatory regime that required Mercer to use its own self-generated electricity first before selling electricity to the grid at market prices. This removed the arbitrage profit. Mercer argued that the other pulp mills in British Columbia were doing the same thing and it was being discriminated against, contrary to Articles 1102, 1103 and 1503 of NAFTA. The tribunal ruled against Mercer and ordered Mercer to pay Canada’s costs of C$9 million.
There were a number of complexities in this case. First, Canada argued that the BC Hydro conduct was shielded by the government procurement protections in Article 1108(7) of NAFTA. The panel also questioned whether the BCUC ruling was discriminatory, contrary to Articles 1102, 1103 and 1503 of NAFTA. It turned out that Mercer was the only pulp mill buying electricity from Fortis – the others were being served by BC Hydro and, therefore, they were not on the same footing or subject to the same regulatory ruling.
There was also a question of whether Mercer was late filing its claim and violated the three-year time limit under Articles 1116 and 1117 of NAFTA. The limitation period involved a review of the earlier NAFTA decision in Grand River. The question was about the date on which the investor first acquired or should have acquired knowledge of the alleged breach and the resulting damage. The panel ultimately found that some of the claims were time barred.
It should be noted that Mercer first raised this complaint before the BCUC, which ruled against it. The BCUC decision effectively ruled that self-generating customers had to first supply their requirements from their own production before they could purchase embedded low-cost power from Fortis.
Mercer was the only pulp mill buying electricity from Fortis. The other pulp mills were purchasing from BC Hydro under a different regulatory regime. The panel ruled that the facts did not support a finding of discriminatory treatment, dismissing the application and awarding costs against Mercer.
Lone Pine Resources
In September 2013, Lone Pine Resources, a US-based gas and exploration company, launched a C$119 million challenge against Canada under NAFTA. The claim related to the Province of Quebec’s suspension of oil and gas exploration under the St Lawrence River. The moratorium was part of a wider Quebec suspension of fracking, a form of horizontal drilling that has already been suspended in other US states and Canadian provinces.
Quebec declared the moratorium in 2011, to conduct environmental impact studies concerning the use of the chemicals involved and the effects on groundwater. This was of particular concern given that the permits that Lone Pine had acquired cover land directly under the St Lawrence River.
Lone Pine alleged that the moratorium contravenes Articles 1105 (minimum standard of treatment) and 1110 (expropriation) of NAFTA. More specifically, the claimant alleged that the passing of the legislation that created the moratorium was arbitrary, unfair and inequitable, and was based on political and populist grounds rather than actual environmental research. The claimant alleged that the revocation of the licence expropriated its investment without compensation.
The government of Canada responded that the action was a legitimate measure in the public interest that applied indiscriminately to all holders of exploration licences that are located under or near the St Lawrence River. Canada argued that the legislation was enacted by a fundamental democratic institution in Quebec and was preceded by numerous studies that established the need to achieve an important public policy objective, namely the protection of the St Lawrence River.
Canada argued that the minimum standard treatment guaranteed in Article 1105 of NAFTA does not protect investors’ legitimate expectations. Even if this were the case, Canada said no representative of the government of Quebec communicated to the claimant any guarantee, promise or specific assurance that could create legitimate expectations relating to the development of hydrocarbon reserves and resources that may be found beneath the St Lawrence River.
Canada has also argued that the disputed measure does not substantially deprive Lone Pine of its investment because the legislation only revokes one of five exploration licences granted. Finally, Canada pointed out that the act is a legitimate exercise of the government of Quebec’s police power and, accordingly, the measure cannot constitute expropriation.
Keystone XL
In most of the NAFTA energy arbitrations, the United States is the claimant and Canada is playing defence. The one exception took place in 2016 when TransCanada, a company based in Calgary, Alberta, filed a C$15 billion NAFTA investor claim against the United States after former President Barack Obama rejected its application for a presidential permit to approve the construction of the Keystone XL pipeline.
