{"id":2859,"date":"2013-03-25T03:33:17","date_gmt":"2013-03-25T08:33:17","guid":{"rendered":"http:\/\/itn.mattrock.ca\/?p=2859"},"modified":"2019-06-21T08:33:58","modified_gmt":"2019-06-21T13:33:58","slug":"awards-and-decisions-11","status":"publish","type":"post","link":"https:\/\/www.iisd.org\/itn\/2013\/03\/25\/awards-and-decisions-11\/","title":{"rendered":"Awards and Decisions"},"content":{"rendered":"

Claim against Venezuela dismissed; State acted legitimately in response to contractual violations<\/b>
\nVannessa Ventures Ltd. v. Bolivarian Republic of Venezuela<\/em>, ICSID<\/span> Case No. ARB(AF)04\/6<\/p>\n

Damon Vis-Dunbar<\/p>\n

A claim by Vannessa Ventures against Venezuela has been rejected on its merits, with the tribunal concluding in January 16, 2013 decision that Venezuela had responded properly to contractual violations. The Canadian company had sought over $1 billion in damages, arguing that its newly acquired stake in a Venezuelan mining operation was expropriated.<\/p>\n

Background <\/i><\/p>\n

Vannessa acquired its share in the mining project from another Canadian firm, Placer Dome, for a nominal fee of $50. Earlier, Placer Dome had entered into a joint venture with Corporaci\u00f3n Venezolana de Guayana (CVG), a state agency. Under a shareholders agreement, Placer Dome and CVG formed a company called MINCA for the exploration and extraction of gold from the Las Cristinas mine.<\/p>\n

Shortly after the mine was inaugurated in 1999, Placer Dome sought to suspend the project on the basis that it was economically unfeasible at a time of low gold prices. CVG agreed to a temporary suspension while a search was conducted for a new investor. That search proved difficult, however, and the parties failed to secure a willing investor.<\/p>\n

With time running out on the temporary suspension of the project, Placer Dome entered into negotiations with Vannessa Ventures, a Vancouver-based company. CVG was not consulted on those negotiations, and it was not until after a deal had been struck that CVG was informed.<\/p>\n

The agreement with Vanessa granted Placer Dome a share of the revenues should Vannessa exploit Las Cristinas. Notably, it also promised Placer Dome a share of any damages that may be awarded should Vannessa sue Venezuela for breach of contract.<\/p>\n

CVG viewed the deal as \u201cunpleasant and insincere,\u201d and citing a number of contractual violations, moved to rescind the work contract and concessions attached to the Cristinas mine. After a set of legal proceedings in Venezuelan courts, Vannessa lodged a claim at ICSID for breaches of the Canada-Venezuela BIT<\/span> in 2004.<\/p>\n

Jurisdiction <\/i><\/p>\n

The majority of the tribunal accepted jurisdiction, while one unnamed member declined. In declining jurisdiction, the unnamed arbitrator concluded that Vannessa\u2019s investment had not been made in \u201cgood faith,\u201d as required by Venezuelan law. However, in the majority\u2019s view the issue of good faith was better dealt with in the merits stage of the proceedings.<\/p>\n

Despite the differences of opinion over jurisdiction, all three members of the tribunal signed on to the final award. The dissenting arbitrator explained that if jurisdiction existed, then the claim should fail for the reasons described by the tribunal in the merits stage.<\/p>\n

Expropriation and FET<\/span> <\/i><\/p>\n

Turning to the merits, the tribunal considered Vannessa\u2019s claim that Venezuela had breached the BIT\u2019s provisions on expropriation and fair and equitable treatment.<\/p>\n

Vannessa argued that contractual rights could be considered expropriated when \u201cthe State has gone beyond its role as a mere party to the contract and relied on its superior governmental power.\u201d However, tribunal added that \u201cin order to amount to an expropriation under international law, it is necessary that the conduct of the State should go beyond that which an ordinary contracting party could adopt.\u201d<\/p>\n

