August 27th, 2010
This week, the federal government announced a settlement of a claim under the North American Free Trade Agreement, Can T.S. 1994 No. 2 (“NAFTA”) by AbitibiBowater Inc. (“Abitibi”) against Canada as a result of the dispute between the company and Newfoundland. In 2008, the Newfoundland government hastily expropriated nearly all of Abitibi’s Newfoundland assets after the company announced the closure of the Grand Fall’s pulp and paper mill, a key contributor to the region’s economy. The federal government has agreed to reimburse Abitibi for the expropriation in the amount of $130 million, much less than the $500 million sought.
Also, Newfoundland announced that it would seek leave to appeal from the SCC of a related decision by the Quebec Superior Court (AbitibiBowater Inc. (Arrangement relatif à), 2010 QCCS 1261), affirmed by the Quebec Court of Appeal (Newfoundland v. AbitibiBowater Inc., 2010 QCCA 965), that Newfoundland’s environmental protection orders compelling Abitibi to clean up certain expropriated sites were claims subject to bankruptcy protection claims procedures. (TheCourt.ca reviewed the Quebec decisions here.)
This article will focus on the NAFTA claim and outcome.
Background and Facts
Abitibi was a failing company as a result of the worldwide drop in demand for newsprint resulting from the proliferation of internet based news sources. A US incorporated pulp and paper manufacturer, it operated throughout the province of Newfoundland for over a century. In 2008, the company announced that its last operating mill, located in Grand Falls-Windsor, would close in 2009. This marked the end of its active operations in the province.
However, Abitibi still retained numerous property rights, assets, and undertakings within Newfoundland amounting to well over $300 million. This included interests in hydroelectric facilities, surface rights, and paper mills, many purchased either from the province or third parties for proper consideration.
Less than two weeks after the final closure was announced the province rushed through the Abitibi-Consolidated Rights and Assets Act, S.N.L. 2008, c. A-1.01 (“Abitibi Act”), which expropriated the majority of the company’s provincial assets. In part, this canceled water and hydroelectric contracts and agreements between the province and Abitibi, ongoing legal proceedings Abitibi had against the province, and blocked Abitibi’s access to Newfoundland’s courts. In response, the company filed a Notice of Arbitration and Statement of Claim (pdf link) under NAFTA Chapter 11 seeking redress for the expropriation in the amount of $500 million.
(An overview of facts of the related NAFTA dispute was outlined by TheCourt.ca in a previous post. They were repeated here.)
Newfoundland Violated NAFTA Chapter 11
The controversial Chapter 11 of NAFTA provides foreign corporations which are parties to the NAFTA agreement with the right to make a claim against the state if actions taken by the government negatively affect a company’s investments. According to Abitibi:
damages…resulted out of the measures undertaken by Canada, through the actions of its constituent political subdivision the provincial Government of Newfoundland and Labrador…Canada is internationally responsible for these measures, which are a breach of its obligations under Section A of the Chapter Eleven of NAFTA…
The claim by Abitibi alleged that Articles 1110, 1105, 1102 and 1103 of NAFTA were breached. A cursory review of the applicable law and related facts demonstrates that, from a legal perspective, Newfoundland was clearly in the wrong.
Pursuant to Article 1110(1) of NAFTA, Canada is prohibited from expropriating the Canadian investments of a US company without a valid reason. The provision states:
No Party may directly or indirectly nationalize or expropriate an investment of an investor of another Party in its territory or take a measure tantamount to nationalization or expropriation of such an investment (“expropriation”), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law…; and
(d) on payment of compensation…
The expropriation was clearly discriminatory, Abitibi argued. Other companies that faced financial difficulties in the province had not been subjected to similar treatment. Furthermore, Abitibi contended, the Act was rushed through the legislature and the company was not given the opportunity to respond “in accordance with due process of law…”
In fact, according to the NAFTA claim, the company received a letter on a Friday demanding that it surrender “to the Province its entitlement to [Newfoundland's] natural resources…” by midday of the following Monday. Abitibi responded on Monday with a request to discuss the issue. On Tuesday, the province passed the Abitibi Act, the assets were expropriated, and compensation was not provided.
According to Article 1105, Canada must “accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security…” Obviously, this was not the case. Finally, Articles 1102 and 1103 compel Canada to treat foreign investors in the same manner as their domestic counterparts. As discussed, this did not happen.
The only possible argument that Canada could have made was that the expropriation was done for a public purpose pursuant to Article 1110, outlined above. For example, the Abitibi Act was put into force following the decision of the company to close the mill in the city of Grand Falls. Later, Premier Williams provided the laid-off workers with severance payments. This could be interpreted as an indication of his desire to compensate workers and that the expropriation of assets was done to accommodate this. However unlikely, a successful public purpose argument would only satisfy one requirement of Article 1110(1). Ultimately, compensation was not provided, the expropriation was conducted in a discriminatory manner, and not in accordance with due process of law.[filed: List of cases]