In January 2015, both the House and the Senate passed legislation that approved Keystone XL, but failed to get the two-thirds majority required to override a presidential veto. When President Obama exercised his veto, TransCanada filed a claim under NAFTA arguing that the denial of the presidential permit for Keystone XL was arbitrary, unjustified, and breached the US administration’s NAFTA obligations. A presidential permit was required for Keystone XL because the pipeline crossed an international boundary.
This all turned around when Donald J Trump won the next election and moved into the White House. One of the first acts by the new president was to sign an Executive Order approving the 1179-mile line. Two days later, TransCanada withdrew the NAFTA claim.
Westmoreland Coal
In August 2019, Westmoreland Mining, a US company, filed a C$470 million damages claim against the government of Canada for breaches by the province of Alberta of Articles 1102 and 1105 of NAFTA. In 2013, Westmoreland acquired a number of coal mines, including the ‘mine-mouth’ operations in Alberta at issue in this dispute. Mine-mouth coal operations are coal mines located adjacent to power plants so that the coal can be delivered to the power plant economically.
The value of Westmoreland’s investment was threatened in November 2015 when a new Alberta provincial government announced its Climate Leadership Plan. Alberta, which historically had relied primarily on its abundant coal supply to fuel its power plants, decided that it wanted to eliminate all power emanating from coal by 2030. Alberta agreed to pay out nearly C$1.4 billion to three coal-consuming power utilities, all of which were Albertan companies. Two of the three, TransAlta and Capital Power, also owned interests in mine-mouth coal mines, and the compensation valued those assets. Westmoreland, unlike the three Alberta companies, was not compensated for the early closure of its mines.
When the coal payouts were issued to the companies, Alberta’s Minister of Energy stated that they were intended to compensate for the ‘economic disruption to their capital investments’ caused by the sudden policy shift and to ‘provide investor confidence and encourage them to participate in Alberta’s transition from coal’. Westmoreland argued that Alberta’s plan to ‘compensate Albertan coal mine operators for the loss of their investments, to the exclusion of the only American coal mine operator, denied Westmoreland national treatment under Article 1102 and treated the company unfairly and inequitably, in violation of NAFTA Article 1105’.
Canada, in its defence, disputes the claimant’s allegation that Alberta coal mine operators were paid millions of dollars for the economic disruption to their operations when none was paid to the only American coal mine operator. Canada claims that no company or individual received any payment from the government of Alberta with respect to any interest in a mine under the government’s 2015 Climate Leadership Plan, designed in part to eliminate the generation of electricity by coal.
Canada further claims that the plan took no policy stance on continued coal mining in the province. Rather Canada argues that the payments in question were voluntary payments that the government of Alberta undertook in 2016 to provide the owners of six coal-fired generating units in the province with an incentive to reduce carbon emissions by moving from generating electricity by coal to generation by natural gas. Canada argues that the payments had two objectives. The first was to reduce emissions from electricity generation. The second goal was to ensure that the generating plants would continue operating and provide electricity to the Alberta grid. The province believed that this could be achieved by converting the coal plants to gas-fired generation plants. Put simply, Canada says that Westmoreland was not a generating unit and did not qualify. In short, Westmoreland was not ‘similarly situated’ to the electricity generators that received the payments.
This is similar to the argument that Canada made in Windstream. Windstream had argued that Canada treated TransCanada more favourably when Ontario made significant payments to encourage TransCanada to terminate operations when at the same time no payments were made to Windstream. Canada pointed out that TransCanada was very different from Windstream. Windstream was a wind generator, whereas TransCanada was a gas plant. They were entirely different operations and the rationale for the payments was entirely different. The tribunal in Windstream accepted the distinction. This argument will no doubt be central in Westmoreland.
Tennant Energy
The most recent energy arbitration against Canada under NAFTA is Tennant Energy. This is a follow-on case to Mesa Power and relies on much of the evidence developed in that case. Tennant Energy, based in Napa, California, filed a claim in June 2017 against Canada for C$116 million relating to a breach of Article 1105 of NAFTA.
As in Mesa Power, the claim related to the actions of the province of Ontario in awarding contracts under the FIT contracts developed under the Green Energy Act. Like Mesa Power, Tennant claims that the FIT contracting process was unfairly manipulated to favour the Korean consortium to the detriment of all the other applicants.