Turning to the facts of this case, the tribunal concluded that CVG has responded legitimately to contractual breaches. The tribunal emphasised that Placer Dome was required to cooperate with CVG in selecting a new investor, but instead the firm \u201cengaged in secret negotiations and share transfers with Vannessa, only to \u2018inform\u2019 CVG after the fact …\u201d<\/p>\n

The tribunal emphasised that CVG had carefully selected Placer Dome for its expertise and resources. In contrast, Vannessa lacked experience, and failed to put in place a plan for developing the Las Cristinas mine.<\/p>\n

The tribunal also had little difficulty in dismissing claims that Venezuela had breached the BITs provisions on \u2018fair and equitable treatment\u2019 and \u2018full protection and security.\u2019 These standards have been interpreted in different ways, noted the tribunal, but they have not been formulated in in terms that would support Vannessa\u2019s claim.<\/p>\n

Costs\u00a0 <\/i><\/p>\n

The tribunal ruled that each party should bear its own legal costs, and share the arbitration fees, noting that Vannessa had succeeded on jurisdiction while failing on the merits.<\/p>\n

The parties spent considerable, albeit considerably different, sums on their legal fees\u2014more than $20 million for Venezuela, and less than half of that by Vannessa. The tribunal commented that the expense is \u201cregrettable,\u201d for what should have been \u201can efficient and reasonable expeditious procedure.\u201d<\/p>\n

The arbitrators in the case are Vaughan Lowe (president), Charles N. Bower (claimant\u2019s nominee), and Brigitte Stern (respondent\u2019s nominee).<\/p>\n

The award is available here: http:\/\/italaw.com\/sites\/default\/files\/case-documents\/italaw1250.pdf<\/b><\/p>\n

Tribunal accepts jurisdiction in claim by Spanish investors over investment in Argentine airlines<\/strong>
\nTeinver S.A., Transportes de Cercan\u00edas S.A. and Autobuses Urbanos del Sur S.A. v. The Argentine Republic, <\/i>ICSID Case No. ARB\/09\/1, <\/i>Decision on Jurisdiction<\/p>\n

Larisa Babiy<\/p>\n

In a decision rendered on December 21, 2012, an ICSID tribunal gave the green light to hear a case brought by Spanish claimants against Argentina. The tribunal\u2019s decision, however, was not unanimous and Argentina\u2019s nominee, Kamal Hossain, accompanied the award with his separate opinion.<\/p>\n

The claimants, acting under the Spain-Argentina BIT, alleged that Argentina expropriated their investment in two local airlines. In particular, the investors denounced various disagreements with the Republic, starting in 2004 or earlier, including disputes on the imposition of airfare caps, which culminated in the 2008 nationalization of the airlines. According to the claimants, Argentina\u2019s conduct amounted both to a \u201cformal\u201d and to a \u201ccreeping\u201d expropriation.<\/p>\n

Argentina objected to the tribunal\u2019s jurisdiction on several grounds. First, it maintained that the claimants failed to meet the pre-arbitration requirements set forth in the BIT. Second, it objected that the claimants lacked legal standing in the dispute. Third, it claimed that the tribunal lacked jurisdiction over certain claimants\u2019 allegations since the conduct invoked was not attributable to the Republic. Finally, Argentina stated that the investment at stake was not an investment protected under the BIT because it was tainted by illegality.<\/p>\n

Parties clash over pre-arbitration requirements and MFN<\/span> clause.<\/i><\/p>\n

The first of Argentina\u2019s objections regarded the claimants\u2019 failure to fulfill the procedural requirements set forth in Article X of the BIT. In particular, Argentina asserted that the investors neglected the obligation to give a formal notice of the existence of a dispute under the BIT to the competent Argentine authorities. Moreover, Argentina submitted that none of the documents provided by the claimants proved that they undertook amicable negotiations for six months, as mandated by the BIT. Finally, Argentina argued that the investors disregarded the requirement to submit the dispute to local courts for 18-months before commencing the arbitration.<\/p>\n

