KluwerArbitration

Document information Merrill & Ring Forestry L.P. v. Canada, Award, 31 March
2010
Publication Charles N. Brower
A contribution by the ITA
Board of Reporters
(★ )
Headnote
Organization In Merrill & Ring Forestry L.P. v. Canada, the tribunal, in Chapter Eleven proceedings
International Centre for conducted under the UNCITRAL Arbitration Rules, determined that federal regulations of log
Settlement of Investment exports did not violate NAFTA Article 1102 (national treatment), Article 1106 (performance
Disputes requirements, or Article 1110 (expropriation). While expressing differences of opinion on the
interpretation and application of NAFTA Article 1105 (fair and equitable treatment), the
tribunal unanimously denied the claim for lack of proof on the question of damages
Organization (31 March 2010)
United Nations Commission
on International Trade Law Digest
Merrill & Ring Forestry L.P. is a limited partnership constituted under the laws of
Washington State. Among other things, Merrill & Ring engages in timber production on
Arbitrators/Judges privately owned land located in British Columbia. In that province, timberland falls into
two main categories: (1) some 95% of productive timberlands are owned and regulated by
Francisco Orrego Vicuña,
Presiding Arbitrator the provincial government but harvested by private companies under tenure
Kenneth Dam, Co-Arbitrator agreements; and (2) slightly over 4% are privately owned and regulated by the federal
J. William Rowley, Co- government. Merrill & Ring's operations fall into the second category.
Arbitrator For timberland subject to provincial regulation, the British Columbia government applies
a surplus test to the removal of logs from British Columbia. For timberland subject to
federal regulation, the Canadian government applies a surplus test to the export of logs
from British Columbia. Under these tests, anyone wishing to remove or export logs from
Case date British Columbia must first advertise them for sale to local processors. If a local
31 March 2010 processor offers to buy the logs at fair market value, they cannot be removed or
exported.
Provincial and federal authorities administer their respective log surplus tests on the
Parties recommendations of the Timber Export Advisory Committee (TEAC) and the Federal
Plaintiff, Merrill & Ring Timber Export Advisory Committee (FTEAC), bodies with overlapping membership drawn
Forestry L.P. heavily from the local sawmill industry. According to Merrill & Ring, the FTEAC meets in
Respondent, Canada closed sessions and does not publish the minutes of its meetings. Also, the FTEAC defines
fair market value as any amount within 5% of the market price for logs in British
Columbia.
Key words The federal regulations just described apply only to exports of logs from British
National Treatment Columbia; they do not apply to exports from any other province. In addition, the federal
Performance Requirements regulations differ substantially from provincial regulations in British Columbia. For
Expropriation example, whereas provincial regulations provide certain exemptions from surplus testing
Fair and Equitable requirements, federal regulations do not. Also, federal regulations impose harvesting
Treatment requirements not mandated by provincial regulations. These include a requirement to
General Principles of Law harvest logs before applying for export permits; metric scaling of timber; sorting logs in
FTC Notes of Interpretation accordance with local market practices; and minimum and maximum volumes with
Damages respect to the advertisement of logs from remote areas.
Costs In December 2006, Merrill & Ring commenced an arbitration challenging the federal
regulations described above. As a practical matter, Merrill & Ring alleged that the
measures required it to forego export premiums and to sell logs to local sawmills at
Applicable depressed prices. In addition, the measures prevented Merrill & Ring from concluding
long-term export supply contracts. Furthermore, the metric scaling and local sorting
legislation requirements imposed unnecessary costs on production for export markets that follow
NAFTA, 1992 different customs. Finally, the obligation to harvest before requesting export permits
UNCITRAL Model Laws exposed its timber to needless deterioration.
As a legal matter, Merrill & Ring claimed that the measures constituted a denial of
national treatment, a performance requirement, an expropriation of the right to sell at
Bibliographic fair market value on international markets, and a denial of fair and equitable treatment.
reference A tribunal was constituted consisting of Professor Francisco Orrego Vicuna (President),
Charles N. Brower, 'Merrill Professor Kenneth W. Dam, and J. William Rowley, Q.C. After conducting evidentiary
& Ring Forestry L.P. v. hearings from May 18 to 23, 2009, the tribunal issued its award on March 31, 2010.
Canada, Award, 31 March
2010', A contribution by the In rendering its decision, the tribunal first discussed the issue of liability under NAFTA
ITA Board of Reporters, Article 1102 (national treatment). As a threshold matter, the tribunal determined that
(© Kluwer Law treatment of foreign investors by the federal government should be compared to the
International; Kluwer Law treatment accorded to domestic investors by the same government. As a result, the
International) differential treatment under provincial regulations became irrelevant.
Turning to the identification of domestic investors in “like circumstances,” the tribunal
observed that the NAFTA aims for broader economic integration and coordination than
trade agreements like the GATT. Therefore, the assessment of “like circumstances” could
go beyond a comparison of economic sectors and could include such factors as the
environment and public policy considerations. Viewed from this perspective, the tribunal
decided to compare the treatment of Merrill & Ring to the treatment of domestic log
producers operating under federal jurisdiction in British Columbia, not in other provinces
where the challenged regulations did not apply. Because Merrill & Ring received the
same treatment as domestic investors in the appropriate category, the tribunal found no
breach of Article 1102.
Taking up the question of performance requirements, the tribunal paused to emphasize
the fact that Article 1106 expressly limits its coverage to a finite list of measures set forth
in paragraphs (1) and (3). Furthermore, taken as a whole, the list of prohibited measures
aims to prevent host states from requiring foreign investors to increase their exports.
Viewed from this angle, the tribunal found it difficult to reconcile the investor's claims
with the text of Article 1106. Strictly speaking, minimum and maximum volume
requirements for the advertisement of logs from remote areas could not “be seen as a
restriction on the exports themselves.” Requirements to sort and scale timber in
accordance with local custom did not represent a “performance requirement designed to
restrict or enhance exports.” While the requirements might have incidental effects on
exports, they did “not appear to be the kind of prohibited performance requirement,
which needs to be directly and specifically connected to exports.”
With respect to the issue of expropriation, the tribunal doubted whether the claim
related to an “investment” as defined by NAFTA Article 1139. Although Merrill & Ring
claimed that the Canadian government had taken its “interest in realizing fair market
value for its logs on the international market,” the tribunal regarded that as a “potential
interest” which fell outside the protection that NAFTA grants to covered investments. In so
doing, the tribunal drew a distinction between access to export markets (which would be
protected) and the interest in exporting at a particular price (which was not protected).
Even assuming that the claim involved a protected investment, the facts did not rise to
the level of ”substantial deprivation” required for liability under NAFTA Article 1110. The
Canadian government had never directed the operations of Merrill & Ring in British
Columbia, nor had it placed the company's officers under state supervision. Furthermore,
Merrill & Ring did not operate at a loss, but continued to generate significant profits.
Thus, while the log export regulations might subject Merrill & Ring to certain
inconveniences, they did not support a claim for expropriation.
Due to “broad and unsettled” debates about the applicable standard, the tribunal
described the issue of fair and equitable treatment as the “most complex and difficult”
component of Merrill & Ring's claim. As a first step in its analysis, the tribunal noted that
NAFTA Article 1105 requires treatment “in accordance with international law,” which
includes “fair and equitable treatment.” Construing this text according to its ordinary
meaning, the tribunal observed that “international law” refers to all sources listed in
Article 38(1) of the Statute of the International Court of Justice. While that includes
treaties, they typically contain very general references to “fair and equitable treatment”
and, therefore, provide little help in elaborating the concept. However, the tribunal
emphasized that general principles of law constitute a relevant source that “no tribunal
today could be asked to ignore.” In to this category fell principles like the obligation of
good faith, the prohibition of arbitrariness, and the norm against discrimination, which
would apply even in the absence of analogous rules under customary international law.
Though more cautious on the topics of a secure legal environment and transparency, the
tribunal opined that the former “has a close connection” to the general principles
described above, and that transparency “appears to be fast approaching that standard.”
Turning to the Free Trade Commission's Notes of Interpretation of July 31, 2001 regarding
NAFTA Article 1105, the tribunal expressed the view that the instrument “seems in some
respects to be closer to an amendment of the treaty[] than a strict interpretation.”
However, even working within its framework, the tribunal found ample room to interpret
Article 1105 “in the light of the evolution of customary law over time.” In so doing, the
tribunal observed that cases from the nineteenth and early twentieth centuries applied
standards like “bad faith” and “willful neglect of duty” in the context of situations
involving due process, the denial of justice and physical mistreatment of individuals.
Significantly, the tribunal noted that these early cases dealt only marginally with
situations involving business, trade and investments. Nevertheless, NAFTA tribunals had
applied similarly demanding standards in Pope & Talbot, Loewen, Waste Management II,
and S.D. Myers. Furthermore, as demonstrated by the recent Glamis Gold award,
jurisprudence had “stiffened” since the FTC Notes of Interpretation.
On the other hand, the tribunal opined that, during the 20th century, the development of
customary international law followed a second track with respect to business, trade and
investments. Describing the standard as “much more liberal” than early jurisprudence on
physical security, the tribunal recounted the “tendency of states to support the [business,
trade and investment] claims of their citizens … with an open mind, and without requiring
a showing of ‘outrageous’ treatment.” Furthermore, this “trend towards liberalization of
the standard applicable to the treatment of business, trade and investments [has]
continued unabated over several decades and has not yet stopped.”
Consistent with the more liberal approach towards the treatment of business, trade and
investments, NAFTA tribunals have found unjust conduct, arbitrary conduct, unfair
conduct and violations of due process to constitute breaches of fair and equitable
treatment, even in the absence of bad faith or malicious intent. In fact, state practice
had become sufficiently widespread and consistent to establish a new custom that
protects business, trade and investments against “all acts or behavior that might infringe
a sense of fairness, equity and reasonableness.”
However, even within the more recent customary practice of fair and equitable treatment
towards business, trade and investments, one could take two views. First, the standard
might encompass a very significant measure of protection for investment and, thus, a
relatively low threshold of liability for states. Alternatively, the standard might require a
showing of wrongful conduct “sufficiently serious” as to be “readily distinguishable” from
the ordinary effects of regulatory measures. Because tribunal members had differing
opinions on the correct view, the tribunal decided to apply both approaches to Merrill &
Ring's principal argument: that the whole log export regime was “geared towards
providing low cost raw material for domestic sawmills in British Columbia at the expense
of private log producers.”
Applying the less stringent view of fair and equitable treatment, the tribunal recognized
that some aspects of the regime seemed designed to benefit a particular industry, as
opposed to the public at large. Examples included the obligation to cut and sort timber
in accordance with local customs. More seriously, the membership of the TEAC and FTEAC
seemed heavily weighted towards the local industry (sawmills) alleged to be the
beneficiary of the log export regime. In practice, the TEAC and FTEAC favored local
sawmills by treating some of their below-market offers as fair market price (i.e., offers
below market price but within 5% of that price). The tribunal also expressed concern
about the practice of the TEAC and FTEAC in conducting closed meetings without
publishing minutes. Observing that investors have a reasonable expectation of freedom
from government regulations not justified by appropriate public policy objectives, the
tribunal observed that regulations designed to benefit a certain local industry at the
expense of investors “might be incompatible with what … investor[s] might reasonably
expect from a government.”
Applying the more stringent view of fair and equitable treatment, however, the tribunal
expressed markedly different opinions. For example, the tribunal observed that the
benefits to local sawmills reflected a legitimate public policy objective, namely the
creation of domestic employment and the retention in Canada of part of the timber value
chain that would be lost upon the export of raw timber. Since this policy subjected
foreign and domestic owners of federally regulated timberland in British Columbia to
identical treatment, the tribunal found it difficult to see how it could be described as a
breach of the more stringent view of fair and equitable treatment. In expressing this
opinion, the tribunal noted that almost all of the TEAC and FTEAC members associated
with sawmills had professional interests in favoring exports of logs or high log prices,
private landholders had received invitations to join the TEAC and FTEAC but had always
declined, the TEAC and FTEAC had conflicts-of-interest rules that required members to
recuse themselves in appropriate cases, the TEAC and FTEAC used actual sales data to
calculate market prices, and landowners typically sold logs at prices around the median
range for market prices during any relevant period.
