Canada, US Driller Spar Over NAFTA Rules In $103.6M Row
By Christopher Crosby
Law360, New York (September 26, 2017, 6:33 PM EDT) -- A U.S. natural gas driller and the Canadian government struck opposing positions Friday in a $103.6 million dispute over whether Quebec’s St. Lawrence River drilling ban triggers mandatory compensation for lost future profits, sparring over recent submissions by the U.S. and Mexico observing how the North American Free Trade Agreement affects the case.
While Lone Pine Resources Inc. concurred with Mexico and the U.S. that their case before the International Centre for Settlement of Investment Disputes is in the correct forum, the company urged arbitrators to be wary of the countries’ arguments that NAFTA signatories possess broad police powers indemnifying them when they act in the public interest.
The Canadian government disagreed, arguing that the countries’ submissions earlier this summer bolster its argument that it acted in “good faith” by passing a 2011 law banning fracking beneath the river because at the time it believed the technique for extracting natural gas and oil could irreversibly damage the main water supply to Quebec City.
While Mexico has sided with Canada in its filing, the U.S. offered its opinion of NAFTA’s rules without backing either party in the case. The tribunal, attorneys for the Canadian government urged, must place considerable weight on the countries’ “common, consistent and coherent views.” Canada concurred with the U.S. that NAFTA parties are under no obligation to stop regulating the environment when it conflicts with the interests of foreign companies.
The country said that the company has not proven it owned a protected investment under Quebec law. Quoting directly from the U.S.’ submissions, Canada reiterated, “States may modify or amend their regulations to achieve legitimate public welfare objectives and will not incur liability under customary international law merely because such changes interfere with an investor’s 'expectations' about the state of regulation in a particular sector.”
But Lone Pine countered that such a reading effectively expands the definition of “police powers” and renders a section forcing NAFTA signatories to be held liable for expropriation meaningless.
Under that section, Article 1110(1)(d), expropriations carried out by a country have to serve a public purpose. Instead, Lone Pine reiterated its stance that the decision was based on political pressure that ignored established science and violated NAFTA’s rules on the fair treatment of investors.
The company argued that it’s not disputing whether sovereign nations have a right to regulate the environment, but whether they can “arbitrarily eradicate” a company’s investment.
“The fact of passage by a legislative body is not an incantation that deflects or supersedes the treaty obligation to comply with the minimum standard of treatment required by the NAFTA,” the driller said.
Lone Pine initiated arbitration proceedings under United Nations Commission on International Trade Law rules in late 2013, and has since argued that Quebec effectively revoked its valid permits when elected officials banned drilling along the entire length of the St. Lawrence River in 2011.
The driller contends the move came after it had spent $11.6 million to start the groundwork and get permits to drill for shale gas deep beneath a sparsely populated section of the river, and that Quebec’s studies were carried out hundreds of kilometers from the proposed drilling site. The company also argued that Quebec disregarded its own evidence on hydrocarbons, invalidating the argument that the ban was a necessary regulation.
Lone Pine has asked for at least $103 million in damages for compensation alone, saying the estimate reflects the revenue it expected to generate from its drilling activities.
Canada pushed back in February 2016, arguing that passing the law was a legitimate exercise of sovereign authority, adding that Lone Pine twisted precedent to argue otherwise.
Quebec’s law, which was backed by environmental groups, doesn’t directly discriminate against Lone Pine’s drilling permits or foreign companies more broadly, Canada said, and was passed with the “goal of legitimate protection of the public well-being.”
Although Canada has argued that the company doesn’t meet the definition of investor, Lone Pine has argued it was one of a small number of companies in an enterprise that held the rights to explore, and it was not a supplier or equipment service provider.
The parties did not immediately respond to requests for comment Tuesday.
The arbitration panel is led by V.V. Veeder, with Brigitte Stern and David Haigh as arbitrators.
Canada is represented by Sylvie Tabet, Jean-François Hebert, Reuben East, Jasmine Wahhab, Maxime Dea, Louis-Philippe Coulombe and Julien Sylvestre Fleury of the trade law bureau of Global Affairs Canada, the country’s foreign ministry.
Lone Pine is represented by Milos Barutciski, Maureen Ward and Sabrina A. Bandali of Bennett Jones LLP.
The case is Lone Pine Resources Inc. v. Canada, case number UNCT/15/2, before the International Centre for Settlement of Investment Disputes.
--Editing by Breda Lund.