Tennant argues that not only was there unfair manipulation, the province also deliberately failed to release information that would put all parties on a level playing field. These steps, Tennant argues, were inconsistent with Canada’s obligations under NAFTA, including Article 1105 of Chapter 11. Tennant claimed for the following wrongful actions:
Ontario unfairly manipulated the award of access to the electricity transmission grid, resulting in unfair treatment to the investors.
Ontario unfairly manipulated the dissemination of programme information under the FIT programme.
Ontario unfairly manipulated the awarding of contracts under the FIT programme.
Senior officials improperly destroyed necessary and material evidence of their internationally unlawful actions in an attempt to avoid liability for their wrongfulness.
The damages sought had a unique twist. Of the C$116 million claimed, C$35 million relating to ‘moral damages’ that the investor suffered from ‘the improper actions of the Respondent, including improper measures to suppress its wrongful conduct and for the gross unconscionable conduct of Ontario in the maladministration of the program resulting in the abuse of process and detriment to the Investment and the Investor’. This is the first NAFTA case claiming moral damages, which appears to be the arbitration version of punitive damages. Not only does this case borrow on the evidence from Mesa Power, it also relies on evidence from Trillium Wind, a common law tort case discussed in the next section. Trillium Wind, Mesa Power and Tennant are all in the same boat. They are challenging arbitrary acts of the Ontario government in connection with wind projects. Of particular interest is the fact that in Trillium Wind, the plaintiff brought an action for spoliation claiming that senior Ontario government officials destroyed documents relevant to the case. Tennant also relies on that evidence to support its claim of wrongful conduct and abuse of process. The matter is currently proceeding before the tribunal.
Going forward
The original NAFTA agreement really began with the Canada–US Free Trade Agreement that came into force on 1 January 1989. However, shortly after, President Bush – anxious to increase American investment in Mexico but worried about Mexican nationalisation – started negotiations with Mexico. That was really the origin of the famous Chapter 11 provision granting unusual rights to private investors. The Canadians then joined in and NAFTA resulted.
Negotiations of the new NAFTA agreement were not easy. Like the first version, it took almost four years. The US administration wanted more US steel in automobiles and access to Canadian poultry and dairy markets, which had long been protected by marketing boards.
Both Canada and the United States wanted out of the Chapter 11 process. The Canadians believed that they had lost too many NAFTA arbitrations. The US administration was not crazy about Chapter 11 either. The latter was not particularly interested in promoting foreign investment. It was more interested in building a wall along the Mexican border, increasing tariffs on Chinese imports and withdrawing from the Paris Climate Accord.
It is worth seeing where we ended up. Chapter 11 is history, but no one is crying about that. In fact, a remedy created by the Supreme Court of Canada in 2018 may give investors even greater protection than Chapter 11 provided. In Lorraine v. Quebec, the Supreme Court of Canada created a common law remedy for de factoexpropriation. Unlike the Chapter 11 remedy, this can be used by both foreign and domestic investors.
It is important, however, that the state-to-state dispute settlement process in Chapter 20 has been maintained. In fact, the parties made an improvement to this provision.
The dispute provisions in the original Chapter 20 had a major flaw. That Chapter allowed either party to block the formation of a panel in a state-to-state dispute settlement case by either not engaging in the meeting of the Free Trade Commission of Ministers, which was required to be approved the panel, or by refusing to agree to the proposed roster of panellists from which the panellists were required to be selected.
The updated dispute settlement provision solves this problem. In the new provision, panels are automatically established upon request, bypassing the Commission of Ministers. Going forward, if the government parties cannot reach consensus agreement on the roster of panellists within one month, the roster will be formed automatically from the individuals proposed by each government.
The difficulty under the former Chapter 20 explains why no dispute settlement panel has been formed under NAFTA Chapter 20 since 2000, when the United States blocked the establishment of a panel in the US-Mexico sugar dispute.
Another important point is that the new NAFTA has a sunset clause promoted by the United States. However, it was increased from the five years originally proposed by the United States to 16 years. There is, however, an automatic review of the agreement every six years. During those reviews, the agreement can be extended for another 16 years.