In the end, the tribunal decided not to render a definitive assessment of the log export
regime under Article 1105 because tribunal members had differing opinions on which
view of fair and equitable treatment should control, and whether the facts established a
breach under either view. Under these circumstances, the tribunal chose to rest its
decision on Merrill & Ring's failure to prove damages, which prevented any finding of
liability under Article 1105.
Returning to the interest that Merrill & Ring sought to protect, the tribunal described the
pursuit of future export contracts as an uncertain expectation. In addition, the tribunal
criticized Merrill & Ring for basing estimated damages on its own harvest plan, which
arguably compromised the objectivity and impartiality of analysis. Furthermore, the
tribunal observed that Merrill & Ring's analysis failed to consider the increased export
competition that it would face in the absence of Canada's log export regime. Finally, the
tribunal expressed the view that Merrill & Ring had not adequately identified
appropriate benchmarks for estimating log prices in export markets. Under these
circumstances, the tribunal found it impossible to conclude that Merrill & Ring would
have achieved any “export premiums” for past operations. The situation concerning
claims for future losses through 2016 required even more speculation.
Turning to the question of costs, the tribunal observed that Merrill & Ring had advanced
certain plausible arguments and had raised questions “of particular interest” under
NAFTA and international law. In addition, both parties had displayed professional
competence at all stages of the proceedings. Therefore, the tribunal held that the parties
should bear equally the costs of arbitration, and that each party should pay its own costs.
Parties: Merrill & Ring Forestry L.P. v. Canada, case no: none, NAFTA/UNCITRAL.

Full text
I Procedural History
1.1 The Request for Arbitration
1. On September 25, 2006, Merrill & Ring Forestry L.P. (“Merrill” or “Investor” or “Claimant”)
served upon Canada (“Respondent”) a Notice of Intent to Submit a Claim to Arbitration in
accordance with Article 1119 of the North American Free Trade Agreement (“NAFTA”). This
was followed on December 27, 2006, by a Notice of Arbitration served upon Canada and a
Statement of Claim submitted by Claimant pursuant to Article 18 of the Arbitration Rules
of the United Nations Commission on International Trade Law (“UNCITRAL”) and
Articles 1116 and 1120 of NAFTA. The Statement of Claim detailed the measures related to
the implementation of the British Columbia and Federal regulatory framework of log
exports that Claimant alleged breached the obligations of Canada under Section A of
Chapter 11 of the NAFTA, including: (i) Article 1102 – National Treatment; (ii) Article 1103 –
Most Favored Nation Treatment; (iii) Article 1105 – Minimum Standard of Treatment; (iv)
Article 1106 – Performance Requirements; and (v) Article 1110 – Expropriation.
1.2 The Constitution of the Tribunal
2. Pursuant to Article 1123 of the NAFTA, the Tribunal was comprised of three arbitrators,
with one arbitrator appointed by each of the disputing parties and the third, presiding
arbitrator, to be appointed by agreement of the disputing parties. Each party appointed
an arbitrator: Professor Kenneth W. Dam by Claimant, and Mr. J. William Rowley, QC by
Respondent. The parties having failed to agree, Professor Francisco Orrego Vicuña was
appointed as presiding arbitrator by the Secretary-General of ICSID and the Tribunal was
considered constituted on August 31, 2007. The parties agreed on certain procedural
matters, including the administration of the case by ICSID, as reflected in a letter of
October 19, 2007 addressed to the President of the Tribunal.
1.3 Preliminary Objections and First Procedural Meeting
3. Pursuant to Article 19 of the UNCITRAL Arbitration Rules (“UNCITRAL Rules”), Canada
filed on October 30, 2007 a Statement of Defence raising preliminary objections and
arguing that the Investor's claims were without merits. Merrill replied to these objections
on November 9, 2007. On the same date and in advance of the first procedural meeting,
the parties filed submissions on procedural questions on which they could not agree:
place of arbitration, confidentiality issues, production of documents, and bifurcation of
proceedings on jurisdiction. The parties met with the Tribunal for the first procedural
meeting in Washington, D.C. on November 15, 2007.
4. At the procedural meeting, the parties confirmed that the Tribunal had been duly
constituted. They also agreed that the place of arbitration would be determined by the
Tribunal but that the hearings would be held in Washington, D.C. After having heard the
parties on the question of the bifurcation of the proceedings, the Tribunal decided that
the preliminary objections would be joined to the merits. The parties could then agree on
a time table for the subsequent submissions and document requests, it being specified
that the deadlines would start running from the signature of the Procedural order
reflecting the agreements reached at the meeting. In addition to these matters, it was
specified that Mr. Howard Dean (1) and Ms. Eloïse Obadia, Senior Counsel, ICSID would
assist the Tribunal and the parties for this arbitration.
5. These agreements and orders were memorialized in a Procedural Order, issued on
instructions from the Tribunal by the ICSID Secretariat on November 20, 2007.
1.4 Tribunal's Decisions on Various Procedural Matters
6. The Tribunal decided on the matters which the parties had left for its determination.
On December 12, 2007, the Tribunal issued its decision on the place of arbitration. The
Respondent had proposed Ottawa, Ontario or Vancouver, British Columbia while the
Claimant had asked that Washington, D.C. be the place of arbitration. The Tribunal
decided in favor of Washington, D.C., mainly for questions of convenience.
7. On January 21, 2008, the Tribunal issued a Confidentiality Order which dealt with the
definition of confidential information, the safeguards for access to restricted information,
disclosure obligations, settlement discussions, hearings open to the public and public
disclosure of documents. On January 29, 2008, Canada filed a motion to reconsider
paragraph 31 of the Order relating to the return at the conclusion of the proceedings of
the material produced during these proceedings. After having received on February 6,
2008 the Claimant's views, the Tribunal issued a revised Confidentiality Order on
February 18, 2008. In March 2009, the parties agreed on a further variation of the “return-
destroy” provision of the Order. Accordingly, the Tribunal issued a further amended
Confidentiality Order on April 1, 2009 which was then signed by the parties.
1.5 Motion to Add a New Party
8. On December 12, 2007, the Claimant filed a motion to add a new party, Georgia Basin
Holdings L.P., as an additional investor. The Claimant relied on Article 20 of the UNCITRAL
Rules and claimed that Georgia Basin owned a small portion of the timber harvest that
was the subject of the claim. Canada replied on January 2, 2008 and opposed the motion
on the grounds that it did not meet the test of Article 20 of the UNCITRAL Rules and that it
failed to present a prima facie claim under Article 1116 of the NAFTA. On January 31, 2008,
the Tribunal decided to reject the motion. The Tribunal considered that the motion did
not appear to be an amendment of the original claim by Merrill, but rather an entirely
new claim, requiring Georgia Basin to comply with NAFTA Articles 1119 and 1120. The
Tribunal concluded that compliance with these safeguards would significantly delay the
proceedings creating a serious procedural prejudice and rendering a consolidation of the
claims inefficient.
1.6 Production of Documents
9. The question was discussed at the first procedural meeting and a first order was issued
by the Tribunal on January 21, 2008 (Order Concerning Requests for Documents and
Certain Evidentiary Matters, hereinafter “Document Production Order”). The Tribunal
established the conditions to file and admit requests for production of documents and
fixed a calendar. The Tribunal also dealt with the production of evidence in relation to
witnesses and interrogatories.
10. The timeline for the various steps in relation to the document production was slightly
modified further to the parties' requests of May 16, 2008. In compliance with the
Document Production Order and the new timeline, the parties – in the first part of June
2008 – submitted their simultaneous requests for document production and counsel met
to assess the objections to the production requests. Further to that meeting, the parties
submitted on June 17, 2008, a joint letter requesting the Tribunal to modify its Document
Production Order to: (i) include additional grounds for refusal; (ii) specify that the
Confidentiality Order applies to documents produced by the parties pursuant to the
Document Production Order; and (iii) modify the calendar for the filings of the Reply and
the Rejoinder. The parties disagreed on some other related matters. The Tribunal issued
an amended version of its Document Production Order on June 24, 2008 incorporating the
changes jointly requested by the parties and modifying the procedural calendar.
11. In June and July of 2008, the parties exchanged various correspondences, including a
Redfern Schedule, in relation to their refusals to produce certain documents requested
by the other party. The Tribunal issued its Decision on Production of Documents on July
18, 2008, ordering the production of some documents and upholding the refusal to
produce others. The Tribunal dealt in particular with the questions of documents
containing Cabinet Privileges and documents concerning the British Columbia
Government, which were grounds of refusal invoked by Canada, as well as confidential
commercial information, ground relied upon by both parties.
12. By letter of July 28, 2008, Canada asked the Tribunal to clarify some parts of its
Decision on Production of Documents and to revise the schedule. The Tribunal replied on
August 4, 2008 and modified the schedule. On that same date and on August 25, 2008,
Canada submitted a list of specific documents for which it was asserting Cabinet
Privileges. Merrill objected on August 20 and 25, 2008. On September 3, 2008, the Tribunal
issued its Decision on Production of Documents in Respect of Which Cabinet Privilege Has
Been Invoked. It ordered Canada to produce 8 of the 9 documents concerned and to
designate them as confidential.
13. The parties encountered some difficulties in reaching an understanding about several
aspects of the document process and the potential consequences of these difficulties on
the procedural calendar. The parties argued in particular on the format of the production
by Canada of the Export Management System database. The Tribunal gave directions to
the parties on this matter on September 22, 2008 and reestablished a new schedule for
the filings of the Reply and Rejoinder. Due to further difficulties in relation to the
production of the large database, the Tribunal issued supplementary directions on this
question on November 4 and 17, 2008 and December 1, 2008.
1.7 Parties' Submissions
14. As agreed at the first session, the Claimant submitted its Memorial on February 13,
2008. Canada raised some concerns with respect to the filing of the Memorial as
Confidential and Restricted Information. The Tribunal ruled on this question by letter of
February 19, 2008 and confirmed that the deadline for Canada to file its Counter-
Memorial was unchanged.
15. Accordingly, Canada filed its Counter-Memorial on May 13, 2008. As mentioned in the
previous section, the schedule for the filings of the Reply and Rejoinder was modified
several times to take into account the difficulties which arose out of the document
production process. By letter of September 22, 2008, the Tribunal fixed the dates of
December 15, 2008 for the Reply and March 27, 2009 for the Rejoinder. Due to the issue of
the production of the Export Management System database and its volume, the Tribunal
– by letters of December 1 and 2, 2008 – granted until January 2, 2009 for the Investor to
submit a supplement to its Reply in relation to the examination of the database.
Considering that when fixing the date for Canada's Rejoinder, the Tribunal had
interrupted the schedule during the year-end period, this decision did not affect
Canada's allocation of time to prepare its filing.
16. Therefore, the Investor submitted its Reply on December 15, 2008 and observations
from one of its experts on the Export Management System database on December 24,
2008. Shortly after the receipt of the Investor's Memorial, the Respondent requested the
Tribunal to disregard the Investor's new damages claim including the expert reports, or,
alternatively, to grant a 2-month extension to file its Rejoinder. By letter of December 29,
2008, the Tribunal considered that the Claimant had not changed its claim but rather had
provided updated damages information using a new method of calculation responsive to
Canada's arguments in its Counter-Memorial. The deadline for Canada's Rejoinder was
unchanged. It was filed on March 27, 2009.
1.8 Evidentiary Hearing
17. A few weeks before the hearing, the parties raised several issues with respect to: (i) the
sequestration of witnesses and experts; (ii) the production of additional documents
supporting some of the experts' comments; and (iii) the reclassification of some of the
filings and expert reports (from restricted to confidential) to allow counsel to consult with
their clients on these documents as well as to avoid sequestration of witnesses and
sessions closed the public during the examination of the concerned experts. The Tribunal
decided on these matters by letters of April 10, 15, 23 and 27, 2009, respectively.