Conversely, the claimants maintained that they complied with all pre-arbitration requirements and that, in any event, any negotiation or local court litigation would have been futile at this stage of the proceedings. Moreover, the investors invoked the most favored nation (MFN) clause of the BIT to circumvent such procedural requirements.<\/p>\n

The tribunal sided with the claimants. It first held that the ordinary meaning of Article X did not suggest any obligation upon the investor to formally notify the host state of the existence of a dispute under the BIT. The tribunal then looked into the jurisprudence of the International Court of Justice (ICJ) to determine when exactly the dispute had arisen between the parties and recalled that \u201cfor a dispute to exist, it must have crystallized in an actual disagreement\u201d.<\/p>\n

While it was clear that the dispute over the airfare caps arose at least 6 months before the filing of the arbitration, the same was less clear with regard to the disagreement on the expropriation of the claimants\u2019 shares in the airlines. The tribunal, however, considered that the two disagreements were \u201csufficiently related\u201d and thus, the consultations conducted with regard to the first disagreement were enough to satisfy the negotiation requirement under the BIT.<\/p>\n

With regard to the local courts requirement, the claimants pointed at an expropriation lawsuit initiated by Argentina before national courts. The tribunal noted that the BIT allowed \u201ceither party\u201d to initiate local court proceedings for the purpose of Article X. Looking again into the ICJ jurisprudence, it stated that it was enough for the local court proceedings to have centered on the \u201cessence\u201d of the BIT claim. Therefore, the tribunal concluded that the local courts requirement had been fulfilled.<\/p>\n

Although the tribunal already found that all pre-arbitration requirements had been fulfilled, it decided to address the claimants\u2019 controversial argument on the MFN clause. The investors claimed that this provision allowed them to rely on the Australia-Argentina BIT, which contained no pre-arbitration requirements. The tribunal found that the broad language of the MFN clause and the absence of any limitation as to its scope allowed the claimants to invoke the dispute resolution provision contained in the Australia-Argentina BIT.<\/p>\n

BIT deemed to cover derivative and indirect claims.<\/i><\/p>\n

Argentina argued that the claimants lacked legal standing because they only had indirect<\/i> shareholdings in the airlines. In fact, they held their shares through a subsidiary, Air Comet S.A. The tribunal, however, dismissed Argentina\u2019s argument, finding that the broad language of the BIT (which refers to investments as \u201cany kind of asset\u201d) <\/i>\u201cimplicitly permits the kinds of claims that Claimants have advanced\u201d <\/i>and <\/i>\u201csuggests that shares held through subsidiaries\u201d is not excluded from the coverage of the BIT.<\/p>\n

Third-party funding and reorganization proceedings<\/i><\/p>\n

Argentina further objected to the claimants\u2019 legal standing, pointing to their recent reorganization proceedings in Spain and at the existence of a third-party funder. The tribunal, however, stressed that international case law consistently found that jurisdiction shall be assessed at the date the case is filed. Since all the events cited by Argentina post-dated the filing of the case, they were irrelevant for the tribunal\u2019s jurisdiction.<\/p>\n

In addressing Argentina\u2019s last objections, the tribunal decided that those relating to the attribution of certain acts to Argentina were too fact-intensive to be decided at the jurisdictional stage. Finally, the tribunal dismissed Argentina\u2019s argument on the illegality of claimant\u2019s investment, since none of Argentina\u2019s allegations referred to illegalities in \u201centering\u201d into the investment.<\/p>\n

The separate opinion<\/i><\/p>\n

Argentina\u2019s nominee, Kamal Hossain, first criticized the majority decision to take a stand on the claimants\u2019 invocation of the MFN clause. He stated that since the jurisdictional issues could have been resolved by simply relying on an express provision, Article X of the BIT, a further ruling on the MFN was unjustified. All the more so, since the interpretation and application of this clause is subject to ongoing controversy.<\/p>\n