Common law remedies
Under the new agreement, American investors in Canada and Canadian investors in the United States will have to rely on common law. Due to recent developments, those remedies are fairly robust in Canada. US law does not appear to be as strong. The good news for American investors is that common law remedies, such as disguised expropriation and good faith in contract performance, may give investors almost as much security as they had before. In fact, their remedies may be greater. And unlike NAFTA, both domestic investors and foreign investors can take advantage of them.
Disguised expropriation
As discussed above, the Supreme Court of Canada created a common law remedy for de facto or disguised expropriation in Lorraine v. Quebec. In fact, the first application is an energy case in which LGX Oil and Gas brought a C$60 million claim against Canada on the basis that an order two years earlier by Environment Canada had devalued its oil and gas wells in southern Alberta. That order prohibited construction and noise activities in April and May of each year, which was the mating season for the greater sage-grouse, which has been recognised as threatened or near threatened by several national and international organisations.
The concept of expropriation deals with the power of a public authority to deprive a property owner of his or her property and the benefits from that property. In the Lorraine case, the Supreme Court Canada defined in some detail what it called ‘disguised expropriation’ or ‘de facto expropriation’. Essentially, disguised expropriation involves an abuse of power. That occurs when a public authority exercises its regulatory power unlawfully in a manner inconsistent with the purpose of the legislation under which it is acting. Ultimately, the court must assess the reason why the government acted in the way it did. In that sense, the court is exercising a function similar to an arbitrator in a NAFTA case. Recall that in Windstream the tribunal questioned whether the real rationale for the moratorium the province placed on offshore wind projects was the need for more scientific research. It was significant, the tribunal found, that Ontario made little if any effort to accommodate Windstream and seemed to deliberately keep Windstream in the dark. The word ‘deliberate’ is important.
In the case of disguised expropriation, the court must determine whether the act is discriminatory or unjust. In short, there must be a finding of abuse of power and or bad faith. In the Lorraine case, the Supreme Court considered whether the environmental regulation at issue was legitimate. The plaintiff had purchased a lot in a residential area in the town of Lorraine in Quebec with the intention to subdivide the property for residential construction. A few years later, the town adopted a bylaw that turned half the property into a conservation area, preventing the plaintiff from constructing residential properties. The court indicated that the plaintiff had two remedies confirming an earlier decision of the Supreme Court in Canadian Pacific Railway. The railway was unsuccessful because the Court found that the City of Vancouver had not acted in bad faith, but had acted within its authority. The result in Lorraine was different, however. The Supreme Court did find that the town had acted in bad faith and stated that the plaintiff could either seek a declaration that the town had acted outside its authority, or could claim an indemnity or payment to reflect the value it had lost. There was a problem, however, in that the plaintiff had missed a limitation period but nonetheless the Court’s statement in respect to the law and the rights of plaintiffs in the case of disguised expropriation is very clear. The rights under common law are just as strong as the rights that foreign investors have, or had, under NAFTA. The difference here, however, is that they are available to both foreign and domestic investors.
Good faith in contract performance
In 2014, the Supreme Court of Canada released its decision in Bhasin, a pioneering decision that recognised a common law duty of good faith in the performance of contracts. Five years later, on 19 December 2019, the same court heard two appeals together on the same issue – one from British Columbia and one from Ontario. The decision has yet to be released but the general view is that it will move this important area of the law forward. The Court noted that the duty of honesty does not require a party to disclose material to the contracting parties, but a party cannot actively mislead or deceive the other contracting party in relation to the performance of the contract. As Justice Cromwell explained:
This means simply that parties must not lie or otherwise knowingly mislead each other about matters directly linked to the performance of the contract. This does not impose a duty of loyalty or of disclosure or require a party to forego advantages flowing from the contract; it is a simple requirement not to lie or mislead the other party about one’s contractual performance.
The Supreme Court decision in Bhasin is novel. It recognised a new common law duty, applicable to all contracts, of honest performance, which means the parties must not lie or knowingly mislead each other about matters linked to the performance of a contract. The court did recognise that common law is not permitted to override express contract terms. Put differently, defendants cannot be faulted under the good faith doctrine for performing in a manner that is entirely consistent with a contract’s express terms. The law in this area in Canada is moving forward. The concept is not as strong in US law, where good faith and implied obligations are restricted to filling in contractual gaps.
