What the KXL and NAFTA filing is about
This article from JWN Energy provides a great summary of what the Keystone XL and NAFTA court item is all about.
TransCanada’s NAFTA claim “has merit”: 10 things you need to know
By Deborah Jaremko
June 27, 2016, 7:47 a.m.
TransCanada Corporation has formally filed the $15-billion NAFTA claim against the U.S. it announced in January over damages based on the rejection of Keystone XL.
Earlier this year we asked Matthew Kronby, partner at Bennett Jones Toronto, to explain why he thinks the claim has merit.
- The claim is about discrimination, expropriation and unreasonable conduct
MK: The claims they are putting forward relate to three substantive obligations of the NAFTA that they are alleging the U.S. has violated. One is so-called minimum standard of treatment, which is really about whether the U.S. engaged in conduct that was so arbitrary and unreasonable that it amounts to a violation of international law and they’ve made some decent arguments that it has.
There is also a claim of expropriation. This is a regulatory expropriation, you’re not talking about a situation where the U.S. government has actually taken title to or nationalized the assets of a foreign investor, but where it has engaged in conduct that had the effect of eliminating substantially all of the economic value of the investor’s investment. We’re not talking sure things here, but arguably it is.
The U.S. will come back and say something like ‘No, this is simply an exercise of appropriate regulatory authority to protect health or the environment and that is not considered a form of expropriation,’ and that will have to be played out.
If the claim is to be believed, and there is pretty good evidence of it, at least initially, the U.S. administration disregarded its findings that there were not significant health, safety or environmental concerns raised by the project.
And then there is this whole issue of discrimination, which is also basis for a claim for damages under the NAFTA. There are two forms of discrimination, and the notice of intent seems to raise both. One is called ‘violation of national treatment,’ which means that the foreign investor and its direct guaranteed investment is being treated less favorably than a U.S. investor or investment in like circumstances.
The other is ‘most favored nations’ treatment, and the argument here might also be that the U.S. has treated the Canadian investor and its investment less favorably than it has treated third-country investors and their investments, again in like circumstances.
- The U.S. has never lost a NAFTA investment claim
MK: One of the reasons the U.S. record is good under the NAFTA is that a lot of the claims that have been brought against the U.S. really don’t have merit.
Experienced trade lawyers can look at them right away and say, ‘this is going nowhere,’ but certainly that is not the feeling you get when you read the [TransCanada] notice of intent.
There haven’t been as many claims made against the U.S. as against Canada or Mexico. U.S. investors tend to be more litigious than Canadian or Mexican ones, but on a fundamental level there is simply more U.S. outbound investment in Canada or Mexico than there is Canadian investment or Mexican investment in the U.S. or in each other.
[TransCanada] says there are other pipeline projects that did not face the same kind of scrutiny that were granted approvals in much the same circumstances, where they were not subjected to the same kind of additional criteria that the administration imposed on TransCanada and Keystone XL, and that is discriminatory. There is something there.
- Canada and Mexico have both taken the loss for less extreme alleged conduct
MK: Canada and Mexico both have lost cases, some of them I would argue in circumstances where, if you accept that the U.S. government conduct is as claimed in the notice of intent by TransCanada, the conduct was not as egregious as what is being claimed here.
- The case is important for Canadians
MK: As a Canadian viewing this, in my case as a former Canadian government official who had to defend these things when they were brought against Canada, you want to see that the tribunal is considering the claims carefully on their merit and that the U.S. isn’t being accorded special deference simply because it is the U.S. government.
- What if the U.S. loses this claim?
MK: It would show that the investor-state dispute settlement under the NAFTA is not a one-way street from the perspective of the U.S. It would demonstrate that the U.S. is being held to the same standard under the NAFTA as Canada and Mexico.
[The claim is] going to increase the scrutiny on investor state arbitration not only under the NAFTA but in other treaties that the U.S. either has negotiated or is negotiating, for example the Trans Pacific Partnership, and possible inclusion of investment arbitration provisions in the free trade negotiations between the U.S. and the E.U. The U.S. is also in the process of negotiating a bilateral investment treaty with China.
What a claim like this demonstrates is that the U.S. can also be on the receiving end of claims and foreign investors will be looking to hold the U.S. to the same standards that it demands of foreign governments with respect to U.S. investors.
- The tribunal will have to face difficult questions
MK: [The claim is] going to force them to think about how much latitude a government has to introduce purely political calculations into regulatory decisions, and also the extent to which it can bring foreign policy calculations into those decisions, including important objectives like dealing with climate change.
The U.S. seems to be justifying the rejection of TransCanada’s application for Keystone XL at least partly on the basis that it was important for the U.S. in negotiating a climate change treaty to demonstrate leadership by rejecting this pipeline.
Arguably, as the U.S.’s own studies seem to have indicated, the pipeline itself would not have had a significant effect on climate change or on environmental concerns more generally, but it was widely perceived to and arguably might have affected the U.S.’s moral authority in the Paris negotiations.
- It’s not political
MK: Investment treaties are intended to depoliticize this kind of investment disputes, give the investor the opportunity to bring claims itself against the host government and have those claims heard by neutral arbitrators partly of its choosing.
This therefore removes this from the political realm and moves it into an international legal realm.
- It’s going to take years
MK: Usually the first thing once the tribunal is constituted is you get at least one and often a series of procedural orders where the tribunal essentially sets out how the arbitration will be conducted including a schedule for the arbitration.
Tribunals can make various forms of interim decisions short of the final award but they are not going to necessarily be instructive as to where they’re going to come out on the ultimate merits of the claim.
It is possible and often happens that the claims are bifurcated in such a way where the tribunal first decides on liability and then separately hears proceedings on the issue of damages.
Particularly when you have a very large damages claim like this one, they might well want to bifurcate and parties may want them to. You may get an award on liability followed by subsequently an award on damages.
- Watch what happens next
MK: We will watch who the parties appoint as their arbitrators, and third the initial procedural order from the arbitrators on how they are planning on organizing the arbitration. Then we’ll be looking for the substantive submissions by the parties where we will see more detail about the claim and also more detail about the defense.
- Nothing is a sure thing
MK: When we say it appears to have merit, obviously it’s not the same as saying it will succeed.