Dr. Hossain then expressed his reservation on the legal analysis of the MFN clause conducted by his co-arbitrators, quoting extensively from recent investment law publications and from Prof. Brigitte Stern\u2019s dissenting opinion in the Impregilo v. Argentina<\/i> case.<\/p>\n

Dr. Hossain also disagreed with the majority finding that indirect shareholdings constituted a protected investment under the BIT. He considered that on a plain reading of the BIT \u201cshares held in a company means shares directly held, unless indirectly held shares are expressly included.\u201d <\/i>To state otherwise would widen the scope of the BIT \u201cwithout limit\u201d.<\/i><\/p>\n

The arbitrators in the case are Thomas Buergenthal (President), Henri Alvarez (claimants\u2019 nominee) and Kamal Hossain (Argentina\u2019s nominee).<\/p>\n

The decision on jurisdiction is available here: http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw1090.pdf<\/a><\/p>\n

Dr. Hossain\u2019s separate opinion is available here: http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw1092_0.pdf<\/a><\/p>\n

US investor wins ICSID claim against Ecuador on grounds of expropriation
\n<\/b>Burlington Resource Inc. v. Republic of Ecuador<\/i>, ICSID Case No. ARB\/08\/5<\/b><\/p>\n

Yalan Liu<\/p>\n

In a December 14, 2012, decision on liability, an ICSID tribunal ruled that Ecuador expropriated a US oil and gas company\u2019s investment in violation of the US-Ecuador bilateral investment treaty (BIT). The quantum of damage was left for future decision.<\/p>\n

Background<\/i><\/p>\n

Burlington Oriente, a subsidiary of the claimant Burlington Resource Inc. (Burlington), entered into Production Sharing Contracts (PSCs) with Ecuador to explore and exploit oil reserves in several Blocks in Ecuador. Under these agreements, the contractor assumed the entire risk of exploitation in exchange for a share of the oil produced.<\/p>\n

As international oil prices soared in 2002, Ecuador attempted to renegotiate the terms of PSCs with Burlington. When those renegotiations failed, Ecuador adopted a number of measures to \u201crestore the economic equilibrium\u201d of the PSCs. Ecuador first imposed a windfall tax on Burlington\u2019s excess profits.\u00a0 When Burlington refused to pay the tax, Ecuador initiated proceedings to seize and auction Burlington\u2019s share of oil production so as to collect the overdue payment.<\/p>\n

Burlington subsequently suspended operations on the grounds that the investment had become unprofitable. In response, Ecuador took the possession of Burlington\u2019s Blocks and eventually terminated the PSCs.<\/p>\n

Jurisdiction declined over the umbrella clause claims <\/i><\/p>\n

In an earlier decision on jurisdiction, the tribunal ruled that it had jurisdiction over the expropriation claim, but lacked jurisdiction over claims of fair and equitable treatment, full protection and security, and arbitrary impairment. However, the claimant\u2019s claim related to the BIT\u2019s umbrella clause\u2014in which Burlington argued that Ecuador\u2019s alleged breaches of the PSCs and the Ecuadorian law also amounted to a treaty violation\u2014was left to be decided in the merits phase.<\/p>\n

Due to the fact that Burlington\u2019s subsidiary was the signatory to the PSCs rather than Burlington itself, Ecuador argued there was no privity of contract between itself and Burlington. As a result, Ecuador insisted that Burlington could not rely on the umbrella clause to enforce contractual rights that did not belong to it.<\/p>\n

In deciding whose right was correlated to the obligation under the umbrella clause, the tribunal resorted to the law governing the PSCs (in this case Ecuadorian law) which stipulates that a non-signatory parent of a contracting party is not allowed to directly enforce its subsidiary\u2019s rights. The majority also noted that the majority of ICSID case law requires privity between the investor and the host state. The majority therefore decided that Burlington could not rely on the umbrella clause to enforce its subsidiary\u2019s rights under the PSCs, and as such jurisdiction over Burlington\u2019s umbrella clause claim in relation to the PSCs was declined.<\/p>\n