18. The hearing took place at the World Bank offices in Washington, D.C. from May 18, 2009
to May 23, 2009. The parties started with opening arguments. This was followed by the
examination of witnesses and experts (2) until May 22, 2009. The closing arguments were
presented on May 23, 2009. Parts of the hearing were held in sessions open to the public.
1.9 Submissions on Costs and New Evidence
19. As agreed during the hearing, the parties filed simultaneous submissions on costs on
June 30, 2009, and simultaneous replies on July 15, 2009. In addition, in the course of the
hearing, Canada argued that the Claimant had introduced new evidence while examining
some of the witnesses it had introduced. Canada developed its arguments on June 4, 2009
and the Claimant replied on June 16, 2009. The Tribunal indicated on June 24, 2009 that it
would take these observations into account during its deliberations.
1.10 Article 1128 and Non-Disputing Party Submissions
20. By letter of May 19, 2008, the Tribunal suggested that the non-disputing NAFTA Parties
file their Article 1128 submissions on July 14, 2008, i.e., after the first round of pleadings,
and that the parties reply to these submissions in their second round of pleadings. In the
absence of any objections from the parties, the non-disputing NAFTA Parties were
informed accordingly on May 29, 2008. The United States filed its submission on July 14,
2008. No submission was received from the United Mexican States on that date.
21. On April 3, 2009, the United Mexican States indicated to the parties that it intended to
make an oral submission during the hearing, but also proposed to file the submission in
writing with the Tribunal in advance of the hearing. The Claimant objected to the
submission as being untimely. Mexico brought the question before the Tribunal on April 7,
2009. While regretting that Mexico had missed the deadline of July 14, 2008, the Tribunal
accepted, on April 7, 2009, the written submission dated April 2, 2009.
22. With respect to the non-disputing parties, the representative of the Communications,
Energy and Paperworkers Union of Canada, the United Steelworkers and the British
Columbia Federation of Labour, informed the ICSID Secretariat that these groups wished
to file a joint submission. At the invitation of the Tribunal, the parties commented on this
request for intervention on July 16, 2008. The Tribunal informed the petitioners on July 31,
2008 of the conditions to file an application for leave and submission of an amicus curiae
brief. The Tribunal referred in particular to Section B of the NAFTA Free Trade Commission
Statement on Non-Disputing Party Participation dated October 7, 2003. The Tribunal
invited the petitioners to file the application for leave and submission on September 8,
2008.
23. Due to an error of their representative, the application for leave and the submissions
of the petitioners were filed on September 26, 2008. The Tribunal asked the parties to
provide their observations on the late filing by October 2, 2008. Both parties having
consented to the late filing, the Tribunal admitted the application and the joint
submissions on October 2, 2008. The parties were given an opportunity to comment on
the joint submissions in their written pleadings and before the hearing.
24. Further to the Tribunal's direction of May 1, 2009, the parties filed their written
observations on the amici joint submissions and the NAFTA Parties' Article 1128
submissions, on May 8, 2009.
25. Following the hearing and the submissions made by the parties thereafter the
Tribunal proceeded to its deliberations both at meetings held in May and September
2009 and by correspondence.

II Merits of the Case

2.1 The measures complained of
2.1.1 The British Columbia and Federal Regulatory Framework of Log Exports
26. This case concerns a claim by the Investor in respect of the implementation of
Canada's Log Export Regime to the Investor's timber operations in British Columbia and
the requirement that any of its exports be subject to a log surplus testing procedure,
among other regulatory measures.
27. Under regulations currently in force, the removal of logs from British Columbia is
subject to provincial legislation as established in the British Columbia Forest Act (“B. C.
Forest Act”). (3) Also the export of logs from that province is subject to federal regulation
as provided in Notice 102 (“Notice 102”) (4) enacted under the Export and Import Permits
Act. (5) Notice 102 has been in force since April 1, 1998, and it was preceded as from
January 1, 1986 by the Notice to Exporters Serial No. 23 (“Notice 23”). (6)
28. Both regulations include a log surplus test prior to authorization of log removal or
exports from the province, as the case may be. Under this test, those interested in
removing or exporting logs from British Columbia must first advertise the logs in question
in the provincial or the federal “Bi-Weekly List”, as the case may be, which allows log
processors in that province to make offers for the purchase of such logs. If no offer is
made, or an offer is made at below fair market value (in terms of the BC market), the logs
are deemed to be surplus and will be suitable for removal and an export permit can then
be approved. If an offer is determined by the regime's administrator to reflect fair
market value, the logs will not be granted an export permit.
29. While both regulations use the same type of mechanism in respect of the surplus test,
their respective goals are different. Canada has explained that the provincial regime
seeks to ensure the availability of logs for use and manufacture in the province, while the
federal regime seeks an adequate supply and distribution of logs in Canada. Their
respective requirements and procedures are also different. Notice 102 applies only to
“federal land”, which is private land acquired through Crown grant prior to March 12, 1906,
as well as to aboriginal land. The British Columbia regulations apply to provincially
owned land where the harvesting occurs under a tenure agreement; they also apply to
private land acquired through Crown grant after March 12, 1906. Log exports from
provincial land are subject to both federal export regulation and the provincial use and
manufacture regime.
30. The provincial regime is administered by the British Columbia Ministry of Forestry
(“BCMOF”) upon recommendations of the Timber Export Advisory Committee (“TEAC”).
Notice 102 is administered by the Department of Foreign Affairs and International Trade
(“DFAIT”) upon recommendations from the Federal Timber Export Advisory Committee
(“FTEAC”). This last body has the same composition as TEAC, with the addition of one
representative from the federal government.
31. Other differences between the two regulatory regimes concern the availability of
certain exemptions under the provincial regime, some of which are not available for logs
originating in the south coast of British Columbia, where the Investor also harvests. These
exemptions are also not available under Notice 102. The Provincial exemptions may
apply when the timber is surplus to the requirements of timber processing in the
province, when the timber cannot be processed economically in the vicinity of the land
concerned or cannot be transported economically to a processing facility elsewhere in
the province, or when the exemption would prevent the waste of or improve the
utilization of timber from provincial land.
32. There are also regime differences in the requirements that apply to certain coastal
areas and other areas considered remote. The provincial regime also applies a fee-in-
lieu of manufacture for all provincial logs removed from the province, a fee that does not
exist under federal regulations.
2.1.2 The Investor's Views
33. The Investor has explained that 95% of all the productive timberlands in the province
are owned by the British Columbia government, while only 4.1% of the remaining
timberlands are owned by about 20,000 private landowners, the vast majority of which
are Canadian investors. The Investor is one of over 70 private timberland companies
which fall under federal jurisdiction in British Columbia, with a share of 0.21% of the log
market. An expert report submitted by the Investor also explains that the types and
species of logs harvested from privately owned federally regulated lands in that province
are interchangeable with logs originating in the provincial lands. (7)
34. The Investor asserts that the federal regulations described affect the conduct of its
business in the province. (8) The Investor explains that Notice 102 only applies to the
export of federal logs from British Columbia, as opposed to other provinces. The
harvesting requirements established under Notice 102 are particularly disadvantageous
when compared to the provincial regulations. Under Notice 102, federal landholders have
to harvest their trees before applying for an export permit, while under provincial
regulation an exemption may be provided so as to allow for the application before actual
harvesting. Notice 102 also requires that federal logs be scaled metrically, a
measurement system not used in the United States and Asian export markets, with the
result that the logs must be re-scaled for export to those markets.
35. It is explained that, in addition, the volume of federal logs from remote areas must be
at least 2,800 m3 and never greater than 15,000 m3. There is also an obligation to sort,
boom or deck the logs to conform to normal log market practices, a concept which is not
defined. The task of inspecting compliance with the harvesting requirements is delegated
to the BCMOF. As noted above, none of the standing exemptions benefiting provincial logs
are available to federal logs. The Investor asserts that, moreover, the activities of the
British Columbia Timber Sales (“BCTS”), a sub-unit of the Ministry of Forests, grants
benefits and assistance to provincial producers but not to federal land owners.
36. The Investor also complains about the procedures that need to be followed in the
export application process, which involves, in particular, the application of the surplus
test. If an offer is made on advertised federal logs, FTEAC has to determine that it is in
accordance with prevailing market prices in British Columbia and recommends to DFAIT
whether to grant an export permit. The Investor asserts in this respect that all offers
(other than those that are made to it) are kept secret and the meetings and minutes of
FTEAC are closed to the public. Although DFAIT can consider in addition to FTEAC
recommendations “other relevant factors” in making a final determination, these have
never been specified and almost invariably DFAIT rubber stamps such recommendations.
Once an export permit is granted, a fee has to be paid and the applicant has only four
months to export its logs, with extensions being limited to one month. None of these
restrictions apply to provincially regulated lands, which may be physically and
geographically identical.
37. The Investor's complaint refers particularly to the administration of Notice 102 by
FTEAC, maintaining that the federal representative in this body is often not in attendance
at the committee's meetings, that there are no specific criteria for determining the
prevailing British Columbia prices for similar logs and that many of its members have
direct or indirect interests in the provincial sawmill industry. (9) The quality of logs is not
adequately assessed and improper recommendations to deny export permits have been
made in a number of situations. Although FTEAC includes a large membership from the
industry, no one with significant private federal landholdings has ever participated in
this body.
38. The Investor complains that as a result of such administration, FTEAC decisions are
not transparent, particularly as to the “fairness” of an offer, its members are in conflict of
interest and no action has been taken to redress this anomaly, and there is no procedure
for the appeal or review of a FTEAC recommendation, except an ad-hoc review by the
DFAIT which is entirely discretionary.
2.1.3 The Respondent's Understandings
39. The Respondent has a different understanding of the measures complained of. It
explains that the Investor holds 7,627 acres of timberland in British Columbia, most of it
located in the coastal areas. Most of these lands are regulated by the Canadian federal
government, with the exception of 584 acres that are under provincial regulation. In spite
of its complaints, the Investor has operated under Notice 102 for the last ten years, and
under the almost identical regime of Notice 23 from 1986 to 1998. Given the importance of
forestry to Canada and British Columbia, Canada asserts that it is only natural that
regulations need to be applied so as to ensure the policy goals related to this resource.
Canada also explains that the activities of BCTS in no way accords benefits to timber
sales licensees in that province. (10)
40. Because of the different commercial viability of forests due to factors such as
location, size, distribution, costs of harvesting and environmental restrictions, the
harvesting requirements might also be different. (11) It is explained that the
measurement of logs in “board feet” used in the United States Pacific Northwest is not
that used in Canada, which measures in cubic or linear meters. The sorting of logs by
species, size, quality and other characteristics needs to be appropriate to the local
market place. There are also cost differences between water transportation used in
coastal areas and the land transportation used in areas of the interior.
41. The Respondent also notes that because of the different policy goals of the provincial
and the federal regulations, their requirements are also different in many other respects.
This is so, in particular, in respect of the fact that provincial regulations allow for several
exemptions that are not available under federal regulations, because they are geared
toward the specific needs of local manufacturing, refer to specific geographical areas or
prevent waste and improve utilization of provincial land.
42. The process of application, advertising and approval is, the Respondent argues,
perfectly clear under the regulations in force and the practice of their implementation.
(12) Offers that occasionally might be made not in good faith (so called “blockmailing”,
described further below) can be controlled by the power of DFAIT to discipline
companies that violate the requirements of Notice 102 and export permits may be
granted to applicants believed to have been unfairly targeted. (13) Moreover, only offers
from persons that own or operate log processing facilities will be considered and offers
are always to be assessed to determine whether they reflect current market value.
43. Other factors, such as the location of logs, transportation costs and weather
conditions, are taken into account in assessing the fairness of an offer. (14) An offer is
normally considered fair if it falls within plus or minus 5% of the current domestic market
price. In arriving at a decision, the Minister of Foreign Affairs may take into account
factors other than the FTEAC recommendation, such as the price of offers, the log supply
and the interests of log processors in Canada. Exporters can make submissions at any
time about such decisions and, in any event, judicial review of the minister's decision is
also available. Canada explains that the Investor has made a number of submissions to
the minister and that some have been successful, but has not applied for judicial review.
