Investment Disputes: The Mesa Power Case and What It Says

By | April 26, 2016

Canada won another NAFTA investment dispute launched by a US investor under Chapter 11 of the NAFTA, the full 26 March 2016 decision recently being released.

Observers of these investment cases are keen to search the dense wording (and this decision is no less dense than many others) to find some golden mien that will magically point the way to the future.

That is not always easy. Cases like these are one-off and fact-oriented. In addition to parts of the award that were largely fact-driven, there are some key aspects that will likely influence future interpretations of the NAFTA – and possibly other treaties like the CETA and TPP as well.

The claimant argued that its failure to secure a contract to supply wind-generated electricity under Ontario’s Green Energy Act was the result of discriminatory and arbitrary behavior on the part of the Province.

Rummaging through the 700-odd paragraphs, here are what can be regarded as some of the key parts of that decision.

First, the claimant’s case was seriously weakened because the panel said this was a government procurement case, meaning Canada’s non-discrimination obligations were inapplicable under the NAFTA:

  1. Article 1108 excludes the application of non-discrimination standards and performance requirements in the event of “procurement by a Party or a state enterprise”. . . .
  1. . . . the Tribunal comes to the conclusion that the FIT Program constitutes “procurement.” By way of the FIT Program, the Government of Ontario purchases electricity through the OPA for the use of and for the ultimate benefit of the people of Ontario. The FIT Program bears all the hallmarks of procurement that have been described above. It was introduced to create a green economy and stimulate job creation. It was designed following extensive consultations with stakeholders, and launched by formal announcements of the Government. Applicants to the Program were rigorously screened through prescribed (and publicized) criteria in a competitive, open process to which any interested person could apply.

Second, regarding the claimant’s other argument that it was still entitled to “fair and equitable treatment” (FET) under international law – as per NAFTA Article 1105 – the panel said, essentially, there was nothing in the evidence to suggest that this obligation was offended by the FIT Program.

Reviewing NAFTA and other recent arbitration decisions, even though these do not bind successor panels, it said,

  1. . . . . the Tribunal considers that the following components can be said to form part of Article 1105: arbitrariness; “gross” unfairness; discrimination; “complete” lack of transparency and candor in an administrative process; lack of due process “leading to an outcome which offends judicial propriety”; and “manifest failure” of natural justice in judicial proceedings. Further, the Tribunal shares the view held by a majority of NAFTA tribunals that the failure to respect an investor’s legitimate expectations in and of itself does not constitute a breach of Article 1105, but is an element to take into account when assessing whether other components of the standard are breached.
  1. . . . while Mesa has challenged many actions, these acts are essentially steps in the implementation of Ontario policy and the Tribunal finds the policy unobjectionable. And where the challenged acts involve an allegation of collusion or unfair preference, there is simply insufficient evidence to establish the same.

 Making an important point which should influence successor panels, it went on to say,

  1. . . . Article 1105 provides no guarantee against regulatory change. This is all the more so in the present case where the FIT Rules expressly state that they may be reviewed and amended, particularly in response to “significant changes in market conditions or other circumstances as required.” The Claimant was fully aware of and accepted these provisions when it filed its FIT Applications with the OPA.
  1. . . . .the Tribunal comes to the conclusion that Canada’s [i.e., Ontario’s] conduct has not breached Article 1105. While reaching this conclusion, the Tribunal nevertheless notes that at least some criticism may be levelled at Ontario’s decision to run two renewable energy programs in parallel without clearly articulating the relationship of the two and without spelling out their interaction in the event of shifts in demand and supply and other changes in the energy market. In the event, this choice and the manner in which it was implemented created certain problems, and might well been handled differently. But judged in all the circumstances, this is not criticism that reaches the threshold of a violation of Canada’s international obligations. 

Finally, of note in the case is the huge cost award, laying the burden entirely on the complainant. Perhaps a signal to others that might want to challenge governments, the panel did not split costs as is often done:

  1. Article 40(1) of the UNCITRAL Rules provides that the unsuccessful party shall “in principle” bear all of the costs of the arbitration. The Claimant too agrees that, in general, costs should follow the outcome of the case.
  1. The Respondent has prevailed in the present proceedings and the Tribunal sees no reason to depart from the general rule set in Article 40(1) of the UNCITRAL Rules. Indeed, it finds it fair and appropriate that the Claimant bear the entire costs of the arbitration, i.e. EUR 1,551,343.80.

There is much more to the decision than this. There always are. The foregoing are just a selection of what struck me as some of the more noteworthy elements.