Misfeasance in public office
During the past decade, the tort of misfeasance in public office has become commonplace. In Canada, this cause of action dates back to 1959 and the famous Roncarelli decision by the Supreme Court of Canada. There the Premier of Quebec improperly ordered the manager of the Quebec Liquor Commission to revoke Roncarelli’s liquor licence because Roncarelli had provided bail money to several Jehovah’s Witnesses arrested by the Premier. The Supreme Court of Canada found that the Premier had no grounds for ordering this and had acted with malice.
Not much happened until the House of Lords decided in Three Rivers, in 2001, and the Supreme Court of Canada followed suit in Odhavji Estate two years later.
The plaintiffs in Three Rivers were 6,000 depositors at the Bank of Credit and Commerce International (BCCI) in London, who had suffered economic losses due to the fraud and eventual liquidation of BCCI. The depositors brought a claim for misfeasance against the senior officials of the Bank of England, who they claimed had acted in bad faith in licensing BCCI as a deposit-taking institution. The creditors complained that the Bank of England officials should have taken steps to close down the BCCI given that ‘known facts cried out for action’.
The main issue in Three Rivers was the required state of mind of the defendant or what is typically described as malice. The general view was that malice required some degree of bias or personal ill-will against the plaintiff, or something that came to be known as targeted malice. In Roncarelli, for example, the plaintiff had established that the defendant, the Premier of Quebec, had a deliberate intention to harm the plaintiff restaurant owner for his involvement with the Jehovah’s Witnesses. He specifically ordered the revocation of the plaintiff’s liquor licence to cause the plaintiff financial harm.
In Odhavji Estate, the Ontario Court of Appeal was divided on whether mere breach of the statute was sufficient to ground a claim for misfeasance in public office or whether the tort required abuse of power or authority The majority concluded the mere breach of statutory obligation was not sufficient for the claim and struck out the claim. The Supreme Court of Canada reversed and restored the claim. Justice Iacobucci writing for a unanimous court concluded that the tort is not limited to abuse of statutory power and was ‘more broadly based on unlawful conduct in the exercise of public functions’. He stated that the tort ‘could be included in a broad range of misconduct’ and the essential question was whether ‘the alleged misconduct is deliberate and unlawful’. In addition, he stressed the public author’s disregard for the plaintiff’s interest, stating:
Liability does not attach to each officer who blatantly disregards his or her official duty, but only to a public officer who, in addition, demonstrates a conscious disregard for the interest of those who will be affected by the misconduct in question. This requirement establishes the required nexus between the parties.
Around the same time, another important decision was released in England. In 2004, in Watkins, the House of Lords established that misfeasance in public office was not actionable unless there is damage. In 2008, another important decision of the Court of Appeal in Ontario was released in O’Dwyer. Justice Rouleau writing for the Court found for the plaintiff, stating that the Commission had engaged in ‘unhelpful and misleading correspondence with the plaintiff’ and Commission officials were ‘reckless, indifferent or willfully blind to the illegality of their actions and the potential harm to the plaintiff’. This type of language is remarkably similar to what the NAFTA panel found in Windstream.
The tort of misfeasance in public office has also been used in a number of Canadian energy cases. In Granite Power, the Ontario Court of Appeal allowed the plaintiff to proceed with a misfeasance claim against the Ontario government for acts it took in the privatisation of the Ontario power industry. The plaintiff, Granite Power, was a small private utility company located in Gananoque, Ontario. Since 1885, Granite Power had supplied electricity to Gananoque. The company had an exclusive agreement to supply power to the town from 1994 to 2014. However, in 1997, the Ontario government changed the provincial energy policy to allow new competition. The statute that created that regime allowed the province to grant exemptions to allow private suppliers such as Granite to continue their exclusive agreements with small municipalities. Granite Power applied to the government for such an exemption.