Challenges to constitutionality of Notice 102 are also available; one such challenge was
unsuccessfully made by Timber West Corporation.
2.2 The effects of the measures complained of in connection with the Investor
2.2.1 The Investor's Argument
44. The Investor is of the view that the log export control regime does not further the
Respondent's objectives in terms of job creation because any such effect is offset by the
losses in the log export sector, just as it does not further the objective of providing
domestic manufacturers with an adequate supply of logs as there is no shortage of supply
in the Canadian market. This may have been different at the origins of the export
restrictions, found first in the Log Export Advisory Committee established by the British
Columbia government in 1918 with the occasion of World War I, and continued in the 1940
federal War Measures Act and in the National Emergency Transition Power Act of 1945, but
it does not find justification today. (15) An Investor's expert report explains that there are
a number of less restrictive trade measures that could be applied to achieve the policy
goals. (16)
45. The Investor argues in particular that the measures described have specific adverse
effects on the conduct of its business in the province. This is so first because it considers
the harvesting, sorting and booming requirements to be unfair as they impose additional
restrictions on coastal log producers in the light of the Coast Domestic Market End Use
Sort Descriptions, (17) applicable only to coastal log producers such as the Investor is;
they mandate scaling in accordance with the metric system, resulting in the need to re-
scale for exports and the inevitable cost of time and money; they prevent the Investor
from preparing the logs in the manner most suitable to its clients needs; and provide for
minimum and maximum volumes of logs from remote areas.
46. Adverse effects also result from the practice of allowing sawmills to “blockmail”
export applications simply by making an offer on the logs advertised for export, forcing
the Investor to sell for a price lower than the export price. (18) The log processors can
thus obtain logs at artificially suppressed prices. This practice also puts the Investor at a
competitive disadvantage in respect of other producers operating in both federal and
provincial lands and producers that own sawmills. (19) FTEAC, aware as it is of this
practice, has not adopted remedial measures. This is also the experience of other log
producers in British Columbia. (20)
47. Other adverse effects which the Investor identifies are the physical damage suffered
by the logs during the long export application process, mostly in terms of degradation
and rot and various diseases; the higher costs that it must incur to comply with the
regime; the fact that it is prevented from harvesting in an efficient and optimal manner;
and missing business opportunities because of its inability to enter into long-term supply
contracts with foreign clients. (21)
48. It also argues that the Investor is prevented under the regime from obtaining standing
timber exemptions which are available to provincially-regulated timberland holders.
Such exemptions involve many benefits, the most important being that of not having to
pass the surplus test and thus avoiding the risk of “blockmail”. The Investor also asserts
that the DFAIT has granted a standing timber exemption to one corporation in spite of
claiming that it has no authority to do so, (22) just as it has done with timber originating
from aboriginal lands.
49. The cumulative effect of such measures is that the Investor must sell its logs below
fair market value, and thus it ends up subsidizing the British Columbia sawmills at its own
expense.
2.2.2 The Respondent's Argument
50. The Respondent believes that the claim by the Investor deals with a miniscule
percentage of its exports and thus the measures concerned cannot have adverse effects
of any magnitude on its business as the Investor describes. (23) The Respondent explains
that of 38,876 parcels advertised from federal lands between April 1, 1998 and March 31,
2008, only 933 offers were considered by FTEAC. This represents only 2.4% of all federal
booms advertised during ten years, which means that 98% of booms advertised have
been granted surplus status. This experience is also that of the Investor. Canada asserts,
moreover, that the log export control policy is in accordance with regulatory aims of
many other jurisdictions which have similar policy goals and legislation. (24) Submissions
made by several intervenors maintain that none of the restrictions are incompatible with
NAFTA. (25)
51. The Tribunal will consider the specific implications of such regulatory framework and
its eventual effects in the context of the specific legal claims brought by the Investor.
2.3 Overview of the claims brought before the Tribunal
52. The Investor believes that regulations are aimed at ensuring that log processors in
British Columbia have access to logs at artificially suppressed prices, and the fact that
these very log processors have been put in charge of the administration of the regime,
breach a number of NAFTA provisions and other standards of international law the
Tribunal is bound to take into account.
53. The claims first concern national treatment under Article 1102. The Investor claims in
this connection that other exporters in “like circumstances” have been provided with
more favorable treatment as they are not subject to the requirements and tests laid
down under Notice 102, with particular reference to the question of the harvesting
requirements, the surplus test and the unavailability of important exemptions benefiting
those other exporters. This differentiated treatment results in the breach of the national
treatment standard.
54. The Investor next claims that the regulatory regime of Notice 102 is in breach of the
international law standard of treatment provided in NAFTA Article 1105, with particular
reference to the standard of “fair and equitable treatment”. The Investor argues in this
connection that it is subjected to unfair and inequitable treatment, in part because of
the substantive requirements of Notice 102 and in part because of the highly secretive
and non-transparent manner in which the Log Export Control Regime is administered,
which, among other consequences, results in the unrestrained practice of “blockmailing”.
55. Another claim brought by the Investor concerns the alleged imposition of
performance requirements in breach of NAFTA Article 1106(a) (c) and (e). In the Investor's
view, the Log Control Export Regime imposes performance requirements in respect of the
obligation to cut and sort timber from federal land at “normal market practices”, scale
the rafts metrically and comply with other rules affecting the Investor's properties
located in remote coastal areas.
56. A last claim brought by the Investor relates to the alleged breach of NAFTA
Article 1110, because the Log Export Control Regime entails a number of measures that
are tantamount to expropriation of the Investor's intangible property right to realize a
fair market value for its logs in the international market.
57. The Investor also claims damages in respect of each of such breaches of the NAFTA
provisions indicated.
58. The Tribunal needs also to consider a jurisdictional objection raised by Canada, a
matter which, as noted above, the Tribunal joined to the merits. Canada maintains that
the Investor's claim is time barred by NAFTA Article 1116(2).
59. The Tribunal will now examine each of these claims, beginning with those concerning
national treatment and performance requirements, to be followed by those other claims
that involve an allegation of expropriation and the breach of fair and equitable
treatment. Canada's jurisdictional objection and damages will be examined at the end to
the extent relevant.
2.4 The claim concerning national treatment under Article 1102
2.4.1 The Investor's Argument
60. The Investor asserts that Canada has failed to accord it treatment equivalent to that
provided to the most favorably treated Canadian investor or its investment in breach of
NAFTA Article 1102. This Article provides that :
Article 1102: National Treatment
1. Each Party shall accord to investors of another Party treatment no less
favorable than that it accords, in like circumstances, to its own investors
with respect to the establishment, acquisition, expansion, management,
conduct, operation, and sale or other disposition of investments.
2. Each Party shall accord to investments of investors of another Party
treatment no less favorable than that it accords, in like circumstances, to
investments of its own investors with respect to the establishment,
acquisition, expansion, management, conduct, operation, and sale or
other disposition of investments.
61. It is argued in this connection that the Investor is in “like circumstances” with log
producers that export logs from other parts of Canada and from other parts of British
Columbia, as is also in “like circumstances” with other log exporters in that province,
including those located in coastal areas. All these other log exporters are either not
subject to the Log Export Control regime as practiced by Canada in British Columbia or
subject to less restrictive regulatory measures.
62. This different treatment is, in the Investor's argument, particularly evident with
respect to the unavailability of standing exemptions for its operations. Those benefiting
from such exemptions have a significant advantage in treatment as opposed to those
that have been excluded, such as the Investor. These advantages result from the fact that
the producer knows in advance that it will be able to export its logs and can thus enter
into supply contracts with its customers, for which it will be able to obtain the best
market price, it is not subject to the surplus test and thus free from “blockmailing”, and
its products will not be subject to the exposure to the natural elements resulting in
deterioration and infestation.
63. The Investor asserts that the national treatment requirement of NAFTA Article 1102
reflects the influence of GATT Article III:4 as well as that of GATS Article XII, but that it is
broader because the NAFTA requirement applies to investors and investments and not
only to “like products” as in the GATT or to “like services” as in the GATS. It is also said
that this interconnection between NAFTA and the GATT was recognized by Canada in its
Statement of Interpretation of NAFTA. (26)
64. In that context, as well as on the basis of the decisions in Pope & Talbot (27) and S.D.
Myers, (28) the Investor asserts that treatment ought to be compared with that accorded
to domestic investments in the same economic or business sector, which is to be broadly
understood, including in particular the requirement to provide for competitive
opportunities. It is argued in this respect that in view of NAFTA's objective of promoting
conditions of fair competition in a free trade area, the equality of competitive
opportunities is an essential element of the national treatment standard. Direct
competition in the marketplace is the benchmark the Investor favors for the comparison
of treatment, a concept which was broadly construed in Occidental v. Ecuador (29) when
comparing to that end broad sectors of economic activity.
65. In the Investor's submission, the concept of “like circumstances” does not mean that
circumstances need to be identical and that even if the standard laid down in the
Methanex decision (30) is followed, so as to compare an investor with a domestic investor
in an identical product market, in the instant case the test is satisfied because the
product market for all comparisons is that of log producers.
66. The Investor argues, in addition, that while Article 1102 is subject to the exceptions
permitted under NAFTA Article 1108, in respect of sectors that require treatment in
accordance with public policies, Canada did not include the forestry sector in its list of
exceptions, thus making policy objectives irrelevant as to the treatment in this sector.
Neither does a breach of national treatment require evidence of any discriminatory
intent based on the nationality of the foreign investor, as held in Thunderbird. (31)
67. The fact that the Investor is in “like circumstances” with log producers in Alberta, (32)
but subject to a restrictive regulatory export regime which does not apply to the latter,
should be enough to establish that national treatment has not been observed. In
addition, the Investor, as a producer in the British Columbia coast, is subject to stricter
harvesting and sorting requirements than those that apply in the British Columbia
interior. The Investor also asserts to be in “like circumstances” with producers in the
British Columbia coast, many of which are subject to the more lenient conditions of
provincial regulations. In view of this likeness, there is no policy justification for Notice
102 applying to the Investor and to none of its comparator producers, particularly in light
of the fact that there is no shortage of logs in the British Columbia market or in Canada
and, moreover, that there is an active inter-regional flow of logs evidencing the
similarities between producers.
68. The end result of being forced to sell logs domestically at a price invariably below
that of the export market, not having available any exemptions, being subject to
“blockmailing” and having to observe stricter harvesting requirements, is in itself in
breach of national treatment, either because none of the Investor's competitors are
subject to such disadvantages or if they are, they are disadvantaged to a much lesser
extent. This differential treatment affects the “establishment, acquisition, expansion,
management, conduct, operation, and sale or other disposition of investments” as
required under Article 1102.
2.4.2 The Respondent's Opposing Views
69. The Respondent maintains that the Investor has not established the essential
elements of Article 1102 in respect of the allegations it has made, particularly because of
the fact that it has been accorded exactly the same treatment as domestic investors and
because it has not suffered any nationality-based discrimination.
70. In Canada's view, the first issue is to determine whether there has been a “treatment”
involving the establishment, acquisition, expansion, management, conduct, operation
and sale or other disposition of investments. Only once this specific treatment is
identified can it be compared with that accorded to other investors, foreign or domestic.
In addition, the treatment that needs to be identified is that accorded to different
investors by the same government. It is not legitimate to compare treatment accorded by
a national government with that accorded by a sub-national government, state or
provincial, as is provided by Article 1102(3).
