Sold Down the Yangtze: Extended note for chapter 31

In Chapter 31 of my book Sold Down the Yangtze: Canada’s Lopsided Investment Deal with China, I said that I’d post on this blog a longer description of the AbitibiBowater v Canada case, which is sometimes cited by foreign investors lawyers as an example of why ISDS works well or is needed.

The case was initiated by AbitibiBowater (now Resolute Forest Products) against Canada under NAFTA’s ISDS mechanism in 2009. The underlying dispute arose after the company closed its last operating mill in the province of Newfoundland & Labrador and the provincial legislature then expropriated assets of the company that had been granted under a historical concession to exploit natural resources in the province. The NAFTA case was settled by Canada’s federal government in 2010, with a payment of about CAD$130 million to the company.

The AbitibiBowater case has been portrayed by some ISDS promoters as a situation of expropriation without compensation and without allowance for access to the courts. Both of these claims are misleading in light of the statutory language and the treatment of “no-review” (i.e. privative) clauses in Canadian judicial review.

Indeed, the case could alternatively be portrayed from another perspective as a situation in which (1) a Canadian company was allowed by the federal government to merge with a U.S. company and then shortly after took advantage of NAFTA to (2) get a taxpayer-funded windfall in a dispute with a provincial government (3) after causing extensive environmental damage including immediate public health risks in its operations in the province and (4) after arguably breaking its commitment to provide local employment as a condition of its resource concession rights. I’ll try to avoid this sort of counter-advocacy in order to give some general context for the dispute.

To backtrack, the AbitibiBowater case arose from a provincial law that was passed by the Newfoundland & Labrador legislature in the late stages of a dispute over a resource concession contract dating from the early 1900s when N & L was a British colony. The provincial law (the Abitibi-Consolidated Rights and Assets Act, SNL 2008, c A-1.01) expropriated assets of the claimant and purported to preclude access by the claimant to domestic courts. The law also provided for payment of compensation as determined by the provincial Cabinet based, presumably on a method and process also to be determined by the provincial Cabinet.

We cannot know how this provision for compensation would have played out, what compensation would have been paid based on what process, and how Canadian courts would have dealt with the merits and process if they were to have reviewed the matter. This is because AbitibiBowater opted out of Canadian courts in favour of a NAFTA ISDS claim. Yet I think it likely that reasonable compensation would have been paid, albeit potentially after extensive litigation in Canadian courts.

Based tentatively on related litigation in Canada involving environmental remediation costs and the distribution of AbitibiBowater’s assets in bankruptcy proceedings, AbitibiBowater can at least have expected a fair and probably sympathetic hearing in Canadian courts, and ultimately the Supreme Court of Canada, of whatever amount was paid under the Act. Most of the judges in Canadian courts at all levels in the bankruptcy litigation were quite hard on the N & L government for the expropriation, although it should be noted that the bankruptcy litigation did originate in Quebec courts – whereas judicial review of the compensation for expropriation would have started in N & L – and then made its way to the Supreme Court, and the AbitibiBowater case is as much about Quebec-N&L relations as it is about U.S.-Canada relations. Abitibi we should keep in mind is a Quebec company that merged with U.S. Bowater in 2007. More on this point below.

The N & L law was passed on short notice in the context of negotiations between the provincial government and AbitibiBowater in the late stages of the resource concession, where the government’s position was reportedly that AbitibiBowater reneged on commitments in the concession to maintain processing facilities in the province as a condition of its resource rights. Passage of the law obviously marked the end of the negotiations and may be viewed in very basic terms as an assertion of legislative sovereignty over provincial natural resources. AbitibiBowater called the decision undemocratic, partly because the legislation purported to bar access to domestic courts, and some ISDS promoters have taken a similar position.

AbitibiBowater’s NAFTA claim was settled by the federal government but, had the expropriation and compensation issues been addressed in Canadian courts, I think it possible but very unlikely that the courts would have found the law itself unconstitutional. Yet it is also likely that the courts would have reviewed the provincial Cabinet decision on the amount of compensation and, as is usual in Canadian judicial review, that they would have treated the statutory language purporting to bar access to the courts merely as a privative clause – of which there are innumerable examples in Canadian legislation – weighing in favour of a degree of judicial deference to substantive decisions of the statutory decision-maker (with little or no deference on matters of process) and not barring judicial review.

That is, the privative clause would have been one of various factors examined by the courts in deciding whether to use a reasonableness standard instead of a correctness standard in substantive (i.e. merits) review of the amount of compensation paid. The reasonableness standard – ramped down by the Supreme Court in 2008, in its well-known Dunsmuir v New Brunswick decision, from an earlier more deferential standard of patent unreasonableness – still affords ample opportunity for courts to vary or overturn decisions. Also, importantly, judicial review of the fairness of the process of the provincial Cabinet would have been subject to review on a correctness standard because Canadian courts do not apply deference doctrine to procedural matters.

