Exxon Mobil's disastrous NAFTA win against Canada: Resource management and sustainable development take a hit in three different investor-state disputes

The Hibernia platform off the coast of Newfoundland (Source: Oil Rig Photos)

(Updated June 6, 2012, 3:10 p.m. ET) It was a bad week for resource management in the private tribunals of investor-state arbitration. First we learned that the International Center for Settlement of Investment Disputes (ICSID) at the World Bank will hear Canadian mining firm Pacific Rim's case against El Salvador for denying permits to build a large gold and silver mine that was fiercely opposed by nearby communities. Although the firm's CAFTA claim was discarded, ICSID will nonetheless decide whether internal investment rules were breached.

A few days later, on June 1, Investment Arbitration Reporter wrote (subscription only) that, "Swedish energy company Vattenfall has made good on a threat to bring an international arbitration claim against the Federal Republic of Germany in relation to that country's recent decision to phase-out nuclear power." The company is demanding as much as 700 million EUR ($907 million) in damages under the Energy Charter Treaty for what was essentially a precautionary rethinking of energy policy after the Fukushima disaster.

Finally and probably most importantly for Canada, a NAFTA tribunal decided in a 2-1 ruling that a general requirement for oil producers in the Hibernia oil field off the coast of Newfoundland to invest some of their profits in research and development in the province was an illegal "performance requirement." Exxon Mobil and Murphy Oil, in their joint April 2009 memorial, called the millions they were paying into provincial R&D and Education and Training transfers "unnecessary" and not based on "commercial need." They also claimed the measure upset the firms's NAFTA right to fair and equitable treatment (Article 1105(1)) by "failing to provide a stable regulatory framework for the conduct of petroleum development in the Newfoundland offshore area."

Exxon Mobil is the richest company in the world with 2011 profits of over $41 billion USD.

LEGAL UNDER CANADIAN LAW, ILLEGAL UNDER NAFTA

The firms claim that between 1994 and 2004 they had already paid $167 million into R&D under provincial laws and regulations in the Atlantic Accord that were exempted from a NAFTA prohibition on performance requirements on investment. The NAFTA Annex I reservation states:

Pursuant to the Hibernia Development Project Act, Canada and the "Hibernia Project Owners" may enter into agreements whereby the Project Owners undertake to perform certain work in Canada and Newfoundland and to use their "best efforts" to achieve specific Canadian and Newfoundland "target levels" in relation to the provisions of any "benefit plan" required under the Canada-Newfoundland Atlantic Accord Implementation Act. "Benefits plans" are further described in Schedule of Canada, Annex I, page I-C-25.

In addition, Canada may impose in connection with the Hibernia project any requirement or enforce any commitment or undertaking for the transfer of technology, a production process or other proprietary knowledge to a national or enterprise in Canada.

Under the Accord, oil companies are expected to submit to a public board a benefits plan outlining provincial employment targets, the sources of goods and services inputs, and ensure that "expenditures shall be made for research and development to be carried out in the Province and for education and training to be provided in the Province." (45(3)(c))

The Government of Canada, in its response to the firms' NAFTA claim, argued that the 2004 increase in required R&D transfers was based on declining R&D expenditures in breach of obligations under provincial law. Three levels of Canadian courts had rejected immediate legal challenges to the new guidelines, which were found to be completely in accordance with the Accord Acts.

The Government also argued convincingly that R&D or Education and Training requirements do not fall within NAFTA's definition of "performance requirements." Even if they did, the federal submission says, they would not count as such because there is no compulsion under the provincial guidelines to purchase local goods or services. Finally, as mentioned already, the Accords and any subsequent amendments to them should be exempted from NAFTA.

I DON'T OWE YOU ANYTHING

We won't be able to see the panel's reasoning until the decision is made public, which isn't expected to happen before appropriate compensation is figured out. But it would be an incredible decision if the tribunal agreed with Exxon and Murphy Oil on how restrictively amendments to apparently safe (exempted) measures under NAFTA are to be defined.

According to a Canadian Press report based on another IAReporter article, "For compensation in this case, the oil companies had asked for $50-million, an amount the NAFTA panel did not give them. Instead, it asked for more information and is expected to issue another ruling with a monetary award."

Exxon Mobil and Murphy argued in their memorial that "Compliance with the Guidelines over the remaining lifetime of their investments in the Hibernia and Terra Nova projects is expected to cause Claimants to suffer damages in excess of CDN $65 million on a present value basis."