71. The investors and investments to be compared must also be “in like circumstances”, a
comparison that requires the identification of an identical domestic investor, if one
exists or otherwise those that, as held in Methanex, (33) are in the most “like
circumstances”. Canada maintains that in the instant case, such identical domestic
investors are available, because all federal land owners in British Columbia that seek to
export logs operate under the same Notice 102 and are subject to the same export
control regime in the same way as the Investor. If there is a need to identify other
comparators that are in the most “like circumstances”, NAFTA Chapter 11 Tribunals have
considered diverse factors, including general principles of NAFTA that take into account
environmental and trade concerns, (34) differences in services and functions of the
investors compared (35) or public policy considerations. (36)
72. Canada argues that, in contrast, the Investor follows a narrow approach identifying
only the economic sector in which the Investor competes and introduces a special
meaning of the national treatment standard relating it to a guarantee of competitive
opportunities. NAFTA tribunals, as noted above, have taken a broader view that allows for
the taking into consideration of different factors relevant to the comparison, just as
Occidental specifically refused to interpret the concept of “in like situations” as meaning
a comparison exclusively in the same sector of economic activity. (37) Neither should “in
like circumstances” be interpreted in the light of the meaning of other NAFTA chapters or
other treaties such as the GATT. This is because Article 1102 reflects a specific
understanding and intent of the NAFTA Parties not necessarily found in other contexts
and should “be read on its own term”. (38)
73. The Respondent explains that the facts do not support the Investor's allegations in
view of the fact that the coastal and interior regions of British Columbia are two
economically distinct regions, where different species are harvested, where log
processing also differs, and because their logs are rarely interchangeable due to the high
costs of transportation from the interior and other factors. Nor is it factually possible to
compare the Investor's operations with those of producers in other Canadian provinces.
Of particular importance, in explaining the differences in regulatory regimes, is the
dependence of the British Columbia economy on forestry and the impact that any
shortage in supply might have in that province.
74. Canada argues that because the Investor receives the same treatment as the
appropriate domestic comparator there can be no breach of national treatment, nor is
there in this case a situation where the domestic investment might have obtained more
favorable treatment than that accorded to the Investor. And there is certainly no
nationality-based discrimination in the treatment accorded to the Investor, the
prevention of which is the overriding objective of Article 1102 as has been established by
both the Canadian (39) and United States' (40) interpretations of this Article and has
been confirmed by Chapter Eleven jurisprudence. (41)
75. In the Respondent's view, the Investor's allegations can be grouped into three types:
the different treatment accorded by Notice 102 depending on where the logs are located
in British Columbia; the different treatment of log producers under Notice 102 and those
under provincial regulations; and the different treatment of log producers in British
Columbia, whether under the federal or provincial regimes, as compared to those in
Alberta. All such differences involve comparing treatment accorded by different
jurisdictions, an exercise that results in invoking the elements of each regime which the
Investor prefers and that would lead to a better treatment than that available to any
domestic investor in Canada.
76. If the treatment complained of is compared to that of domestic producers in “like
circumstances”, there is no difference that could be in breach of national treatment. It
follows that the requirements of Notice 102 cannot be compared to those applied to
Alberta log producers (42) or to log producers on British Columbia provincial land, but
only to log producers on federal land in British Columbia, which are subject exactly the
same treatment as the Investor. (43) Similarly, the obligation eventually to sell logs in the
domestic market or the “blockmailing” allegation cannot be compared to the treatment
in other provinces, such as Alberta, but must be compared with the treatment of federal
land log producers in British Columbia, which are again under the same obligations and
requirements or are otherwise affected by the same market practices.
77. The proper comparator in terms of cutting and scaling are the log producers in British
Columbia and not in other provinces, just as sorting is to be compared with requirements
applicable to coastal log producers in British Columbia and not those in the BC interior
or Alberta. Special requirements concerning remote areas are to be compared to the
treatment of producers in those areas and not in the coast or elsewhere. The question of
standing exemptions under provincial regulations, which are not available to the
Investor, should be compared to the situation of producers on federal lands in British
Columbia and not those on provincial land. Coastal log producers in the province, it is
explained, and not those in the interior are the proper comparator for restrictions on the
advertising of standing timber, just as log producers on provincial land, and not those in
federal land, are the comparators for the fee-in-lieu of manufacture.
78. Each of the measures is applied in identical terms to the entities operating in the
same areas and conditions, domestic or foreign, as provided for in the different
regulatory regimes and none involves a nationality-based discrimination.
2.4.3 The Tribunal's Findings
79. The Tribunal must first address Canada's argument that no “treatment”, in the sense of
Article 1102, has been identified by the Investor. The treatment to which that Article
refers is with respect to the “establishment, acquisition, expansion, management,
conduct, operation and sale or other dispositions of investments”. This is a broad
definition indeed, as it includes almost any conceivable measure that can be with
respect to the beginning, development, management and end of an investor's business
activity. The treatment is no different than the aggregate of all the regulatory measures
applied to that business. The Investor has specifically complained about the adverse
effects the measures in question have on the expansion, management, conduct and
operation of its forestry business in British Columbia. The Tribunal is thus satisfied that
the treatment complained of has been adequately identified by the Investor.
80. The Tribunal in S.D. Myers related “treatment” to a requirement of a practical impact
on the investment and not merely a motive or intent so as to produce a breach of
Article 1102. (44) While motive or intent cannot be excluded from the scope of Article 1102
beforehand, it is not an issue that arises in the instant case. To the extent that a practical
impact must be shown, the Tribunal notes that the Investor has identified the adverse
effects it believes arise from the treatment received, and thus also meets this particular
test, subject, of course, to proving the actual extent of those effects and the adverse
consequences that ensue, if any.
81. An additional issue concerning treatment that the Tribunal also needs to consider is
whether the treatment accorded to the Investor by the national government can be
compared to that accorded under British Columbia jurisdiction. Canada argues in this
respect that Article 1102(3) specifically distinguishes the treatment accorded by a state
or province from that of the national government and, thus, the two cannot be compared.
82. Despite the fact that, on occasion, concurrent jurisdictions relating to the same
activity might make that distinction difficult, as in some respects the instant case
appears to reflect, the Tribunal considers the argument made by Canada correct.
Treatment accorded to foreign investors by the national government needs to be
compared to that accorded by the same government to domestic investors, subject to
meeting the requirement to be in “like circumstances”, just as the treatment accorded by
a province ought to be compared to the treatment of that province in respect of like
investments.
83. While the parties have spent considerable time on the correct analytical steps to
establish whether a breach of national treatment has occurred, (45) the issue is finally to
determine which investors are in “like circumstances”, so as to allow for a comparison of
the treatment concerned. Following different routes the parties reach the same point and
the discussion turns on what “like circumstances” mean and which are the proper
investors to be compared to each other in connection with the treatment received.
84. The Tribunal does not exclude the possibility for the contextual interpretation of a
provision of a treaty in the light of other provisions of the same treaty, or even of other
treaties, as the Investor favors, in appropriate cases, as allowed for under Article 31 of the
Vienna Convention on the Law of Treaties. (46) The fact that Article 1102 does not define
“in like circumstances” has been subject to two different readings. The Investor believes
that because other provisions of NAFTA and also the GATT and GATS have used either that
or similar expressions in the broad sense of requiring treatment that shall allow for
competitive opportunities, the same special meaning ought to be given to “in like
circumstances” in Article 1102.
85. Canada has, however, a different reading. (47) If a special meaning has been given to
that concept by other NAFTA Articles or by other treaties and not by Article 1102, this only
allows for the interpretation of the concept in the light of its ordinary meaning, which is
none other than comparing situations that are similar. A special meaning is thus
unwarranted.
86. The Tribunal is mindful of the need not to make expressions used in different contexts
and treaties interchangeable in spite of their similarity, as is the case of “like products”
under GATT Article III:4. WTO panels and other tribunals have been extremely careful not
to interpret expressions or concepts used in specific provisions in the light of the use of
those or similar expressions in other contexts. This care is also appropriate in respect of
the Investor's argument of identifying the meaning of “in like circumstances” of
Article 1102 with that under Articles 1405 or 1505.
87. In the strict context of a trade treaty, such as the GATT or a number of NAFTA Chapters,
the Tribunal might be inclined to understand “in like circumstances” as relating to the
need to ensure equality of treatment in respect of competitive opportunities and other
trade objectives. But, it must also note that NAFTA, and some other free trade
agreements, includes matters that go beyond trade so as to provide for broader
mechanisms of economic integration and coordination of economic policies. This is the
case of NAFTA Chapter Eleven in respect of investments. It would thus be limiting to
relate the concept exclusively to trade objectives and it is thus necessary to understand
it in a broader sense that will allow for the comparison of other relevant elements, not
excluding trade where appropriate.
88. This explains why NAFTA tribunals have, on a number of occasions, considered various
factors in assessing whether investors are “in like circumstances”, as evidenced by the
references noted above to S.D. Myers, UPS and Pope & Talbot. The environment, trade, the
nature of services and functions, and public policy considerations are found among such
factors. This also explains why it is not enough on occasions to undertake the comparison
solely in the same sector of economic activity and it might be necessary, as in Occidental,
to consider whole sectors of the economy and business.
89. Having decided that the proper comparison is between investors which are subject to
the same regulatory measures under the same jurisdictional authority, which in the
instant case is the comparison between foreign and domestic investors subject to Notice
102 and the national jurisdiction of the Canadian government, the Tribunal must now
determine which is the appropriate comparator for the purposes of the treatment
accorded to investors “in like circumstances” under Article 1102.
90. To the extent there are investors in identical circumstances to be compared, this
makes it unnecessary to resort to the Methanex alternative choice noted above of finding
investors in the most like circumstances. Such identically situated investors are those log
producers operating on lands under federal jurisdiction in British Columbia and subject
of course to the same requirements under Notice 102. As was also noted, jurisdictional
overlaps might occur in certain respects, but these appear to arise mostly in the case of
lands that have been reclassified and log producers that are accordingly subject to some
transitional regime, such as in the case of one of the Investor's competitors which was
granted standing exemptions under federal regulation notwithstanding that these
exemptions are only available under provincial jurisdiction. (48)
91. Canada has persuasively argued that the Investor must be compared to other log
producers subject to Notice 102 and not to producers in other provinces, notably Alberta,
or to producers that are operating under the provincial regulations. As some of the
Investor's operations are located in provincially regulated lands, these ought to be
compared with those operations of similarly located log producers, whether in respect of
the surplus test or of harvesting and sorting requirements. Some sub-categories of
provincially regulated operations, such as producers in remote areas of British Columbia,
which is also the case of some of the Investor's operations, ought to be compared within
that sub-category.
92. Referring to a similar discussion that entailed differential treatment of staff in the
employment of the World Bank, the Administrative Tribunal of that organization clarified
the question of the proper comparator in the following terms: “The Tribunal must note
that this is not the meaning of discrimination, because staff members in different
situations will normally be governed by different rules or provisions.… Rather,
discrimination takes place where staff who are in basically similar situations are treated
differently”. (49)
93. That same conclusion is appropriate in the instant case. In all the comparisons that
are made within the appropriate category, the treatment the Investor is accorded is
identical to that accorded to domestic investors in the same category. Here, there is no
issue as to which is the best treatment available to an investor, such as was discussed in
Pope & Talbot, since the treatment here is the same in each category of comparison.
Accordingly, we conclude that no standard of national treatment can be or was breached
in these circumstances.
94. The Tribunal turns lastly to the issue of whether the purpose of Article 1102 is to
prevent nationality-based discrimination as discussed in Feldman. In that case, the
Tribunal concluded that the concept of national treatment in Article 1102 “is designed to
prevent discrimination on the basis of nationality, or by ‘reasons of nationality’ ”. (50)
While nationality-based discrimination would make a finding of breach of national
treatment unavoidable, some argue that this is not the only aim of the concept of
national treatment under Article 1102. They would say that, even in the absence of
discrimination, a differentiated treatment which is arbitrary and unjustified might
qualify as a breach of national treatment. Thus discrimination might entail
considerations other than nationality. However, in the instant case there is not the
slightest evidence that any of the measures discussed might be based on considerations
of the nationality of the Investor. As concluded above, nor is there any differentiated
treatment on other grounds among the appropriate categories of comparison.
Accordingly the Investor's Article 1102 case must fail.
2.5 The claim concerning performance requirements under NAFTA Article 1106
2.5.1 The Investor's Argument
95. The Investor asserts that the Log Export Control regime imposes performance
requirements in breach of Article 1106 in connection with the obligation to cut and sort
timber in accordance to “normal market practices”, to scale timber rafts metrically and
to follow additional rules for properties located in the remote coastal region. All these
requirements, it is also argued, impact the way the Investor manages its investments in
Canada.
