The Bilcon Award: a recent decision from NAFTA investment tribunal sparks new debate on an old issue
By Daniel F. Behn, Posdoctoral Fellow, PluriCourts, and Laura Letourneau-Tremblay, Research Assistant, PluriCourts
In a Decision on Jurisdiction and Liability dated 17 March 2015, a NAFTA investment tribunal – in the case of Bilcon et al. v. Canada – has held that Canada violated the minimum standard of treatment and the national treatment standards under chapter 11 of the North American Free Trade Agreement (NAFTA). In finding Canada in violation of its treaty obligations, this case has reignited a debate on the possibility that international legal protections given to foreign investors can have a chilling effect on a state’s effort to regulate in the public interest. However, and as in many investment treaty arbitrations involving an environmental protection component, the violation of the treaty in this case did not relate to the substantive content, validity or legitimacy of a state’s environmental regulations; rather, the violation stems from due process and rule of law deficiencies in a state’s implementation of its own environmental regulations. For the larger debate on the legitimacy of investment treaty arbitration, the questions raised in this case are timely and pertinent: can a supra-national or international adjudicative body ever legitimately second-guess the procedures by which a sovereign state chooses to regulate its domestic activities? This brief note will provide an overview of the case and analyze the major holdings of the Decision in the context of the ‘regulatory chill’ debate.
The underlying facts of this case relate to a US company’s (Bilcon) efforts to build and operate a quarry and marine terminal in Nova Scotia (the Whites Point project). The core issue of the dispute stemmed from the decision of Nova Scotia and federal Canada to reject the project proposal. In addition, the investors advanced various claims with regard to their treatment by the provincial and federal authorities during the evaluation of the project. The project that Bilcon proposed required obtaining a permit for the project and approvals to conduct blasting operations. Ultimately, these proposed activities raised concerns at the provincial and federal levels in regard to the potential negative impact that the quarry and marine terminal might have on the local environment. The investors went through a lengthy evaluation process: Nova Scotian regulators referred the evaluation to federal Canada officials which further referred the project to a Joint Review Panel (JRP). Under the Canadian Environmental Assessment Act (CEAA), a JRP can provide for an assessment by both jurisdictions: the federal government and a province or another jurisdiction. The JRP required Bilcon to produce an Environmental Impact Assessment (EIA). After reviewing Bilcon’s EIA, which – according to the JRP – required a consideration of the project in light of a novel ‘community core values’ standard, the JRP rejected approval of the Whites Point project and did not recommend mitigation measures. The JRP’s recommendation was thereafter followed by both Nova Scotia and federal Canada.
Arguments of the parties
In supporting its case, Bilcon advanced a number of claims against the overall review process. First, it held that it had received direct encouragements by officials in Nova Scotia to pursue the White Point project. Second, it claimed that the referral of its project to the JRP was unprecedented and not unwarranted under the law. Third, it claimed that the ‘community core values’ standard was a new standard of assessment and was not required under federal or provincial law. Given that Bilcon had been encouraged to pursue the project and that the ‘community core values’ standard was the overriding consideration in the JRP’s rejection of the relevant permits, Bilcon claimed that its legitimate expectations were ‘frustrated unfairly’ and that the whole process had the ‘appearance of inappropriate political interference in the regulatory process.’ The government of Canada, on the other hand, held that the project was taking place in an ‘ecologically sensitive area,’ that careful compliance with both provincial and federal law was required, and that a referral of the project to a JRP was not a violation of its own laws. The Tribunal (by majority), rejected these defenses and held that the conduct of the JRP was arbitrary and unjustified.
Analysis of the Tribunal
According to the Tribunal, the JRP considered ‘community core values’ as an overriding factor in its report and this particular concept was a new standard of assessment which had been imposed upon Bilcon without legal authority or fair notice. The JRP report did not recommend the project and this decision was adopted by both jurisdictions without conducting distinct investigations. After considering the investor’s reasonable expectations (encouragements by governmental officials to invest in the project) and major investment in the process, the JRP’s use of the ‘community core values’ standard as the overriding consideration in rejecting the project’s approval, and the JRP’s deviation from a standard of evaluation required under Canadian laws, the Tribunal held that Canada had violated its obligations under Article 1105 (the minimum standard of treatment) of the NAFTA. While acknowledging that the mere misapplication of domestic law would not necessarily give rise to international responsibility, the Tribunal held that the extraordinary circumstances of this case did rise above the threshold required under Article 1105 of the NAFTA. In upholding Bilcon’s claim, the Tribunal stated that the investors and their investment were not afforded a fair opportunity to have the specifics of their case considered, assessed, and decided in accordance with the applicable laws of Canada.
In concluding its analysis on the international minimum standard, the Tribunal noted the potential tensions in regard to the interrelation between NAFTA and environmental protection. It noted that ‘this case involves environmental regulation, and that there is substantial concern among the public and state authorities that investor-state treaty provisions not be used as obstacles to the maintenance and implementation of high standards of protection of environmental integrity’ (para 595). The majority emphasized that the mere involvement of an environmental regulation in a dispute will not per se present a justifiable claim under an investment treaty. It further noted that the laws of federal Canada, Nova Scotia, and the NAFTA itself acknowledge that economic development and environmental integrity can be reconciled and mutually reinforced. The Tribunal underlined that ‘[e]ach [contracting party] is free under NAFTA to adopt laws that are as demanding as they choose in exercising their sovereign authority,’ but that the issue in the present case was not about the demandingness of Canada’s environmental regulations, but in the way that these regulatory requirements were implemented in contravention of due process standards and Canada’s own laws (para 598).
