NAFTA - Chapter 11 - Investment

Cases filed against the Government of Canada

Clayton/Bilcon v. Government of Canada

Claimant

The Claytons and Bilcon of Delaware Inc., (Bilcon) are U.S. investors who own and control shares in a Canadian subsidiary named Bilcon of Nova Scotia to operate the Whites Point project, the purpose of which was to provide a reliable supply of aggregate for Bilcon of Delaware and the Clayton Group of Companies. Bilcon entered into a partnership with a Nova Scotia company, Nova Stone Exporters, to develop a quarry and marine terminal at Whites Point Quarry. The partnership was acquired entirely by Bilcon in 2004.

Agreement

North American Free Trade Agreement (NAFTA)

Articles

• 1102 (National Treatment)
• 1103 (Most-Favoured Nation Treatment)
• 1105 (Minimum Standard of Treatment)

Damages claimed

US $443,350,772.00

Status

Suspended.

The proceedings were bifurcated between a liability and a damages phase. In the liability phase, the Tribunal found that Canada breached NAFTA Articles 1102 and 1105. Canada applied to have this award set aside in the Federal Court of Canada and its application was dismissed. In the damages phase, the Claimants claimed US $443,350,772.00, and the Tribunal awarded damages of US $7 million plus interest.  The Claimants applied to have this award set aside in the Ontario Superior Court and this application has been dismissed.  The Claimants appealed this decision. The appeal is ongoing. The NAFTA Tribunal costs proceedings and any accrual of interest are suspended while the set aside proceedings are ongoing. 

Arbitration rules

UNCITRAL

Summary

Procedural history

On February 5, 2008, William Ralph Clayton et al. and Bilcon of Delaware, Inc. submitted a Notice of Intent to Submit a Claim to Arbitration, and on May 26, 2008, they served a Notice of Arbitration on the Government of Canada. After the disputing parties exchanged pleadings, the Tribunal held a hearing on jurisdiction and liability in Toronto, ON from October 22 to 31, 2013, and issued its Award on Jurisdiction and Liability on March 17, 2015. As the Tribunal found Canada liable for having breached NAFTA, the proceedings moved into a damages phase during which the disputing parties exchanged pleadings and participated in a hearing on damages in Toronto, ON from February 19 to 28, 2018.  The Tribunal issued its Award on Damages on January 10, 2019. The costs proceedings and interest are suspended while the set aside proceedings are ongoing.

Factual overview and nature of the claim

The Claimants allege that the Environmental Assessment (EA) that was undertaken by the Government of Canada and the Government of Nova Scotia for the Whites Point project, along with the administration and conduct of the EA, were arbitrary, discriminatory and unfair. The Claimants do not dispute the fact that EAs were required before construction and operating of industrial projects was to begin, although they allege that Canada’s environmental regulatory regime was applied to the project in an arbitrary, unfair and discriminatory manner.

The governments of Canada and Nova Scotia jointly conducted the EA for the Whites Point project from 2003 to 2007.  As the governments jointly determined that the project engaged widespread public concern and the possibility of significant adverse environmental effects, the EA was referred to a Joint Review Panel (JRP), which was comprised of three professors from Dalhousie University.

The JRP gathered information on the environmental effects of the Whites Point project, held public hearings, and issued a recommendation to government decision-makers that the Whites Point project should not be permitted to proceed because it would have a significant and adverse environmental effect on the “community core values” of the Digby Neck. “Community core values” were defined by the JRP as shared beliefs by individuals in a group that constitute defining features of the community. Nova Scotia and the federal government rejected the project in late 2007. The Government of Canada specifically concluded, under the former Canadian Environmental Assessment Act, that the project was likely to cause significant and adverse environmental effects that were not justified.

Award on Jurisdiction and Liability

In its March 17, 2015 Award on Jurisdiction and Liability, the Tribunal found Canada liable for having breached its obligations under Articles 1105 and 1102.

The Tribunal agreed with Canada that the Claimants challenged a number of decisions made over the course of the EA that were made more than three years prior to the commencement of Bilcon’s NAFTA claim. As such, the claims regarding these decisions were time-barred under Article 1116(2).

The Tribunal disagreed however with Canada’s argument that the actions of the JRP were not attributable to it. It found that the JRP was part of the apparatus of the Government of Canada and exercised elements of Canadian governmental authority. It also found that Canada had acknowledged and adopted the actions of the JRP as its own.