However, Prof. Orrego Vicu\u00f1a (claimant\u2019s nominee) dissented in this regard. He agreed that privity was widely accepted in domestic contract law; however, here he viewed the decisive issue as whose rights were protected under treaty. He emphasised that the US-Ecuador BIT expressly protected both direct and indirect investments, and therefore the \u201cobligations\u201d referred to by the umbrella clause also covered indirect investments.<\/p>\n

With respect to Burlington\u2019s allegation that Ecuador\u2019s failure to observe its obligation under Ecuadorian law amounted to a treaty violation via the umbrella clause, the majority found that Ecuadorian law merely reiterated Ecuador\u2019s contractual obligations under the PSCs rather than providing independent obligations.<\/p>\n

In his dissenting opinion, Prof. Orrego Vicu\u00f1a asserted that Ecuador\u2019s obligation under the Ecuadorian law was specific enough to be regarded as separate from Ecuador\u2019s obligation under the PSCs.<\/p>\n

The object of expropriation <\/i><\/p>\n

Burlington alleged the expropriated investment was the contract rights under the PSCs, as it possessed these rights \u201cthrough its ownership of Burlington Oriente.\u201d\u00a0 Ecuador did not disagree that this was the object of expropriation under dispute, and also noted that \u201cthe investment Burlington alleges is precisely the value of those contract rights.\u201d<\/p>\n

In the tribunal\u2019s view, however, the claimant could not claim expropriation of \u201cdiscrete parts of the investment,\u201d but rather the analysis must focus on \u201cthe investment as a whole.\u201d<\/p>\n

The tribunal explained that the \u201cwhole investment\u201d consisted of the rights of its subsidiary under the PSCs, the shares in its subsidiary, the production facilities, other tangible property, the monetary and asset contributions made to carry out operations, and the physical possession of the Blocks.<\/p>\n

The majority decides the windfall tax did not amount to expropriation <\/i><\/p>\n

Burlington argued that several measures, both individually and in the aggregate, amounted to expropriation.\u00a0 This included Ecuador\u2019s imposition of the windfall profits tax without, as it argued was contractually required, \u201cabsorbing\u201d the impact of the tax increase so as to stabilise the economic equilibrium of the project; the proceedings to seize and auction Burlington\u2019s share of oil production; the takeover of its Blocks; and eventually the termination of the PSCs.<\/p>\n

The tribunal decided to deal with the claims by first analyzing each of the challenged measures separately, and in the event of no expropriation being found, it would go on to examine the cumulative effect of those measures.<\/p>\n

To ascertain expropriation, the tribunal applied both the \u2018effect test\u2019 and the police powers doctrine. In terms of the effect test, the tribunal required permanent and substantial deprivation of the investment in order to amount to an expropriation. The tribunal also considered if the measures could be justified under the police power doctrine (i.e. as a legitimate use of governmental authority to restrict private rights for the public good).<\/p>\n

The tribunal first considered if the windfall tax amounted to an expropriation. Here it found that the participation formulas in the PSCs to allocate the oil production were not linked to oil price, and as such the increase in oil prices could not be considered as a disturbance to the \u201ceconomy\u201d of the PSCs. The tribunal also noted that the PSCs contained mandatory tax absorption clauses; this required that, in the event of tax modification, Ecuador was obliged to take measures to compensate Burlington for the resulting impact on the \u201ceconomy\u201d of its investment. Due to the fact that Ecuador failed to do so, the tribunal decided that the imposition of the windfall profits tax in conjunction with Ecuador\u2019s failure to absorb the effect thereafter breached the PSCs.<\/p>\n

Nevertheless, the majority considered that the windfall tax, while breaching the PSCs, did not amount to an expropriation because it did not make Burlington\u2019s investment \u201cunprofitable and worthless.\u201d<\/p>\n

The proceedings to seize and auction Burlington\u2019s share of oil production shared the same fate, in that the \u2018effect\u2019 of these measures was not deemed grave enough to amount to expropriation.<\/p>\n