In addition to a finding that Canada had violated the minimum standard of treatment, the Tribunal also found that Canada had breached the national treatment provisions of the NAFTA. The Tribunal held that the environmental assessment procedures imposed on Bilcon constituted a level of treatment less favorable than other investors in ‘like circumstances.’ In comparing the assessment procedures of a number of similar mining projects, the Tribunal found that projects were not evaluated in terms of ‘core community values’ but rather the assessments were carried out in accordance with a ‘likely significant adverse effects after mitigation’ standard as mandated under the CEAA. The majority concluded that the ‘like’ projects reviewed in accordance with the latter standard received more favorable treatment. An environmental assessment under the CEAA requires the identification of mitigation measures in respect to potential effects. Following the identification of these mitigation measures, a project must then be evaluated in terms of whether the measures will prevent likely significant adverse effects. The White Point project (unlike other similarly situated projects) was not subject to this approach and no mitigation measures were identified as mandated under the CEAA. In finding that Canada had breached Article 1102 of the NAFTA, the Tribunal held that the CEAA includes a standard of assessment that requires an evaluation of the ‘likely significant adverse effects after mitigation;’ and that the ‘core community values’ standard was ‘at odds with the law and policy of the CEAA’ (para 724).
While the majority noted that it ‘must be sensitive to the need to avoid “regulatory chill” including with respect to protection of the environment’ (para 737), a dissenting opinion by the respondent state-appointed arbitrator, Donald McRae, was not convinced that the majority had been sensitive enough to the issue of ‘regulatory chill.’ Giving two key reasons as to why the majority’s decision would have a chilling effect on environmental regulation, arbitrator McRae refused to agree that Canada had violated the minimum standard of treatment and the national treatment under the NAFTA. First, McRae focused on the issue of the ‘core community values’ standard and why it should not be considered as controversial as the majority assumed. He stated that the term ‘community core values’ used by the JRP was merely a restatement encapsulating the various human environmental effects the project can have: a component the JRP was entitled to assess. Human environmental effects can refer to elements such as the historical use of the area, fishing, eco-tourism, the quality of life, air and water, and the health of the community. The JRP also emphasized that the investors in this case failed to provide adequate analysis of the human environmental effects of the project on local communities. In rejecting the ‘community core values’ approach, McRae opined that the majority decision risks chilling environmental review processes that focus more heavily on the impacts to the human environment because it could potentially result in a claim for damages under the NAFTA. Second, McRae explained that a state’s violation of its own laws and procedures should not give rise to a violation of Article 1105; and in finding this to be the case, the majority risks changing the character of a state’s domestic environmental review process. McRae stated: ‘[f]ailure to comply with Canadian law by a review panel now becomes the basis for a NAFTA claim allowing a claimant to bypass the domestic remedy provided for such a departure from Canadian law. This is a significant intrusion into domestic jurisdiction and will create a chill on the operation of environmental review panels’ (para 48). In short, McRae perceived the decision of the majority as ‘a remarkable step backwards in environmental protection’ (para 51).
Responding to the dissenting opinion, the majority included additional observations where it highlighted that a NAFTA Tribunal must be sensitive to the need to avoid ‘regulatory chill’ including environmental regulatory chill. The majority reiterated that the decisional factors of this case were not mere errors in applying the national laws but were the very specific and exceptional set of circumstances of the present case in which the investors were denied a just opportunity to have their project considered on its individual merits.
The Relationship between International Investment Agreement and Domestic Law ?
The Bilcon Decision provides important insights into the relationship between investment treaty arbitration, international investment agreements (IIAs) and domestic environmental review law and procedures. It raises concerns on whether an international investment tribunals can/should review EA procedures at all. While the dissenting opinion clearly held that international review of EAs and their procedures should not be subject to international adjudication (para 439), the majority carefully emphasized the ‘distinctive and exceptional overall set of facts’ (para 740) of this particular case.
This decision could have potential impacts on current negotiations on the inclusion of investor-state dispute settlement (ISDS) provisions in international investment agreements such as the Trans-Pacific Partnership (TPP) or the Transatlantic Trade and Investment Partnership (TTIP). For those opposing the inclusion of ISDS provisions in these agreements, the Bilcon decision is ammunition for the argument that investment treaty arbitration improperly bypasses potential domestic remedies, and that it interferes with a sovereigns ability to regulate in the public interest, protect the environment, or protect human health. On the other hand, for those in favor of IIAs and ISDS, the Bilcon decision is ammunition for the argument that IIAs assist in promoting the rule of law (including due process standards) by providing enforceable international legal protections for individuals when a state’s conduct does not comply with its own laws or procedures in a manner that is compatible with an international obligation. According to such a view, IIAs with ISDS provisions can help secure investor confidence and promote investments in important economic sectors.