Ontario granted the requested exemption in 2002. However, between 1998 and 2002, the government’s communication had been noncommittal and ambiguous. The government allowed advertising that suggested that Granite Power’s monopoly to serve the town was likely to disappear. Further, the town used the new provincial policy to challenge the exclusive agreement it had with Granite Power. Granite Power argued that the government’s delay and lack of candour had caused its supply agreement to become worthless and claimed damages from the provincial government for that loss.
The Ontario Court of Appeal allowed Granite Power to claim for misfeasance in public office, finding that there were sufficient allegations that the province acted maliciously and in bad faith. Specifically it was alleged that the province had deliberately delayed its decision whether to grant an exemption to Granite Power. This made it difficult for Granite to make critical business decisions. The province was also accused of promoting its new energy policy in a fashion that allowed new retailers to get a foothold in the community. The Court of Appeal concluded that these allegations, if proved, would support a successful claim for misfeasance in public office.
The next energy decision involving this cause of action was Saskatchewan Power in 2006. The plaintiff complained that Saskatchewan Power, a state-owned utility, had used its monopoly position to engage in predatory pricing and had amended the terms of service in its supply contract unilaterally. The plaintiff argued that this amounted to misfeasance in public office.
The defendant brought a motion to strike the claim on the basis that the plaintiff had not identified any human being as having the requisite bad faith or malice to make up the tort. The defendant argued that Saskatchewan Power Corporation was incapable of having the necessary malice or intent. The Saskatchewan Court of Appeal held that this was not fatal to the claim. The Court interpreted ‘public office’, broadly stating that there was no reason to distinguish between the officeholder and the office itself. The claim was allowed to proceed.
The Trillium Wind case in Ontario is close to the fact situations in the NAFTA arbitrations in Mesa Power and Windstream Energy.
Trillium Power Wind Corporation, a Toronto-based developer building offshore wind turbines in Lake Ontario, applied to lease provincial land under Ontario’s wind power policy and had been granted applicant-of-record status by the Ministry of Natural Resources. That status gave Trillium three years to test the wind power. After that, the company could proceed with an environmental assessment and obtain authorisation to operate the wind farm.
Trillium subsequently notified the Ontario Ministry of Natural Resources that the company intended to close a C$26 million financing for the project. On the same day, the government of Ontario issued a moratorium on offshore wind development, including by developers like Trillium that had applicant-of-record status. The government issued a press release stating that the projects were cancelled pending further scientific research.
Trillium brought a number of claims against the Ontario government, seeking C$2 billion in damages. The claims included breach of contract, unjust enrichment, negligent misrepresentation, misfeasance in public office and intentional infliction of economic harm. The province brought a motion to strike the Trillium statement of claim on the basis that it did not disclose a reasonable cause of action. The motion was successful. The motion judge found that the government decision to close the wind farms was a policy decision and therefore immune from suit.
The motion judge also found that the fact that Trillium had been granted applicant-of-record status did not amount to a contractual relationship between Trillium and the government. The motion judge concluded that the claim should be struck because it was plain and obvious that the claim could not succeed at trial.
Trillium appealed on two grounds: first, misfeasance in public office was a tenable claim as a matter of law; and second, the claim had been adequately pleaded. The Ontario Court of Appeal agreed. It was not clear that the claim of misfeasance in public office would necessarily fail. Moreover, Trillium had properly pleaded that the province’s actions were taken in bad faith for improper purpose. The Court also found that the government’s decision was made to harm Trillium specifically. Although the Court of Appeal did agree with the motions judge that a government decision involving political factors was not the basis for a cause of action, there was an exception for irrational acts of bad faith. The facts in this case were unique. It was clear that Trillium’s announcement disclosing new financing triggered the government action. And, as the Court concluded, the government specifically targeted Trillium. The Court was clear that decisions motivated by political expediency do not constitute bad faith for the purpose of a tort claim, stating as follows:
Ministerial policy decisions made on the basis of political expediency are part and parcel of the policy-making process and, without more, there is nothing unlawful or in the nature of bad faith about a government taking into account public response to a policy matter and reacting accordingly.