A majority of the Tribunal found Canada liable for having breached its Minimum Standard of Treatment obligation under Article 1105(1). This provision requires that investors’ investments of NAFTA Parties be treated “in accordance with international law, including fair and equitable treatment and full protection and security” and prescribes the customary international law minimum standard of treatment of aliens as the applicable standard. The majority’s findings were based on the fact that the JRP’s recommendation relied on the application of a standard, “community core values,” that was not found in Canadian law and therefore that there was a lack of due process because the proponents were not given an opportunity to make a case based on this criterion. Professor Donald McRae issued a dissenting opinion related to the finding of a breach of Article 1105. In the dissent, Professor McRae disagreed with the majority’s determination that the JRP departed in fundamental ways from the standard of evaluation required by the laws of Canada. He also expressed disagreement with the effect of the majority’s decision on the threshold for the application of the standard under Article 1105.

The majority also found Canada liable for having breached its National Treatment obligation under Article 1102. This provision requires Canada to accord NAFTA investors treatment no less favourable than that which it accords, in like circumstances, to domestic investors. The majority’s finding was based on the fact that the standard applied by the JRP had not been applied in other environmental assessments and the government had not shown any legitimate non-discriminatory reason for such difference in treatment.

The United States, Mexico and Canada criticized the Tribunal’s award in submissions filed in the Mesa Power Group, LLC v. Government of Canada arbitration. The three NAFTA Parties have stated that the Tribunal failed to adequately address nationality-based discrimination in its analysis of Bilcon’s Article 1102 claim, failed to properly assess customary international law for the purposes of determining the content of Article 1105, and incorrectly concluded that alleged violations of Canadian law amounted to a violation of the customary international law minimum standard of treatment.

Award on Damages

In the damages phase of the arbitration, the Claimants claimed US $443,350,772.00 in damages, representing the loss of profits they allege that they suffered as a result of the NAFTA breaches. On January 10, 2019 the Tribunal issued its Award on Damages in which it awarded the Claimants US $7 million plus interest.  

In the damages Award, the Tribunal concluded that a NAFTA compliant EA process would not, in all probability, have resulted in the approval and successful construction and operation of the Claimants’ proposed project.  This was because various outcomes of a NAFTA-compliant JRP process – including rejection of the project or imposition of mitigation conditions that would render the project economically unviable – were reasonably conceivable.  As such, the Tribunal found the injury suffered by the Claimants was not the denial of their project, but rather the denial of an opportunity to have the environmental impact of the project assessed in a fair and non-arbitrary manner. The Tribunal quantified the compensation owing to the Claimants on this basis. 

In so doing the Tribunal considered the amounts incurred by the Claimants in developing the project, including during the EA process, as a primary indicator of the value of the Claimants’ lost opportunity. The Tribunal also considered several valuations of the unpermitted project over the course of the EA proceedings as secondary indicator of value. Based on these indicators, the Tribunal determined the value of the opportunity lost by the Claimants in respect of the project to be US $7 million.   

Legal documents

This case is being governed by the arbitral rules of the United Nations Commission on International Trade Law.  Legal documents related to this case can be viewed at the website of the Permanent Court of Arbitration.

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.

The Government of Canada is not responsible for the accuracy, reliability or currency of the information supplied by external sources. Users wishing to rely upon this information should consult directly with the source of the information. Content provided by external sources is not subject to official languages, privacy and accessibility requirements.

Applications for Set Aside

On June 16, 2015, Canada filed a notice of application with the Federal Court of Canada seeking to set aside the Award on Jurisdiction and Liability, on the grounds that the Tribunal exceeded its jurisdiction and that the award is in conflict with the public policy of Canada. The Federal Court dismissed this application on May 2, 2018.

On April 8, 2019, the Claimants filed a notice of application with the Ontario Superior Court seeking to set aside the Award on Damages, on the grounds that the Tribunal rendered an award beyond the terms and scope of the Parties' consensual submission to arbitration, and in conflict with the public policy of Canada. The Court dismissed the Claimants’ set aside application for the damages award on November 24, 2022. The Claimants appealed this decision to the Ontario Court of Appeal on December 28, 2022; the appeal process is ongoing.