96. The Investor explains in this respect that the prohibited performance requirements
are listed in Article 1106(1), which is followed by a specific subset of performance
requirements, that cannot be imposed upon the Investor as provided under
Article 1106(3). These provisions read as follows:
Article 1106: Performance Requirements
1. No Party may impose or enforce any of the following requirements, or
enforce any commitment or undertaking, in connection with the
establishment, acquisition, expansion, management, conduct or
operation of an investment of an investor of a Party or of a non-Party in
its territory:
(a) to export a given level or percentage of goods or services;
[…]
(c) to purchase, use or accord a preference to goods produced or
services provided in its territory, or to purchase goods or services
from persons in its territory;
[…]
(e) to restrict sales of goods or services in its territory that such
investment produces or provides by relating such sales in any way
to the volume or value of its exports or foreign exchange earnings;
[…]
3. No Party may condition the receipt or continued receipt of an
advantage, in connection with an investment in its territory of an
investor of a Party or of a non-Party, on compliance with any of the
following requirements: […]
97. The Investor complains specifically about the performance requirements it believes
have been imposed upon it in breach of Article 1106(1)(a) in imposing the export of a
given level or percentage of goods or services; of Article 1106(1)(c) in that it must
purchase, use or accord preference to services provided in Canada; and of Article 1106(1)
(e) restricting its sale of logs in Canada by relating such sales to the volume of its exports.
98. A first alleged breach concerns such measures that impose the exporting of a given
level of goods originating in Canada, in the instant case the requirement to advertise for
the export of logs from remote areas in a minimum volume of 2.800 m3 and a maximum
volume of 15.000 m3. As this is a precondition for export approval, any advertisement of
logs outside those levels cannot be exported. (51)
99. The Investor complains about a second breach of Article 1106 in that it is required to
cut, sort and scale its logs in accordance with the specifications of the Coast Domestic
Market End Use Sort Description and is thus required to produce certain types of goods.
100. A third breach of Article 1106 complained of is the alleged obligation to accord
preference to services provided in Canada in that the Investor, in complying with the
regulations to cut, sort and scale its logs in a certain way, needs to hire the services of
those who perform such tasks, which also occurs when it is required to retrieve logs that
break up while awaiting the surplus testing procedures. With respect to logs to be
exported from remote areas, there is also the need to hire extra towing services.
101. The Investor complains next of the alleged restriction of the domestic sale of its logs
by relating their sale to the volume of its exports, because the minimum and maximum
volumes for the advertising of logs from remote areas results in volume restrictions which
are inextricably linked to the volume of its exports.
102. The Investor argues that the ordinary meaning of Article 1106(1)(a), (c) and (e), as well
as the related provisions of Article 1106(3), the interconnection of which was discussed in
Pope & Talbot, as well as the context of these provisions, support its claim. Although the
Pope & Talbot tribunal considered the word “requirement”, as used in Article 1106(1), to
have a mandatory nature, the WTO panel in Measures Affective the Automotive Industry
considered that “requirement” could include various forms of governmental action that
could influence the conduct of private parties.
103. Despite the fact that Article 1106(5) provides that paragraphs 1 and 3 of the same
article do not apply to any requirement other than those set in those paragraphs, the
Investor affirms that its arguments do not expand that list of requirements.
104. The Investor lastly argues that Article 1106(1) must be read in the light of the object
and purpose of the treaty as a whole, with particular reference to the objective of
eliminating barriers to trade. The performance requirements imposed do not further this
objective, the Investor maintains. But even if the Article is read in the light of its own
objective and purpose, the mere fact that the regulations concerned are designed to
encourage the domestic manufacturing of logs means that the investment is being
distorted in Canada's favor. The Investor also points to the fact that Canada did not
include the forestry sector among the economic sectors it exempted from Article 1106.
2.5.2 Canada's Opposing Arguments
105. Canada is of the view that prohibited performance requirements are specifically
listed in Article 1106(1), with a further elaboration in Article 1106(3), and that these
provisions, as held in Pope & Talbot (52) and S.D. Myers (53) , cannot be broadened
beyond their express terms as indicated by Article 1106(5). Otherwise every border
measure could be considered a prohibited performance requirement, thus leading to an
absurd result.
106. The Respondent argues, in particular, that none of the measures complained of
involve the imposition or enforcement of a requirement, commitment or undertaking,
and thus do not meet the ordinary meaning of Article 1106. There are no requirements
found in the regime to increase or limit log exports, and thus producers are free to sell
logs in both the domestic and international markets. Moreover, the measures complained
of do not relate to the objective of this Article, which is to prohibit export requirements
that are designed to oblige an investor to export more than it otherwise would have
exported.
107. The advertisement of a minimum volume of logs concerns only the advertising of logs
and has no bearing on the level of goods exported. In fact, Canada points out that the
Investor did not export almost 20% of the logs for which it had obtained an export
permit. Nor is there a preference accorded to logs produced in Canada since the logs are
produced there because they grow there. The measure is designed to prevent the
advertisement of small volumes in remote areas so as to discourage offers by processors.
Moreover, the maximum volume complained of has no connection with exports and does
not restrict the Investor's capacity to export as many logs as have been authorized.
108. The Investor is free to sell as many logs as it wishes in the domestic market and it is
in no way constrained from so doing because of a performance requirement. There is no
connection whatever between its domestic sales and the volume of its exports and hence
Article 1106(1)(e) simply does not apply, as held in Pope & Talbot in interpreting this
provision where no such link had been established. (54)
109. Canada also maintains that the use of the metric system in the scaling of logs is
simply an application of the measurement system applied in Canada and has no
connection with the manufacture or sale of logs. Neither the use of this system nor the
recovery of logs compels the Investor to purchase services from persons in Canada, and
the Investor is free to hire workers from outside Canada. To hire such services in Canada
is purely a business decision.
110. The fact that there might have been incidental consequences of the regulatory
regime does not mean that these are a “performance requirement”, as was held in S.D.
Myers. (55)
2.5.3 The Tribunal's Findings
111. In considering this claim, the Tribunal is mindful of the restricted scope of
Article 1106(5) in that the performance requirements that are prohibited are limited to
the specific matters identified in paragraphs (1) and (3). The Tribunal finds the views of
Pope & Talbot and S.D. Myers tribunals to be convincing in this respect.
112. Thus the first question for the Tribunal is whether the measures complained of are
among those listed in Article 1106(1) and (3), with specific reference to those contained in
paragraph (1)(a), (c) and (e). It is also necessary to establish the objective to which this
particular Article responds.
113. On this latter point, Canada makes a persuasive argument to the effect that the
objective of the article is to prohibit performance requirements designed to oblige an
investor to export more than it otherwise would have exported. This is also evident from
the very terms of each of the requirements identified in the article: all are related to the
export of goods and services and the conditions under which such exports are made.
114. The complaint that the requirement to advertise for the export of logs from remote
areas in a minimum volume of 2,800 m3 and a maximum volume of 15,000 m3
contravenes Article 1106(1)(a) because it restricts the level of the Investor's export of logs,
is difficult to reconcile with the terms of this provision. Canada's argument in this respect
is convincing: a requirement related to the advertisement of goods, as a step in the
process of obtaining an export permit, cannot be seen as a restriction on the exports
themselves, which can be undertaken in any level which has been authorized. Indeed, the
Investor has every right to export an aggregated amount of logs by adding up the various
permits obtained within the period of authorization, which may occur depending on the
demand of a given customer or destination and the cost effectiveness of transportation.
115. The Investor also complains about the requirement to cut, sort and scale its logs in
accordance with the specifications of the Coast Domestic Market End Use Sort Description,
which it says constitutes an obligation to produce certain types of goods in contravention
of Article 1106(1)(c), in that a preference is accorded to goods which meet the
requirements of the domestic market. This complaint is equally difficult to reconcile with
the terms of the provision. While such a requirement is evidently related to the manner
in which goods are to be shipped to the domestic market, an issue that will be discussed
further below, it is not a performance requirement designed to restrict or enhance
exports.
116. Scaling in accordance with the metric system is also a measure which simply relates
to the measurement system in use throughout Canada, and it would be rather unusual to
have a country applying different systems of measurement to different ends.
117. This is not to say that the requirement at issue might not have an incidentally
adverse effect on the Investor's exports to the extent that it might wish to cut, sort and
scale its logs as required by its customers in foreign markets. This, however, does not
appear to be the kind of prohibited performance requirement banned by Article 1106,
which needs to be directly and specifically connected to exports. The Articles' ban does
not appear to capture other requirements which merely have some indirect effect on
exports.
118. The same holds true of the complaint about a requirement to hire services in Canada
for the purposes of cutting, sorting and scaling logs or retrieving logs that have broken
loose. Any connection with exports is only remote and indirect. Moreover, it has been
convincingly explained by the Respondent that the Investor is free to hire these services
from anyone it wishes. To the extent it hires in Canada is because of business
convenience. The higher cost of hiring elsewhere is certainly the core of this business
decision.
119. The Investor's argument about a restriction of the domestic sale of its logs by relating
their sale to the volume of its exports, because the minimum and maximum volumes for
the advertising of logs from remote areas result in volume restrictions inextricably linked
to the volume of the Investor's exports, all of it in contravention of Article 1106(1)(e), is
somewhat difficult to understand. This is so because the Investor, as Canada has
asserted, is free to sell as many logs as it wishes in the domestic market and this is in no
way restricted by the minimum and maximum volumes required for advertising in
connection with an export permit.
120. The Tribunal thus concludes that the measures complained of do not lend
themselves to inclusion in the closed list of performance requirements laid down under
Article 1106, unless these requirements were to be broadened beyond a reasonable
interpretation. However, the Investor is not wrong in arguing that there are effects on its
exports, but these effects are incidental and not prohibited by the terms of
Article 1106(1).
121. That said, it is conceivable in certain circumstances that incidental effects, when
aggregated may be seen to constitute something more than an incidental effect, even
though each measure, when considered individually, does not result in the breach of a
specific performance requirement. To the extent that this issue requires to be examined,
the proper place to do so is in the context of fair and equitable treatment.
2.6 The claim concerning expropriation
2.6.1 The Investor's Argument
122. The Investor argues next that the Log Export Control Regime results in the
expropriation of its investment in breach of Article 1110(1). This Article provides as
follows:
 Article 1110: Expropriation and Compensation
1. No Party may directly or indirectly nationalize or expropriate an
investment of an investor of another Party in its territory or take a
measure tantamount to nationalization or expropriation of such
investment (“expropriation”), except:
(a) for a public purpose;
(b) on a non-discriminatory basis;
(c) in accordance with due process of law and Article 1105(1); and
(d) on payment of compensation in accordance with paragraph 2
through 6.
123. Relying on Pope & Talbot, the Investor maintains that expropriation refers to the
taking of an investment of an investor of a NAFTA Party, and that an investment includes
any tangible or intangible property interests included in Article 1139 as relating to such
investment. (56) Both that case and S.D. Myers (57) relied on the substantial deprivation
test to the extent that the government's interference would prevent the use, enjoyment or
disposition of the property concerned, as opposed to a mere ephemeral interference.
124. Expropriation, it is said, no longer needs to be direct to be in breach of international
law, as many forms of indirect or de facto expropriation have also been so considered.
(58) Neither is motivation or intent a factor to be taken into account in reaching a
determination about the effects of interference.
125. The Investor accepts that not every regulatory interference will result in some form of
taking under customary international law. However, it explains that those measures that
unreasonably interfere with the effective enjoyment of the property, or unduly delay that
right, can result in deprivation and expropriation, as was noted in Feldman in connection
with the Third U. S. Restatement on International Law. (59) Intangible property rights, such
as the enjoyment of rights under a license, have been held to be compensable takings,
(60) as is also the case of property rights exercised under various legal instruments.
