NAFTA - Chapter 11 - Investment

Cases Filed Against the Government of Canada

Mobil Investments Inc. and Murphy Oil Corporation v. Government of Canada

Claimant

Mobil Investments Canada Inc. (“Mobil”) and Murphy Oil Corporation (“Murphy”) are two corporations incorporated in the U.S. with subsidiaries located in Canada. Mobil and Murphy each hold interests in two petroleum development projects in the Canada-Newfoundland and Labrador offshore, known as the Hibernia and Terra Nova offshore oil projects.

Articles

  • 1105 (Minimum Standard of Treatment)
  • 1106 (Performance Requirements)

Damages claimed

$66 million CAD.

Arbitration Rules

ICSID Additional Facility Rules

Summary

Procedural history

On August 2, 2007, Mobil submitted a Notice of Intent to Submit a Claim to Arbitration, and on August 7, 2007, Murphy submitted a similar Notice of Intent. On November 2, 2007, Mobil Investments Canada, Inc. and Murphy Oil Corporation together served a Notice of Arbitration on the Government of Canada. They argued that the Guidelines on Research and Development Expenditures (“Guidelines”) adopted by the Canada-Newfoundland and Labrador Offshore Petroleum Board (“Board”) have caused, and will cause in the future, approximately $66 million in damages to their investments in the Hibernia and Terra Nova projects.

The Tribunal held a hearing on Liability and Damages in Washington, D.C. in October 2010, issued its Decision on May 22, 2012, and issued its Final Award, incorporating and attaching the Decision, on February 22, 2015.

Factual overview and nature of the claim

The Board established under federal and provincial legislation (the “Accord Implementation Acts”), regulates offshore oil development projects in Newfoundland and Labrador. In November 2004, the Board adopted the Guidelines which require operators of offshore petroleum projects to contribute a certain percentage of their revenue to research and development and education and training in the Province of Newfoundland and Labrador. The Board added a new condition to the authorizations for the Hibernia and Terra Nova projects, requiring the operators of the oil fields to comply with the Guidelines as issued by the Board on November 5, 2004, and taking effect from April 1, 2004. Although Hibernia and Terra Nova had previously approved Benefits Plans, new R&D expenditures were imposed on the projects as a result of the Guidelines. In 2007, Mobil Investments Inc. and Murphy Oil Corporation, U.S.-based investors in the Terra Nova and Hibernia projects, initiated a claim related to the 2004 Guidelines established by the Board.

Decision on Liability and Final Award

In its May 22, 2012 Decision on Liability and Principles of Quantum, the Tribunal rejected the claim for breach of Article 1105 but accepted that the Guidelines are inconsistent with Article 1106.

The Tribunal agreed with Canada that the threshold for a breach of Article 1105 is high. It agreed that the Article 1105 “standards are set … at a level which protects against egregious behaviour.” When deciding whether a State's conduct falls below that standard, the Tribunal accepted that the State’s failure to fulfil legitimate expectations arising from “clear and explicit representations … in order to induce the investment” is a “relevant factor.” The Tribunal held that, since there was no evidence of clear and explicit representations that the Guidelines would not be introduced, there could not be a breach of Article 1105.

The Tribunal accepted the Claimants’ argument that the Guidelines are inconsistent with NAFTA Article 1106(1)(c), which prohibits requirements “to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory.”

The Tribunal rejected Canada’s argument that the word “services” in Article 1106(1)(c) does not include research and development and education and training. The Tribunal also rejected Canada’s argument that there was no requirement to purchase, use or accord a preference to local goods or services because, even though it is “possible to identify a small number of examples indicating that operators may not necessarily be compelled to purchase domestic goods or services … the reality is that the implementation of the 2004 Guidelines would, in practice, require local expenditures.”

Finally, the Tribunal rejected Canada’s argument that there was no compulsion to “purchase, use or accord a preference” to “services provided” because the Claimants could fulfil their Guidelines requirements through in-house research and development and education and training. The Tribunal held that there is no requirement in Article 1106(1)(c) that the service is provided from one entity to another.

By a majority of two to one, the Tribunal rejected Canada’s argument that the Guidelines are reserved from the obligations of Article 1106 because they fall within Canada’s Annex I reservation for the Accord Implementation Acts and subsequent “subordinate measures.” According to the majority, to fall within the reservation for a measure listed in Annex I, the alleged subordinate measure (in this case, the Guidelines) must not only be under the authority of and consistent with the measure listed in Annex I (in this case, the Accord Implementation Acts), but also relevant intervening subordinate measures (such as the Hibernia and Terra Nova Benefits Plans, which the Board had approved prior to the adoption of the Guidelines). The majority of the Tribunal found that the Guidelines are not “consistent with” the Hibernia and Terra Nova Benefits Plans and are thus not a reserved subordinate measure under Annex I.

After finding that the Guidelines were inconsistent with Article 1106 and do not fall within the reservation for the Accord Implementation Acts, the majority turned to address the damages suffered by the Claimants from the breach. The majority ultimately found that the Claimants’ evaluation of future damages was “extremely hazardous” and not, on balance, probable. 

The majority also agreed with Canada that the Claimants are only entitled to “actual damages”, which, according to them, “occur when there is a firm obligation to make a payment and there is a call for payment or expenditure, or the occurrence of payment or expenditure has transpired.” The majority suggested that “actual damages” are any current spending shortfalls (obligations under the Guidelines less ordinary course spending on research and development and education and training) secured by a promissory note, line of credit, or some other type of performance bond.

The majority of the Tribunal invited the parties to file further submissions on the “actual damages” that the Claimants have suffered as a result of the breach of Article 1106 before issuing a final award on the quantum of damages.

On February 20, 2015, the Tribunal issued its Final Award, where, by majority, it awarded Mobil Investments Canada Inc. $13.893 million CAD plus interest and Murphy Oil Corporation $3.401 million CAD in damages plus interest for the period 2004-2012.

The Tribunal decided that each party shall bear their own costs of the arbitration.

Status

Set-aside proceedings

On May 19, 2015, Canada filed a notice of application in the Ontario Superior Court of Justice in Toronto to set aside the Tribunal’s award of February 20, 2015. Canada argued that the finding of liability by the majority of the Tribunal in May 2012 on the basis of non-application of Canada’s Annex I reservation for the Canada-Newfoundland Accord Act was outside the jurisdiction of the tribunal.

The Government of Canada’s factum was filed on September 25, 2015 at the Ontario Superior Court of Justice in Toronto. Mobil filed its response on November 13, 2015. A hearing is scheduled for January 29, 2016.

Legal Documents (all documents are in pdf)

This case was governed by the Additional Facility rules of the International Centre for Settlement of Investment Disputes (ICSID).  Additional documents related to this case can be viewed at the website of ICSID.

Copies of all legal documents posted have been prepared in a language of operation of the Tribunal or Court in question. The Government of Canada has not modified or changed them in any way. As such they have not been translated from the original. They are provided in Acrobat (pdf) files. To view or download pdf files you need Adobe® Acrobat® Reader™ a free software that you can download from the web.

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Application to the Ontario Superior Court of Justice for Set Aside of the Award

On May 19, 2015, Canada filed an application with the Ontario Superior Court of Justice seeking to set aside the award on the grounds that the Tribunal exceeded its jurisdiction.

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