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NAFTA ruling in Nova Scotia quarry case sparks fears for future settlements

A sign is posted on the lawn just off of highway 217 near Sandy Cove, NS in 2006. Bilcon proposed the expansion of a quarry near Digby on the shore of the Bay of Fundy in September, 2002, but the Nova Scotia and federal governments rejected it after a joint review panel recommended it not proceed. The company will now seek $300-million in damages after a NAFTA arbitration panel declared that it was denied a fair environmental hearing.

Sandor Fizli/The Globe and Mail

A NAFTA arbitration panel has ruled against Canada in a claim by a U.S. company that wanted to develop a quarry in Nova Scotia, although a dissenting member of the panel warned that the decision will be seen as a "remarkable step backwards" in environmental protection.

Bilcon proposed the expansion of a quarry near Digby on the shore of the Bay of Fundy in September, 2002, but the Nova Scotia and federal governments rejected it after a joint review panel recommended it not proceed. The family-owned company – which is registered in Delaware – will now seek $300-million in damages after the arbitration panel declared that it was denied a fair environmental hearing.

The Bilcon decision has raised a number of concerns about the investor-state dispute settlement provisions that are commonplace in international agreements, ranging from the North American free-trade agreement, to the Canada-China foreign investment agreement, to the proposed Trans-Pacific Partnership currently under negotiations.

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A dissenting member of the panel – University of Ottawa law professor Donald McRae – warned that the ruling represents a "significant intrusion" into domestic jurisdiction and will "create a chill" among environmental review panels that will be reluctant to rule against projects that would cause undue harm to the environment or human health.

There is a growing concern in legal circles that the arbitration panels are expanding their mandate – including substituting their decision-making role for domestic courts – and that they cannot be appealed, Toronto trade lawyer Larry Herman said Tuesday. The Bilcon decision "will feed ammunition to those who oppose international arbitration as a form of dispute settlement," he added.

It's the second high-profile NAFTA loss for Canada. Last month, Ottawa was ordered to pay Exxon Mobil Corp. and Murphy Oil Ltd. $17.3-million after a NAFTA panel ruled that Newfoundland and Labrador had violated the trade agreement by imposing retroactive research-spending requirements on its offshore oil producers.

The ruling will also serve as a precedent should TransCanada Corp. decide to launch a NAFTA challenge against the Obama administration's handling of the Keystone XL pipeline review.

"The fact that the Keystone XL project has been subject to purely political delays … in my view, gives TransCanada a good argument that the U.S. has breached the international standard of full protection and security," Mr. Herman said.

The three-person NAFTA panel was chaired by Bruno Simma, a University of Michigan law professor who served a nine-year term as judge on the International Court of Justice in The Hague. The ruling was posted by the Investment Arbitration Reporter website.

In the majority ruling, the panel outlined a litany of problems that arose when Nova Scotia and Ottawa determined that an environmental review was required after the province had courted Bilcon to invest in the quarry. It noted the company's contention that the federal fisheries minister at that time, Liberal Robert Thibault, represented the riding, opposed the project and wanted to "drag out" the review process.

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The majority also criticized the review panel for assessing whether the project was consistent with "community core values" – a requirement, it said, that had not been properly communicated to Bilcon. But Mr. McCrae said the "community core values" standard was merely a restatement of the company's requirement to show the project did not unduly affect the "human environment" in the area.

The two-person majority insisted their ruling would not set back environmental protection.

"Lawmakers in Canada and the other NAFTA parties can set environmental standards as demanding and broad as they wish and can vest in various administrative bodies whatever mandates they wish," they wrote. But investors must be given a fair opportunity to have their case heard on its merits, they added.

Max Moncaster, a spokesman for federal International Trade Minister Ed Fast, said the government is "disappointed" with the decision and is "considering all available options," although he did not say what those might include. There is no appeal allowed.

Editor's note: A previous version of this story incorrectly identified a website that reports on trade issues. The correct name is Investment Arbitration Reporter.

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