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Cross Border Issues - "Legal Alert – December, 2000, NAFTA Panel Strikes Down Another Canadian Environmental Measure"

A NAFTA panel decision, dated 13 November 2000, in S. D. Myers Inc. v. Canada found that the Canadian government’s ban on PCB exports during 1995-1997 offended the NAFTA Chapter 11 investment provisions and that, consequently, the claimant was entitled to compensation. The claim was initiated by S.D. Myers Inc. (“SDMI”), a U.S.-based company that had prospects for exporting those wastes from Canada and treating them in the United States. The NAFTA panel, composed of two Canadians and a British chair, ordered Canada to pay compensation to S.D. Myers in an amount to be determined.

Interestingly, the case involves a Federal measure that was implemented during the tenure of the Hon. Sheila Copps as Canadian Minister of the Environment, as did a different environmental measure banning importation of the gasoline additive MMT. That import ban was also the subject of a well-known claim against the government by Ethyl Corporation.

The Factual History:
SDMI was engaged in the maintaining and repairing of large electrical transformers. Over time, it developed an expertise in the treatment and disposal of PCB’s, a highly-toxic carcinoginerous chemical used in these transformers. The company’s head office was in the U.S. but it established a Canadian subsidiary called Myers Canada in 1993 to export Canadian PCB wastes to treatment plants south of the border. The Canadian company was successful in obtaining a good deal of waste disposal business.

SDMI’s Canadian operations were, however, temporarily halted when the federal government introduced an export prohibition on PCB wastes in November 1995 under the Canadian Environmental Protection Act. The Order in Council was in effect for approximately 16 months. As a result of its inability to export PCB’s from Canada, SDMI and Myers Canada lost business. Eventually SDMI launched a claim under the NAFTA Chapter 11 investment provisions seeking compensation.

Failure to Respect National Treatment:
The panel accepted SDMI’s argument that the Canadian ban offended the national treatment rule under NAFTA Article 1102 because it prevented the company from operating its investment in Canada, while not affecting the comparable operations of Canadian waste disposal companies. While Canada claimed that the measure was “neutral” in terms of corporate nationality, the history of official governmental documentation and correspondence was replete with references to the need to protect the Canadian industry and to ensure that PCB waste disposal was handled in Canada by Canadian companies.

On this evidence, the panel concluded that the measure was protectionist and was not primarily designed for environmental purposes. “The evidence establishes”, it said, “that Canada’s policy was shaped to a great extent by the desire to protect and promote the market share of enterprises that would carry out the destruction of PCB’s in Canada and that were owned by Canadian nationals.” The panel went on to conclude that,

“. . . the practical effect of the Orders was that SDMI and its investment were prevented from carrying out the business they planned to undertake, which was a clear disadvantage in comparison to its Canadian competitors”.

It put the final nail in the coffin by finding, “there was no legitimate environmental reason for introducing the ban”. But even if there had there been a legitimate environmental objective, the panel went on to say that this could have been achieved by measures other than through an export prohibition.

Scope of Chapter Eleven:
The S.D. Myers decision has clarified the scope of Chapter Eleven of the NAFTA in other key respects. In terms of whether the Canadian operation of SDMI was technically an “investment” as defined in the treaty, the panel said that corporate structure should not get in the way of an otherwise meritorious claim under these NAFTA provisions.

With respect to whether SDMI and Canadian companies operated “in like circumstances”, the panel rejected Canada’s arguments that there were distinctions between Canadian companies and the claimant which would mean there could be no offending of the national treatment obligation and no discrimination because the companies were not operating on the same plane. The panel found that from the practical “business perspective”, it was clear that these companies were competitors and operating in “like circumstances”.

With respect to the obligation under NAFTA Article 1105 requiring Canada to accord the minimum standard under international law of “fair and equitable treatment and full protection and security”, a majority of the panel concluded that, by breaching the national treatment obligation in Article 1102, Canada ipso facto failed to meet these minimum standard obligations.

In an important part of its decision actually favouring Canada, the panel rejected the SDMI’s argument that the export ban was an “expropriation” or a measure “tantamount to” expropriation under NAFTA Article 1110. On this point, the panel followed the recent NAFTA panel in Pope & Talbot and said that there must be an actual taking, as opposed to mere regulatory interference. The term “expropriation”, it said, “must be interpreted in light of the whole body of state practice, treaties and judicial interpretations of that term in international law cases”. In an important passage, the panel confirmed Pope & Talbot’s view that the NAFTA has not expanded the internationally accepted scope of that term. This should give comfort to those that have voiced concern over the theoretical expanse of these anti-expropriation provisions in the NAFTA.

Impact on Environmental Law:
While at first glance, the S.D. Myers decision might seem to be a blow to national sovereignty and the right to legislate for environmental purposes, this is not really so. The decision is carefully balanced in this sense and emphasizes, in the facts of this particular case, the absence of legitimate environmental and scientific underpinnings to the PCB export ban. In some respects, it provides a road map for governmental policy-makers in the future.

The decision also recognizes the interaction between trade and environment. Referring to Canada’s rights under the Basel Convention, it states however that, “where a party has a choice among equally effective and reasonably available alternatives for complying . . .with a Basel Convention obligation, it is obliged to chose the alternative that is . . . least inconsistent . . . with the NAFTA”. This is not a rejection of the environmental aspect.

Lessons for Government Policy Makers:
The decision thus brings home to governments a number of important lessons. As noted, the panel endorses the point that environmental measures are fully permissible under the NAFTA. What it did underscore is that, when the record is examined in any dispute, there must be proof that the measure has a clear environmental rationale and a sound scientific underpinning as opposed to being devised for direct or indirect protectionist objectives. What damned the measure in this case were the numerous statements on the record at the senior bureaucratic and political level (including statements in Parliament) that the handling of PCB wastes would “be done in Canada by Canadians”. That kind of approach may have been permissible in the pre-NAFTA era. It is no longer.

References:
S.D. Myers, Inc. (Claimant) v. Government of Canada (Respondent), NAFTA Arbitration Tribunal Partial Award, 13 November 2000.

Pope & Talbot Inc. v. Government of Canada, Arbitration Tribunal Interim Award, 26 June 2000.

Basel Convention on the Control of Transboundary Movements of Hazardous Waste and their Disposal (1989, in force for Canada 5 May 1992).

Canadian Environmental Protection Act, S.C., S.C. 1999, c. 33.

LLH/gdm
November 27/00