126. The Investor maintains that Article 1110 applies to a broad range of economic
interests relating to the definition of investment under Article 1139, including an
“enterprise” (Article 1139(a)) and “real estate or other property” (Article 1139(g)). The Pope
& Talbot tribunal specifically considered that the ability to sell softwood lumber from
British Columbia to the United States was a very important part of the business of the
investment undertaken. (61) That case also considered, in measuring interference, the
taking of the proceeds of company sales, interference with management activities and
depriving the investor of full control of its investment. (62)
127. On the facts of this case, the Investor asserts that the Log Export Control Regime is a
measure tantamount to expropriation as it substitutes government control for the
Investor's control over critical parts of its business, including the harvesting, processing
and selling of its logs. The Investor asserts in this connection that it loses control over its
logs during the lengthy process of export approval, because the regulations encourage
the practice of “blockmailing”, because it is compelled to cut its logs to domestic length
preferences, and because the logs deteriorate during the waiting time, which may take
up to a year. In the end, the whole regime is geared towards providing low cost raw
material for domestic sawmills in British Columbia.
128. The Investor believes that all the factors listed in Pope & Talbot as constituting
interference in breach of Article 1110 are triggered in this case because proceeds are
taken from the company sales, management activities are interfered with and the
Investor is deprived of the full control of its investment. Furthermore, the expropriation is
both discriminatory against small producers such as the Investor and arbitrary, because
there are many other alternative policies available to meet the objective of ensuring an
adequate supply of logs. (63) Due process requirements are also said not to be met and
compensation has not been paid for the depressed domestic log prices at which the
Investor is forced to sell its logs.
129. The Investor maintains that its investment includes an interest in realizing a fair
market value for its logs in the international market and that this is a property interest
protected under Article 1110 as an investment covered under Article 1139(h), as the Pope
& Talbot decision held in connection with the access to the United States' market. The
deprivation it has suffered is asserted to be substantive, and not merely ephemeral,
including both the lower price the Investor receives for its logs and the higher cost it
incurs in producing them.
2.6.2 Canada's Opposing Views
130. Canada contends that the Investor has not suffered any deprivation of the benefit of
its investment under Notice 102 because Canada has never controlled the Investor's
enterprise, directed its operations, taken the proceeds of its sales or in anyway
intervened in the management or the shareholders activities. In addition, those aspects
of the log export control regime that are complained of have a minimal effect on the
Investor's operations and Canada has never made a commitment to the Investor that it
would refrain from regulating log exports.
131. Canada also maintains that the interests that the Investor claims to have been
expropriated, in particular the alleged right to export to foreign markets or to sell at a
fair market value, are not within the scope of the definition of “investment” of NAFTA
Chapter Eleven. While Article 1139(h) covers interests in contracts, and contractual rights,
and that, although intangible, these have generally been considered to be capable of
expropriation, subparagraphs (i) and (j) of Article 1139 specifically stipulate that claims to
money under commercial contracts and other commercial arrangements are not
investments under NAFTA.
132. Thus, only the lands, logs or timber would be capable of being expropriated and the
price differential which the Investor claims to have been expropriated is just a claim for
damages. Even goodwill cannot be considered a kind of vested right as it cannot stand
alone, separate from the value of the enterprise. (64) The investment must be considered
as a whole for the purposes of expropriation. Even the Pope & Talbot decision, in
considering the importance of the access to the United States' market, did not separate
this aspect from the investment as a whole, concluding in this light that no expropriation
had taken place.
133. Also, as was held in Feldman, an investor cannot recover damages for the
expropriation of a right it never had. And, as in this case, the requirements at issue in
Feldman were not new and had not changed to the detriment of the Investor at any
relevant time. (65)
134. In any event, Canada contends that the measures here at issue cannot be said to
have affected the Investor's business to the degree of interference or deprivation
required under international law to amount to a direct or indirect expropriation. The test
of rendering property rights “so useless that they must be deemed to have been
expropriated” has not been met in this case. (66)
135. Nor has the degree of substantial deprivation of the investment, as opposed to mere
interference, required by Pope & Talbot to be measured by the effective control of the
investment, been met in this case. (67) In fact, the Investor continues to direct the
operations of the company, operates at a profit, its officers are not supervised by the
state, no proceeds of its sales have been taken, nor has there been any interference with
management or shareholders functions. A host of other decisions have supported a
similar standard of substantial deprivation. (68)
136. Furthermore, Canada asserts, that the Investor has not demonstrated that it has been
deprived of a legally cognizable investment and it does not have an unfettered right to
export or sell at any given price. No representations were made by Canada to that end,
nor could the Investor have had any reasonable expectation that it could operate outside
the log export control regime. A significant number of the export permits applied for has
been approved and the Investor's profits are also significant.
137. None of the Investor's allegations concerning the possession or control of logs by
Canada during the export permit application process have been demonstrated, nor can
Canada be held responsible for the commercial conduct of private actors, such as
“blockmailing”. The length of time required for the export permit process does not
normally exceed 35-45 calendar days and since 2006 an automated on-line system has
been in place. (69) Damage to the logs while in the water has not been demonstrated and,
in any event, this is the normal practice for the storage of logs on the British Columbia
coast.
138. Since no expropriation of an investment has taken place, Canada argues that there is
no need to examine the conditions of Article 1110(1)(a)-(d), particularly in respect of
issues concerning discrimination, arbitrariness, due process or compensation.
2.6.3 The Tribunal's Findings
139. The first question the Tribunal must decide is whether the Investor's claim
concerning expropriation relates to an investment as defined under the NAFTA treaty.
NAFTA Chapter Eleven contains a broad definition of “investment” as Article 1139 makes
quite evident. As provided by Article 1139(h), this includes contractual interests and
contractual rights, which accords with a well established view of international law about
rights that are capable of being expropriated. However, the Tribunal is mindful that the
protection of contractual rights under international law has traditionally been
understood within certain limits, particularly having regard to the extent of state
participation required to engage international responsibility for a breach of such rights
and the related rules on attribution of certain kinds of conduct to the state. These limits
explain the exclusion under Article 1139(i) and (j) of claims to money under commercial
contracts and other commercial arrangements from the definition of investment.
140. The question is then to establish from where the rights the Investor claims for arise.
The Investor defines these rights as an “interest in realizing fair market value for its logs
on the international market”. (70) While an intangible investment is certainly capable of
expropriation under international law, the issue here is that the right as defined does not
appear to arise from a contract that might be considered directly related to the
investment made. In fact, it is only a potential interest that may or not materialize under
contracts the Investor might enter into with its foreign customers. But even assuming that
an actual right is involved in this relationship, this appears to be too remote from the
protection NAFTA grants to covered investments.
141. While there can be no doubt that property such as the lands, logs or timber which are
affected to the requisite degree by government measures will be protected under
Article 1139(h), just as intangible interests arising from a contract directly related to the
investment will be protected, the kind of right the Investor claims has been expropriated
appears to fall under the exclusions noted. This was in fact the kind of situation
envisaged in Methanex in respect of goodwill and in its conclusion that goodwill cannot
be considered as a stand-alone vested right, a view which is also consistent with the
principles of international law governing acquired rights, which also had limits, as
reflected in the decision in Oscar Chinn. (71)
142. The right concerned would have to be an actual and demonstrable entitlement of the
investor to a certain benefit under an existing contract or other legal instrument. This
reasoning underlies the Feldman tribunal's conclusion that an investor cannot recover
damages for the expropriation of a right it never had. (72) Expropriation cannot affect
potential interests.
143. The Tribunal is in agreement with the view expressed in Pope & Talbot to the effect
that the access to the United States' market was an important aspect of the business
concerned in that case. So too, the Tribunal has no doubt that in this case, the right to
access the international market is a fundamental aspect of the log export business of the
Investor. Were this right impeded or prohibited it would certainly qualify for protection
under NAFTA because it is the very objective of the investment made. However, there can
be no doubt that the conditions and terms under which such a right may be exercised
may be subject to appropriate regulation, provided this does not result in a form of
substantial interference with the business.
144. In this regard, as was also concluded in Pope & Talbot, the business of the investor
has to be considered as a whole and not necessarily with respect to an individual or
separate aspect, particularly if this aspect does not have a stand-alone character. It
could well happen that a certain aspect is so fundamental to the business concerned that
interference with it might result in a kind of compensable expropriation. And while the
right to export is one such fundamental aspect, the protection against expropriation does
not, and cannot, guarantee exports will be made at a certain price. Such a conclusion
would transform NAFTA into an insurance policy, guaranteeing that every investor
exporter will get for its products the best price available in the international market,
which is a somewhat farfetched proposition.
145. The next question for the Tribunal to decide, assuming for this purpose that the
Investor complains about the expropriation of a protected investment, is whether the
degree of interference relied upon amounts to a taking of the rights concerned, either
directly or indirectly. The standard of substantial deprivation identified in Pope & Talbot,
and followed by many other decisions, both in the context of NAFTA and other investment
protection agreements, is the appropriate measurement of the requisite degree of
interference.
146. It is first patently clear to the Tribunal that neither the Government of Canada nor
that of British Columbia has ever directed the operations of the company, which have
been at all times directed by the Investor. In fact, it is the Investor that decides how
much timber it wishes to plant and to cut under a production plan which is prepared
entirely by its management. It is the Investor that decides the amount of logs it wishes to
submit to the export permit process and how much it may wish to sell in the domestic
market. The question of minimum and maximum volumes only applies to the
advertisement of logs from remote areas and it responds to specific conditions of those
areas. The fact of having the production and export process regulated under government
measures is entirely unrelated to the issue of directing the operations of the company. If
it were, all industries and business round the world would have been expropriated
because of the existing regulations pertaining to them.
147. It is also patently clear that the Investor's corporate officers have not been and are
not now under the supervision of the state. There is no government administrator in
place, nor is there any measure that might amount to the state watching over the
business decisions of those officers. The observance of and compliance with the log
export regime in no way approximates the sort of interference that might affect the
independence and professional conduct of those officers. The same holds true of the
management and shareholders activities, whose respective duties and rights have been
determined independently by the company's decision-making bodies and processes.
148. In the end, the claim, as framed by the Investor, comes down to whether it could
have obtained better profits in exporting logs to the international market, and whether
its inability to achieve this profit level because of Notice 102 results in some form of
taking of the proceeds of its sales. The Tribunal must first note in this respect that no
argument has been made about the company operating at a loss as a consequence of
government measures. If this were in fact the case, the value of the investment and its
essential objectives would have been seriously compromised and this conceivably might
amount to a taking. However, to the contrary, Canada points out that the Investor
operates at a significant profit in spite of the regulations complained of, and that the
volume of its exports still constitutes by far the largest part of the Investor's operations.
The Tribunal is satisfied that this is the case indeed.
149. As for the proceeds from the Investor's future sales, as explained above, such
proceeds are only a potential future benefit that cannot be the subject of a taking
because the Investor is not contractually entitled to them. The situation would be totally
different if an existing contract for a certain volume of logs, at a certain price, had been
interfered with by the government to the requisite extent. This is the kind of intangible
property right protected under NAFTA and international law. But absent interference with
rights of this sort, the state cannot guarantee a profit which is no more than an
expectation on the drawing board and which may or may not actually be realized.
150. Legitimate expectations are no doubt an important element of a business
undertaking, but for such expectation to give rise to actionable rights requires there to
have been some form of representation by the state and reliance by an investor on that
representation in making a business decision. And here there is no evidence whatsoever
that Canada made any sort of representation to the Investor that it would enjoy a certain
price level at the international market or the making of a certain profit thereon.
151. The Tribunal must conclude accordingly that the use, enjoyment or disposition of the
property concerned have not been affected in this case so as to amount to an
expropriation. While regulatory measures usually imply a long decision process, a rather
typical situation in the forestry sector worldwide, the normal time period for completing
an export permit in this case is not excessively long, as reflected in the 35-45 day
approval delay and the operation of the automated online application procedures. A
lengthy delay could of course result in undue interference, but this is not the case here,
except in limited and unusual circumstances.
152. The arguments made by the Investor in respect of losing control over its logs during
the process of export approval, the encouragement of the practice of “blockmailing” as a
consequence of the regulations, the satisfaction of domestic length preferences for
cutting logs, and the deterioration of logs during the waiting time, are, if correct,
inconveniences indeed, but they do not meet the standard of substantial deprivation so
as to qualify for a compensable expropriation under NAFTA.
