US forestry company and Canada dispute British Columbia logging regulations

By Elizabeth Whitsitt
8 June 2009

Oral hearings were held in May over a claim by an American forestry and land management company against the Government of Canada for damages of US$25 million for alleged breaches of NAFTA Chapter 11.

At the heart of Merrill & Ring’s complaint is a complex regulatory regime in Canada that controls the export of logs out of the Canadian province of British Columbia (BC). All logs exported from Canada require federal export permits for any destination.  Logs exported from BC, however, are subject to different export permit application procedures depending on whether the federal or provincial government owns the land from which logs are harvested.

Under both regulatory schemes, log exporters in BC must comply with a surplus testing process before they are considered eligible for an export permit.  Specifically, the surplus testing process requires that logs harvested from either federal or provincial lands in BC be deemed “surplus” to BC’s needs before they can be exported.  BC, however, is the only Canadian province in which the federal government exercises its authority to control the export of logs harvested from federal lands through a surplus testing process.  As such, log exports generated from timber grown on federal lands in another province do not have to be deemed “surplus” to that province’s needs before they can be exported.

In addition to the surplus testing process, potential exporters whose logs are harvested from timber grown on provincial lands may obtain an export permit when: (i) timber cannot be processed and/or transported economically by or for a mill in BC (the “economic exemption”) and/or (ii) permitting the export of logs from BC would prevent the waste of or improve the use of timber from provincially owned lands (the “utilization exemption”).

Potential exporters whose logs are harvested from timber grown on federal lands in BC are not entitled to obtain an export permit on the basis of an economic or utilization exemption.

Merrill & Ring claims that the economic and utilization exemptions available exclusively to provincial landowners under the BC Forest Act provide them with significant advantages, including: (i) increased revenues because such landowners have a greater likelihood of obtaining the international price for logs instead of the BC price, (ii) reduced compliance costs because such landowners do not have to go through the surplus testing process if they can obtain an economic or utilization exemption, and (iii) longer term contracts because such landowners are better able to provide a predictable timber supply to international buyers.

Moreover, Merrill & Ring argues that the surplus testing process—which is only applicable to log exports generated from timber grown on federal lands in BC—provides similar advantages to those investors and investments situated in other Canadian provinces.

As a result, Merrill & Ring claims that Canada, among other things, has breached its obligations under Section A of Chapter 11 of NAFTA, including Articles 1102 (National Treatment), 1105 (International Standards of Treatment), 1106 (Performance Requirements), and 1110 (Expropriation).

While Canada disputes the foregoing alleged breaches, its primary argument is an objection to jurisdiction of the Tribunal.  Specifically, Canada asserts that Merrill & Ring’s claim is time barred.  Article 1116(2) prevents an investor from making a claim “if more than three years have elapsed from the date on which the investor first acquired, or should have first acquired, knowledge of the alleged breach and knowledge that the investor has incurred loss or damage.”

Noting that the regulation governing timber grown on federal lands has been in effect since 1998, Canada claims that Merrill & Ring has known about the alleged breaches of NAFTA Chapter 11 for almost a decade, and certainly more than three years, before it commenced arbitral proceedings in this case.   Consequently, Canada has requested that the Tribunal dismiss Merrill & Ring’s claim without further consideration.