We take a look at how investor state disputes impede environmental policy

As you might have read in your daily news feed, Canada’s new trade agreement with the European Union (EU) is getting closer to being implemented — the European Union Parliament is expected to vote on the agreement in February.

What you might not know is that the deal almost didn’t happen after the Belgian region of Wallonia baulked at the trade agreement’s plan to give foreign investors access to a highly controversial legal system, Investor State Dispute Settlement (ISDS). What makes ISDS divisive is it exposes governments to potentially expensive private arbitration by foreign corporations who feel that environmental protection measures impede their business — the Canada-EU deal is now back on track, after the Walloons forced major changes to the ISDS part.

This is a problem that Canada knows only too well.

The federal government is now defending itself from a landmark claim brought under the North American Free Trade Agreement’s (NAFTA) ISDS provisions by an American corporation, Bilcon of Delaware. The company wants $300 million compensation because Canada’s environmental assessment laws blocked it from building a quarry in a sensitive coastal area of Nova Scotia — the case presents a prime example of the problems with private investor state disputes.

And for the past few months, Ecojustice has worked, on behalf of the Sierra Club of Canada and East Coast Environmental Law (ECELAW), to block Bilcon’s claim in court.

Let’s back up a second for those unfamiliar with the case.

The case: Bilcon of Delaware

In 2002, Bilcon and the owners of Clayton Concrete, a New Jersey-based concrete company, applied to operate a quarry and marine terminal at Whites Point in Digby Neck, Nova Scotia. Because this project was subject to an environmental assessment under both the laws of Nova Scotia and the laws of Canada, they agreed to strike a Joint Review Panel to evaluate Bilcon’s environmental impact assessment, hold public hearings, and provide recommendations to the provincial and federal ministers.

After lengthy public hearings, the Joint Review Panel issued its report in October 2007. It recommended that the proposed project not be approved, partly on the basis of its adverse impact on the “‘core values’ of the affected communities.” Both Ministers accepted this recommendation. In other words, Bilcon’s project could not go ahead.

What happened next is striking. Bilcon did not challenge the Ministers’ decision in Canada’s courts. The company instead claimed the environmental assessment process was arbitrary, discriminatory and unfair and was so illegal that it breached NAFTA. Bilcon demanded a hearing under NAFTA’s ISDS rules, and has taken the position that Canada should compensate it for loss of hypothetical future revenues from the quarry.

So far, Bilcon’s approach has paid off. In June 2015 a majority of the three member NAFTA tribunal found that the Joint Review Panel had not complied with Canadian environmental assessment law when it rejected Bilcon’s project. And that wasn’t all. The tribunal found that the breach of Canadian law was so unfair that it was a breach of NAFTA too.

While the final number has yet to be hashed out, our latest information is that Bilcon’s claim against Canada has blossomed to more than $400 million.

The dangers of investor-state disputes

The obvious problem with the NAFTA tribunal’s decision is that Bilcon turned down its opportunity to have a Canadian court rule on this alleged breach of Canadian law. The NAFTA tribunal is only supposed to decide questions of NAFTA law. In other words, the NAFTA panel overstepped both its mandate and its expertise.  For this reason, Canada’s federal government immediately applied to set the tribunal decision aside in Federal Court.

The tribunal’s decision represents the worst that can come out of ISDS rules in trade agreements.  Under NAFTA, Canada will potentially have to pay huge sums of money for an alleged breach of Canadian environmental law, not proven in a Canadian court. In contrast, if Bilcon had gone to Federal Court and had successfully argued that the Joint Review Panel had breached Canadian environmental law, Bilcon’s only remedy would have been a new environmental assessment — not a multi-million dollar payout.  The absurdity of NAFTA’s ISDS systems is that companies like Bilcon can benefit even when it has little proof it was legally wronged.

And NAFTA is not the only agreement where ISDS’s have been a problem. The controversial, Trans-Pacific Partnership Agreement presented the same issues: It gives foreign corporations the power to challenge strong environmental measures brought in by governments, if it interferes with their profits. With the U.S. withdrawing on President Trump’s executive order, Canada announced it will not come into effect for us either.

What this could mean for environmental policy

Bilcon’s win (so far) in the NAFTA tribunal sends a chill over environmental policy in Canada. The Joint Review Panel put weight on socio-economic factors as part of the environmental assessment, but got into trouble for it. This is highly likely to make future panels shy away from socio-economic considerations in their assessments. It may also make the federal government cautious about including a consideration of socio-economic impacts in any new environmental assessment legislation — a review of which is currently ongoing.

If every negative environmental assessment risks hundreds of millions of dollars under an ISDS system run amok, how many environmental assessments will governments allow to be negative, and what does that mean for the future of environmental protection?

Looking ahead

We are hopeful that we can help convince the Federal Court that the NAFTA tribunal overstepped and didn’t have the legal authority to make the decision it did.

Limiting the scope of international dispute arbitration is important to ensure that policy decisions are made in the public interest, without worrying what a panel of private arbitrators will think.