Notably, Dunsmuir was not new in its general approach to privative clauses in judicial review. Canadian courts have never given privative clauses their apparently obvious facial meaning of “no-review” in courts. Since the 1950s, legislatures in Canada inserted increasingly detailed privative clauses in an effort to limit judicial review of various kinds of statutory decisions. This originated in privative clauses to attempt to keep courts out of labour arbitration due to, among other things, fears of delay in dispute resolution and perceived pro-employer bias in the courts. They were extended to other areas as part of the management of the relationship between courts and administrative decision-making.

Thus, I think it likely, at least, that the Supreme Court would have reviewed – very likely on a reasonableness standard – the amount of compensation arrived at by the provincial Cabinet. Again, we’ll never know because AbitibiBowater short-circuited the process by initiating a NAFTA claim and then pretending it was denied the right to go to court. It seems more likely to me that AbitibiBowater would have preferred the NAFTA ISDS process to Canadian courts because, among other things, investor-state arbitrators virtually never discuss (let alone show) deference in general to legislatures, governments, or (outside of the NAFTA context) domestic courts. For more on this aspect, see my book Sovereign Choices and Sovereign Constraints: Judicial Restraint in Investment Treaty Arbitration (Oxford University Press, 2013).

The decision to “Go NAFTA” appears to have served AbitibiBowater well when the Harper Government opted to settle the claim for $130 million rather than litigate the claim on issues such as AbitibiBowater’ underlying contractual obligations or potential set-off of environmental costs of AbitibiBowater’s record of pollution. The Harper Government was also in power when Abitibi’s merger with Bowater was approved in 2007, a decision that in hindsight seems to have proven quite costly for taxpayers given that it allowed AbitibiBowater a few years later to qualify as a U.S. company in bringing its NAFTA claim.

I’m not in a position to comment on whether the settlement amount of $130 million was a reasonable deal for taxpayers but, as an aside, there is at least some basis to suspect that AbitibiBowater was over-compensated, considering the environmental remediation costs later saddled on the N&L government following domestic litigation on AbitibiBowater’s bankruptcy. In the Supreme Court’s decision at the conclusion of that litigation, for instance, Chief Justice McLachlin noted in dissent [emphasis mine]:

Courts should not overlook the obstacles governments may encounter in deciding to remediate environmental damage a corporation has caused. To begin with, the government’s decision is discretionary and may be influenced by any number of competing political and social considerations. Furthermore, remediation may cost a great deal of money. For example, in this case, the CCAA [Companies’ Creditors Arrangement Act] court found that at a minimum the remediation would cost in the “mid-to-high eight figures”, and could indeed cost several times that. In concrete terms, the remediation at issue in this case may be expected to meet or exceed the entire budget of the Minister ($65 million) for 2009. Not only would this be a massive expenditure, but it would also likely require the specific approval of the legislature and thereby be subject to political uncertainties….”

I take this as an indication that there were significant remediation costs potentially avoided by AbitibiBowater due to the NAFTA ISDS lawsuit. Chief Justice McLachlin elaborated on the nature of some of the remediation issues left behind:

The Buchans site posed immediate risks to human health as a consequence of high levels of lead and other contaminants in the soil, groundwater, surface water and sediment. There was a risk that the wind would disperse the contamination, posing a threat to the surrounding population. Lead has been found in residential areas of Buchans and adults tested in the town had elevated levels of lead in their blood. In addition, a structurally unsound dam at the Buchans site raised the risk of contaminating silt entering the Exploits and Buchans rivers.

Overall, the use of the AbitibiBowater case by ISDS promoters seems designed to paint Canada, or at least N & L, as some kind of autocratic expropriation-happy hinterland. I find it sadly predictable, amusing, and ridiculous. I should say that I agree the expropriation was provocative politically in two ways. First, it was provocative in N&L’s relations with the company; i.e. it culminated a process of bargaining that followed AbitibiBowater’s own provocative decision to close its last processing facilities in the province while still asserting ownership of resource rights. Second, it was provocative in N&L’s relations with Quebec and the federal government.

In this second context, there is especially a longstanding conflict between N & L and Quebec over allocation of resource exploitation benefits between the two. The conflict dates from a heavily lopsided (in favour of Quebec) cost-sharing deal from the 1960s for the major Churchill Falls hydro project that is located in N & L but depends on Quebec transmission lines to get to market. This history was referenced extensively in N & L in the run-up to the AbitibiBowater legislation; keep in mind, Abitibi was a Quebec company that merged with Bowater in late stages of the AbitibiBowater resource concession. No sensible investor, foreign or domestic, would in this context take the decision to shut down the last processing facilities in N & L, arguably in breach of the concession deal, without realizing that it would damage investor’s relationship with the provincial government not to mention the whole province. This is all getting into another story, and not one that removes the government’s obligation to pay fair compensation for expropriated assets but it’s wrong to blame politics when things go badly for an investor, while ignoring politics when they benefit the investor or, indeed, when they were presumably part of the investor’s reasonable business calculations.