However, the tribunal viewed Ecuador\u2019s move to take possession of Burlington\u2019s Blocks differently. Ecuador contended that this measure was a legitimate response to avoid the significant economic risk arising from the envisaged suspension of operations by Burlington. However, the tribunal dismissed this argument on the grounds that the takeover did not comply with Ecuadorian law and the risk was not significant enough. Turning to the effect test, the tribunal considered that the takeover resulted in Burlington losing \u201ceffective use and control\u201d over its investment without compensation. Therefore, the tribunal concluded the takeover of Burlington\u2019s Blocks constituted an unlawful expropriation.<\/p>\n

In light of this conclusion, the majority considered it irrelevant to consider the termination of the PSCs within its expropriation analysis, because it merely formalized a prevailing state of affairs, i.e. the takeover of Burlington\u2019s Blocks.<\/p>\n

Owing to one of the measures being confirmed as expropriation, the tribunal also found it unnecessary to examine the cumulative effect of all measures complained of by Burlington.<\/p>\n

In his dissenting opinion, Prof. Orrego Vicu\u00f1a argued that the other measures\u2014not only the takeover of Burlington\u2019s Blocks\u2014also constituted expropriation. He held that substantial deprivation was a matter of reasonableness rather than a mathematical exercise. He asserted that the windfall tax was beyond any standard of reasonableness and therefore reached the level of substantial deprivation.<\/p>\n

In respect of the termination of the PSCs, he considered that it constituted an aggravating factor to the unlawfulness of expropriation. Overall, he was of the opinion that all the challenged measures were interlinked and amounted to expropriation as a whole. He argued that it was a shortcoming that the majority isolated these measures and therefore narrowed down the expropriatory effects by finding only one measure amounted to expropriation.<\/p>\n

The tribunal comprised Prof. Gabrielle Kaufmann-Kohler (president), Prof. Francisco Orrego Vicu\u00f1a (claimant\u2019s nominee), and Prof. Brigitte Stern (respondent\u2019s nominee).<\/p>\n

The award was available here: http:\/\/italaw.com\/sites\/default\/files\/casedocuments\/italaw1094_0.pdf<\/a><\/p>\n

Prof. Orrego Vicu\u00f1a\u2019s dissenting opinion is available here: http:\/\/www.italaw.com\/sites\/default\/files\/case-documents\/italaw1095_0.pdf<\/p>\n

Canada loses NAFTA<\/span> arbitration over R&D performance requirements
\n<\/b>Mobil Investments Canada Inc. and Murphy Oil Corporation v. Canada<\/em>, ICSID Case No. ARB(AF)\/07\/4 <\/b><\/p>\n

Damon Vis-Dunbar<\/p>\n

In a decision signed in May 2012, and published six months later, the majority of a 3-person ICSID tribunal has found Canada in breach of the North American Free Trade Agreement (NAFTA) for imposing prohibited performance requirements on two U.S. oil companies.<\/p>\n

The claim by Mobile Investments Canada and Murphy Oil Corporation against the government Canada stems from requirements on research and development expenditure (R&D) in the province of Newfoundland and Labrador.<\/p>\n

Background <\/i><\/p>\n

The claimants have stakes in two oil fields in the North Atlantic. For both projects, the oil companies have been obligated to submit \u201cbenefits plans,\u201d which include planned expenditure on R&D and education and training. A board is responsible with approving those plans.<\/p>\n

The dispute hinges on a new set of guidelines introduced in 2004. In contrast to earlier guidelines, the 2004 rules required a fixed amount of expenditure on R&D, using average expenditures by industry as a benchmark.\u00a0 The 2004 guidelines were introduced in response to declining expenditure in R&D, and were recommended by a public commissioner.<\/p>\n

The 2004 guidelines were challenged in Canadian courts, but the court found them to be consistent with the board\u2019s responsibility to monitor R&D expenditures. The claimants sent a request to ICSID to arbitrate the dispute in late 2007.<\/p>\n