Exxon Mobil had revenues of $452.9 billion USD and profits of $41.1 billion USD in 2011, edging out Wal-Mart as the richest company in the world. The R&D money the Newfoundland and Labrador government was seeking equaled 0.16 per cent of profits. Yet the claimants had the nerve to suggest in their 2009 initial case against Canada that the relatively small mandatory increase in R&D investiture in the 2004 guidelines upset the intent of the original benefits plan in the Accord and may have affected their decision to move ahead with the projects had they known it was coming. Puhleez.

CORPORATE RIGHTS TO RESOURCES - NO QUESTIONS ASKED

The NAFTA Chapter 11 loss for Canada highlights the relative powers of multinational oil and gas firms over governments under international investment treaties. Like in the AbitibiBowater dispute, also against Newfoundland and Labrador and which the federal government settled for $130 million, provincial rights under the Constitution to manage resources sustainably and in the interest of the public are being undermined by private investment tribunals siding with big business.

"In decisions concerning such resources, the interests of investors ought to be balanced against other legitimate interests, such as those of workers, local businesses, communities and the environment," said Scott Sinclair, senior trade researcher with CCPA, in a presentation to trade committee last year. "Under Canadian constitutional law and the division of powers, these are clearly matters to be decided by the provincial legislature...

"By contrast," he added, "the AbitibiBowater settlement embraces an open-ended, excessively broad conception of property rights which goes well beyond reasonable protections and Canadian legal norms."

Steven Shrybman, a trade lawyer and member of the Council of Canadians board of directors, explained to the same trade committee the consequences of the AbitibiBowater decision related to water rights. By settling with the company, he said, "the federal government has invited claims by any foreign owned company that loses an entitlement to take surface or groundwater in Canada for commercial purposes."

The ExxonMobil-Murphy decision appears to extend those corporate rights to resources even further out of reach of Canadian laws and courts. It is cause enough to tear up the NAFTA Chapter 11 pages related to investor-state disputes and to refrain from signing any more investment treaties until the process has been gutted or radically revised. That includes with the EU in the Comprehensive Economic and Trade Agreement.

MAKING THE SAME MISTAKE IN EU NEGOTIATIONS

At the very least, the Exxon Mobil-Murphy decision should be a caution to to provincial governments deciding what laws, regulations and other measures to protect in CETA negotiations. Clearly the Annex I reservation is insufficient if investment dispute arbitrators will find the remotest change to an exempted measure--in this case new guidelines for completely legal R&D transfers--is prohibited under trade and investment rules. The same threats to legitimate public policy exist wherever Canada hasn't sought protection for future policy measures in Annex II.

This includes, in CETA, our public health care system, where provincial governments are leaning on a fairly weak federal carveout for future measures and not taking any Annex II protection of their own. The same goes for municipally delivered services such as water, transit and energy, where the federal government is simply grandfathering existing non-conforming measures (ex. public monopolies to deliver these services) but where neither the federal nor provincial governments want protection for future measures.

(Interestingly, Exxon and Murphy Oil argued that Canada's blanket exemption for non-conforming provincial measures at the time NAFTA came into effect should have no effect since that exemption was never made publicly available.)

At a minimum, the provinces should go over their CETA offers in light of this latest NAFTA loss to see where they need to be more careful. EU member states should take not, also. Considering how understaffed many provincial negotiating teams are, they should seek outside support for this or, god forbid, hold public hearings of some kind. I also think the federal government needs to revise this section from its "Myths and Realities About Canada's Free Trade Agreements":

Myth #8: Free trade agreements allow foreign investors and foreign companies to challenge Canadian laws and regulations.

Facts:

- Canada's FTAs do not allow foreign investors or companies to force a government to change its laws and regulations.
- Including mechanisms for dispute resolution through international arbitration in FTAs does not restrict any level of government from legitimately legislating in the public interest.
- Canadian and foreign investors alike are subject to all of Canada's laws and regulations pertaining to environmental, labour, health care, building and safety standards.

Does the Exxon-Murphy NAFTA ruling not contradict each one of these claims?

CP reports, "A spokeswoman for the federal Department of Foreign Affairs and International Trade said the government was disappointed and was still reviewing the decision."

We'll have more information when it's available. It's time to increase the pressure on the Canadian government to stop negotiating dangerous investment protection treaties that put public policy at risk in all countries. Check back for campaign updates and actions to help us make this case over the coming months.