The Court found that to make out ‘bad faith’ for the purpose of the tort of misfeasance in a public office, Ontario must have acted deliberately in a manner that was ‘inconsistent with the obligations of its office’.
Trillium never found its way to trial but Capital Power Solar did. The plaintiff, Capital Solar Power, was a small business that submitted applications to the microfit programme operated by the OPA, an agency of the Ontario government. These applications were submitted on behalf of their customers. In submitting these applications, Capital Solar Power relied on the microfit rules and pricing schedule provided by the OPA.
On 31 October 2011, the OPA announced a new pricing schedule. The rules required that the OPA provide 90 days’ notice of any changes. The OPA did not provide that notice.
As result of the new price changes, Capital Solar Power lost all its potential customers. Capital Solar Power then filed a claim against the OPA for misfeasance in public office because the OPA had amended the microfit programme without 90 days’ notice.
The court rejected the claim, finding that it was not issued for any improper purpose and there was no element of bad faith or dishonesty in the OPA’s actions. The court found the OPA made the changes in accordance with the direction from the Minister of Energy and was attempting to achieve a balance among common interests.
There was also some discussion of damages. The court reduced the damages claim from C$3 million to C$450,000. In the end, the court did not award any damages because the plaintiff has failed to establish liability against the OPA with respect to misfeasance in public office. The case reinforces the importance of the proposition that when it comes to the tort of misfeasance in public office, an essential component is that the plaintiff must establish a clear intent on the part of the public official to harm the defendant, or at least that she or he should have known that harm would result. That is known as ‘reckless disregard’.
State-to-state claims
There is no question that NAFTA has had a significant impact on the Canadian energy sector. It certainly has stimulated investment in the sector. And American investors have taken advantage of Chapter 11 to question the energy policy and regulatory decisions made in British Columbia, Alberta, Ontario, Quebec and Newfoundland. Ontario has been the main offender, with three cases to date questioning the province’s management of the FIT contract programme under the Green Energy Act.
Going forward, things will be different. Private investors from the United States no longer have any right to bring a NAFTA action on their own volition in Canada. Canadian investors have lost a similar right in the United States. The loss affects US investors most, and it is they who have been most active under Chapter 11 of NAFTA. Although the right to bring a private action is gone, the state-to-state action continues. This requires the investor to convince the relevant government to bring an action, which is not always easy.
The regime under the new Agreement is complicated in that it creates two classes of investors: priority investors and non-priority investors. The priority investors are investors that are parties to a government contractor in one of five sectors: oil and gas, power generation, telecommunications and infrastructure. The protection available to priority investors under the new Agreement is largely the same as under the old NAFTA.
For non-priority investors, the new Agreement it is not nearly as attractive as the old NAFTA. First, there is a requirement that those investors must exhaust all legal remedies in the local courts before they can bring a claim under the new Agreement. They cannot make an application until they have a final decision from the local courts or 30 months have passed. This may be of little concern to the energy sector, however. Investors in oil and gas and power generation qualify as priority investors and will not face this limitation.
Conclusion
The fact that Chapter 11 dispute resolutions have been abolished between Canada and the United States may not turn out to be that significant. The common law cases under the misfeasance in public office tort have not been that successful. But it looks like the cases under the new common law actions – disguised expropriation and good faith in contract performance – are much more promising. There is no reason to believe that US investors will not take advantage of this developing law. In fact, non-priority investors will be required to. As far as the Canadian regulators and governments are concerned, they should pay attention to the fact that these new causes of action, unlike NAFTA, are not limited to foreign investors and include domestic investors. While the publicity surrounding NAFTA has focused on foreign investors because they were the only ones that could exercise that remedy, the fact is just as much investment in renewable energy throughout Canada comes from domestic investors as foreign investors. Put differently, the surveillance and policing of dubious policy decisions that discriminate against particular parties is not going away. If anything, it will increase.
One last comment may be in order. Although investors may continue to have protection through common law remedies, a treaty is a treaty. Government liability is clear. Common law remedies, however, are still subject to legislation and most jurisdictions have some form of legislation setting out various forms of crown immunity. That argument is being raised in the Trillium case before the Ontario courts. It will be an important decision.
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