Minimum standard of treatment <\/i><\/p>\n

The claimants asserted breaches of two NAFTA articles: Article 1105, which accords investors the minimum standard of treatment under customary international law; and Article 1106, which deals with prohibited performance requirements.<\/p>\n

With respect to Article 1105, the claimants argued that Canada had frustrated their \u201clegitimate expectations\u201d by changing the regulatory framework governing R&D expenditures.<\/p>\n

Canada countered that it had not failed to provide a stable legal environment, and even if it had, the minimum standard of treatment under customary international law does not obligate governments to ensure such stability.<\/p>\n

After reviewing NAFTA case-law, the tribunal concluded that NAFTA governments could change the rules governing an investment \u201cto a high or modest extent.\u201d To breach to Article 1105, changes to the regulatory environment would need to be \u201carbitrary or grossly unfair or discriminatory.\u201d<\/p>\n

Turning to this case, a central question for the tribunal was whether federal or provincial governments \u201cmade a series of express promises\u2014in the form of representations\u2014which they then broke.\u201d\u00a0 On the facts, the tribunal failed to see any evidence of a promise that regulations governing R&D would not change. The tribunal therefore, found no breach of Article 1105.<\/p>\n

Performance requirements <\/i><\/p>\n

The claimants also argued that Canada had breached Article 1106, which restricts governments from imposing various performance requirements. This includes a prohibition on requirements \u201cto 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.\u201d<\/p>\n

In the claimants view, the 2004 guidelines required them to purchase goods and services in the Province of Newfoundland, and thus violated the restrictions set out in Article 1106.<\/p>\n

Canada responded that R&D was \u201coutside the scope\u201d of Article 1106. Canada later added that even if R&D was considered a \u201cservice\u201d under Article 1106, the guidelines did not require those services to be local.<\/p>\n

The tribunal rejected Canada\u2019s arguments.\u00a0 It decided the research, development and education could rightly be considered a \u201cservice\u201d for the purposes of Article 1106. The tribunal also considered that those services would largely need to be purchased in the province\u2014despite Canada\u2019s efforts to highlight potential exceptions.<\/p>\n

Next, the tribunal considered whether the 2004 guidelines should be considered exempt from Canada\u2019s obligations under Article 1106, due to the country\u2019s list of reservations under Article 1108.<\/p>\n

Canada\u2019s exceptions to Article 1108 <\/i><\/p>\n

NAFTA\u2019s Article 1108 allows the NAFTA parties to maintain, and in certain circumstances amend, measures that do not conform to their NAFTA obligations. Therefore, if a NAFTA government imposed performance requirements on investors prior to NAFTA, these could be maintained post-NAFTA if listed as a reservation. In addition to the non-conforming measure, an annex to NAFTA states that \u201cany subordinate measure\u201d is also considered exempt.<\/p>\n

In this case, Canada listed the federal statute (the Federal Accord Act) in its reservations, and explained that the accord requires benefit plans to ensure that expenditures on research, development and training are provided in the province.<\/p>\n

A key point of contention, however, was whether the 2004 guidelines could be considered a \u201csubordinate measure\u201d that was covered by Canada\u2019s reservation.<\/p>\n

In coming to a decision on that question, the tribunal considered several questions: whether subordinate measures must be introduced prior to the commencement of NAFTA, whether they were \u201cunder the authority\u201d of the reserved measure (i.e. the Federal Accord Act), and whether they were \u201cconsistent\u201d with the reserved measure.<\/p>\n

On the first question, the tribunal concluded that subordinate measures introduced after the commencement of NAFTA formed part of the reserved measure. This view was supported by submissions from Canada, the United States and Mexico.<\/p>\n

On the second question, the tribunal determined that whether a subordinate measure is \u201cunder the authority\u201d of the reserved measure is a matter of national law. Here the majority found little difficulty in concluding that the 2004 guidelines were under the authority of the Federal Accord Act.<\/p>\n

On the third question, the tribunal decided that the issue of \u201cconsistency\u201d needs to be viewed through both national and international law. It noted that a measure could provide different and additional burdens on an investor, and still be considered consistent. However, it concluded that the 2004 guidelines passed an appropriate threshold.<\/p>\n

Key to that conclusion was the fact that the majority required consistency with both the principal reserved measure\u2014the Federal Accords Act\u2014and other subordinate measures, such as earlier benefit plans and board decisions. The principal reserved measure, together with its subordinate measures formed the \u201clegal framework\u201d against which consistency was to be judged. On this point, Philiippe Sands issued a dissenting opinion.<\/p>\n

Judged from that perspective, the majority found that the 2004 guidelines inconsistent with other subordinate measures. The majority noted that the board had earlier recognized that it was difficult to provide fixed plans for expenditure on R&D over the life of a project, and therefore the earlier benefits plans had not been so stringent. By later introducing mandatory spending at prescribed levels, the 2004 guidelines introduced a \u201cfundamentally different approach to compliance,\u201d stated the majority.<\/p>\n

In the majority\u2019s view \u201cthe effect of the 2004 Guidelines bespeaks a set of requirements to purchase, use or accord a preference to local goods and services that have undergone a substantial expansion as compared with the earlier legal framework.\u201d The 2004 guidelines could therefore not be considered \u201cconsistent\u201d with Canada\u2019s NAFTA reservations.<\/p>\n

Philippe Sands\u2019 dissent <\/i><\/p>\n

In a dissenting opinion, Professor Sands rejected the majority\u2019s decision that the 2004 guidelines must be consistent with the Federal Accord Act and<\/i> subordinate measures. He countered that a new subordinate measure \u2013 such as the 2004 guidelines \u2013 must be consistent and under the authority of the measure excluded in NAFTA \u2013 in this case the Federal Accord Act.<\/p>\n

In Professor Sands\u2019 opinion, the majority\u2019s decision to include subsequent subordinate measures was inconsistent with the ordinary meaning of Article 1108. It also led to practical problems by creating \u201ca continually evolving standard, as new subsidiary measures are adopted.\u201d<\/p>\n

Professor Sands stated that over time this will make it difficult for investors to determine the benchmark for \u2018authority\u2019 and \u2018consistency,\u2019 with implications for transparency given that new subordinate are not added to a country\u2019s NAFTA list of non-conforming measures.<\/p>\n

Damages <\/i><\/p>\n

Having diverged with Professor Sands in finding that Canada had breached its obligations under NAFTA, the majority went on to consider damages.<\/p>\n

The parties disagreed on whether damages could be awarded for future losses. Canada argued that only actual losses could be compensated, while the claimants argued that their obligation to make future R&D payments is a \u201closs incurred.\u201d<\/p>\n

The majority concluded that it had jurisdiction to decide on future damages. The next question, therefore, was how to assess damages for future losses. Here the majority noted that Canada had not yet demanded payment under the 2004 guidelines, and as such the claimants had not yet incurred actual losses. As such, the claimants were given 60 days to provide further evidence of actual damages.<\/p>\n

With respect to the future payments under the 2004 guidelines, the majority found those were too uncertain. The claimants would need to need to initiate a new NAFTA claim to seek compensation for those losses, ruled the majority.<\/p>\n

The tribunal decided that the allocation of costs of the arbitration and legal fees would be determined in the final award, to be issued after the claimants have been given 60 days to submit further evidence on damages.<\/p>\n

Arbitrators in the case are Hans van Houtte (president), Merit Janow (claimants\u2019 nominee) and Philippe Sands (Canada\u2019s nominee).<\/p>\n

The decision on liability and on principles of quantum is available here: http:\/\/italaw.com\/sites\/default\/files\/case-documents\/italaw1145.pdf<\/a><\/p>\n

The partial dissenting opinion by Professor Sands is available here: http:\/\/italaw.com\/sites\/default\/files\/case-documents\/italaw1146_0.pdf<\/a><\/p>\n

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