153. The fact that no individual contract right might have been affected or that no
substantial deprivation has taken place, so as to constitute an expropriation, does not
mean that the regime is necessarily in compliance with the broader standard of fair and
equitable treatment, which is a separate matter. One argument in particular, made in the
context of expropriation, is examined in greater detail below in the context of fair and
equitable treatment. That is the Investor's view that the whole regime is geared towards
providing low cost raw material for domestic sawmills in British Columbia.
2.7 The claim concerning fair and equitable treatment
2.7.1 The Investor's Arguments
154. The Investor also claims that the Log Export Control Regime is in breach of the
international law standard of treatment contained in Article 1105(1) as Canada fails to
provide fair and equitable treatment and full protection and security. Article 1105(1)
provides as follows:
Article 1105: Minimum Standard of Treatment
1. Each Party shall accord to investments of investors of another Party
treatment in accordance with international law, including fair and
equitable treatment and full protection and security.
155. This failure is also said to be contrary to the international law obligation to act in
good faith, which Article 1105 imports into NAFTA as noted by the S.D. Myers decision. (73)
The Investor asserts in this respect that good faith entails an obligation of fairness,
including therein the obligation to protect the Investor's legitimate expectations, not to
act in an arbitrary or discriminatory manner, to fulfill its commitments and not to abuse
its rights. The non-compliance with any of these obligations results in the breach of the
treaty standard and does not require that all of them be breached to that end.
156. Arbitrary and discriminatory conduct have been considered in breach of the
minimum standard of fair and equitable treatment, as noted by the Waste Management
tribunal with reference to S.D. Myers, Mondev, ADF and Loewen. (74) That case, and Gami,
singled out conduct which is “arbitrary, grossly unfair, unjust or idiosyncratic, is
discriminatory and exposes the claimant to sectional or racial prejudice”. (75) The
Investor points out that other tribunals, deciding under different investment or trade
agreements, have arrived at an identical conclusion. (76)
157. The Investor also emphasizes the Azinian conclusion in respect of abuse of rights as a
kind of denial of justice arising from a malicious application of the law. (77) It is further
argued that legitimate expectations have also been included under the fair and
equitable standard by both NAFTA and other tribunals, noting in particular the Metalclad
decision to the effect of protecting an investor “acting in the expectation that it would be
treated fairly and just in accordance with the NAFTA”. (78)
158. It is also argued that Waste Management (79) and Gami (80) have identified lack of
transparency as a breach of fair and equitable treatment, as was also done in Metalclad,
in the light of other NAFTA Chapters. A secure legal environment, the argument follows, is
also a part of fair and equitable treatment.
159. The Investor maintains that fair and equitable treatment is a part of the customary
international law minimum standard concerning the treatment of aliens as evidenced by
state practice and opinio juris, including therein the content that has been shaped by
over two thousand bilateral investment treaties. Also international jurisprudence has
shaped that content, as recognized in Mondev (81) and ADF. (82)
160. The Investor also discusses in the context of the applicable law the NAFTA Free Trade
Commission Notes of Interpretation concerning Article 1105(1) of July 31, 2001 (“FTC
Interpretation”), and asserts in this respect that a tribunal deciding on this Article under
NAFTA is not bound to apply just customary international law but may apply the normal
sources of international law, particularly in the light of Article 1131(1) mandating the
tribunal to apply the “applicable rules of international law”.
161. Consistent with that mandate, the Investor notes that Article 1105(1) provides for
treatment in accordance with international law, and not just with customary international
law. Nor do the travaux préparatoires contain any evidence that the meaning of this
Article might have been restricted to customary international law. To the extent that the
FTC Interpretation narrows down Article 1105(1) to only one source of international law,
there is an amendment of the NAFTA and not just an interpretation. The Investor also
maintains that treaties need to be interpreted in the light of international law generally,
and that the contents of this law may also be discerned in the light of the decisions of
tribunals, as noted in ADF when holding that the “general requirement to accord ‘fair and
equitable treatment’ must be disciplined by being based upon state practice and
judicial or arbitral case law or other sources of customary or general international law”.
(83)
162. The Investor further argues that the ordinary meaning of fair and equitable
treatment as an autonomous standard under international law has converged with that
under customary law in the light of the evolution that has taken place in recent years to
the point that there is no meaningful difference between the two, as held by numerous
tribunals. (84)
163. The Investor also believes that the threshold for breach of this standard is not as high
as Canada has argued in the light of the ELSI decision and its association of arbitrary
state behavior with “a willful disregard of due process of law…which shocks, or at least
surprises, a sense of judicial propriety”. (85) This lower threshold was the one adopted in
Mondev, which rejected the suggestion that a breach requires a standard of conduct that
is “outrageous” or even “egregious”. (86) A number of non-NAFTA tribunals have followed
this very approach. (87) The Investor concludes its legal argument by maintaining that the
test of fair and equitable treatment is a flexible one that needs to be adapted to the
circumstances of each case and its facts.
164. In the light of the preceding understandings, the Investor asserts that Canada has
breached the fair and equitable treatment standard as it has subjected export permits
to the surplus testing procedure as a condition of authorization, has prevented the
Investor from obtaining standing exemptions, has compelled the cutting and sorting of
logs to artificial “normal market practices”, imposed additional requirements for logs
from remote areas, mandated the metric measurement system and required the
payment of a fee-in-lieu on the export of provincial rafts. Normal market practices have
never been defined and are left to the determination of the British Columbia Ministry of
Forests. Nor has “remote” been defined.
165. The Investor also asserts that the highly secretive and non-transparent manner in
which the regime is administered is in breach of the rule of law, as is the composition of
TEAC and FTEAC because of the exclusion of private log producers. Moreover,
“blockmailing”, an unfair practice about which Canada is well aware, has not been
remedied. (88) The Investor has not been allowed to make oral submissions to TEAC or
FTEAC in respect of the offers made for, and the assessment of the market value of its
logs, which takes place in meetings closed to the public. Nor are the minutes of meetings
made public. A 5% deviation from the domestic market value is normally considered fair,
despite the fact that such a deviation can mean a serious disadvantage in a competitive
market. Transparency and accountability are not observed in a decision-making process
that is regularly endorsed by the DFAIT, save in very unusual occasions.
166. The requirements concerning the cutting, sorting and scaling of logs are allegedly
designed to accord a preference to local mills and prevent the Investor from entering
into long term contracts with foreign customers. Market distortions and significant losses
have ensued. All the elements of unfairness that are complained of have a cumulative
nature which is designed to harm private landowners so as to benefit domestic log
manufacturers and processors in a manner which discriminates against and harms
private log producers. In the ten-year period between April 1998 and May 2008,
TEAC/FTEAC rejected 81.6% of the applications submitted, which in the Investor's case
amounted to a 92% rejection of its export applications.
167. In conclusion, the Investor maintains that unfairness, discrimination and an unstable
business environment are all elements of Canada's regime which are contrary to the fair
and equitable treatment standard. In addition, the measures in force are in violation of
the Investor's legitimate expectations and constitute an abuse by Canada of its rights.
2.7.2 Canada's Opposing Views
168. Canada argues first that the applicable law is quite different from what the Investor
understands. Article 1105(1) provides for a minimum standard of treatment based on
long-standing principles of customary international law, as was noted in Canada's
Statement on Interpretation for NAFTA in 1994 and further confirmed by the FTC
Interpretation of July 31, 2001. The FTC Interpretation, which is binding on NAFTA
tribunals, further clarifies that fair and equitable treatment or full protection and
security do not require treatment in addition to or beyond that which is required under
the customary international law minimum standard of treatment of aliens.
169. The Respondent also maintains that the fair and equitable treatment and full
protection and security standards are not free-standing obligations and that, as held in
Loewen, they “constitute obligations only to the extent that they are recognized by
customary international law”. (89) To that end, international law requires that the
obligation must be proven in the light of state practice and opinio juris. (90) In this
context, arbitral awards are not customary international law and this, Canada believes, is
not the meaning the Investor assigns to ADF. Nor are bilateral investment treaties
relevant in the context of this arbitration as ruled, contrary to the Investor's
understanding, in Mondev. (91) To the extent that under such treaties there is no link to
customary law, then the concept of fair and equitable treatment may be interpreted
independently.
170. Canada opposes, in particular, that good faith and legitimate expectations might be
considered independent rules of customary international law, and says that good faith is
not an independent source of obligation as the Investor asserts. (92) Moreover, the
prohibition of arbitrariness does not constitute a stand-alone obligation and no such
conclusion is found in either Metalclad or Waste Management II, contrary to the Investor's
understanding. Article 1105(1) contains neither a prohibition against discrimination nor
an obligation to protect legitimate expectations. In any event, the conditions for a
legitimate expectation are not met in this case, as none of the conditions invoked by the
Investor prevailed at the time the investment was made and no representations were
made by Canada.
171. Canada also maintains that transparency is not a stand-alone obligation and it is not
part of the international law minimum standard. Contrary to the Investor's argument,
Canada says that Metalclad was not based on other NAFTA articles, but on Article 1105(1)
itself, and this is what led to the award being set aside on judicial review by the British
Columbia Supreme Court. So too, Canada argues that the Waste Management II tribunal
did not consider transparency as a free standing obligation, but as a part of denial of
justice and due process.
172. In Canada's argument, there is no such thing as a stand-alone obligation to provide a
secure legal environment, nor is such an obligation part of customary international law.
NAFTA Article 1105 is a different situation from that considered in CMS and Occidental
under bilateral investment treaties unrelated to customary law. (93) In addition, full
protection and security does not refer to legal security, but to physical security, a matter
which in this case is not an issue. Canada also asserts that there is no general prohibition
of abuse of rights under Article 1105 and that its consideration in Azinian was again in the
context of denial of justice.
173. In Canada's view, the sole mandate of a NAFTA tribunal is to decide whether there
has been a breach of Chapter Eleven and not to adjudicate on the legitimacy of a given
regime or the soundness of its administration, as noted in S.D. Myers. Neither a failure to
satisfy requirements of national law necessarily violates international law, as held in
Gami, nor does it necessarily breach the customary international standard embodied in
Article 1105(1), as noted in ADF. (94) The high threshold identified in ELSI in respect of
arbitrariness, requiring “wilful disregard of due process of law, an act which shocks, or at
least surprises, a sense of judicial propriety” (95) is also applicable in NAFTA and it was
the threshold used by both S.D. Myers (96) and Thunderbird, (97) specifically with regard to
regulations and administrative proceedings.
174. Against this backdrop, Canada contends that the impugned regime cannot be said to
breach the Article 1105 standard. Canada asserts that 97.6% of all logs advertised were
deemed surplus and allowed to be exported - and that this outcome was the same for the
Investor. Ultimately the Investor's claim in this respect concerns only a miniscule portion
of its log business in British Columbia. Moreover, Canada has no role in “blockmailing”
and has disciplined such conduct when it comes to its attention. (98) These facts can
hardly be said to have created an insecure legal and business environment.
175. Canada also maintains that the regime is not administered in an arbitrary manner, as
claimed by the Investor. (99) Canada does not have the legal authority to grant standing
timber exemptions and the requirements applicable to logs from remote areas are
related to (and were developed to address) the very specific conditions of those areas, as
discussed further above. The same holds true of the minimum and maximum volume
requirements. (100)
176. In particular, Canada contends that the decision-making process is in no way
arbitrary, because TEAC/FTEAC cannot influence the domestic market price of logs, which
is based only on supply and demand. (101) The private sector members participating in
these bodies do not represent the interest of industry but are there as neutral specialists.
Moreover, Canada points out that private landowners have also been invited to
participate, but have declined these invitations. There are also specific conflict of
interest procedures in force which result in the exclusion of any person having an interest
from the meeting where decisions concerning their interests are considered.
177. Canada argues that TEAC/FTEAC meetings are not often cancelled and a federal
representative is always in attendance, including by conference call. Recommendations
are made based on concrete criteria, comprising a number of factors, all of which are
well known to the industry, within a margin of flexibility so as to take into account all
relevant facts of a case. The Investor has often made representations to such bodies
concerning offers made on its logs, and has succeeded in many instances in having such
offers rejected. (102)
178. Neither does the Minister of Foreign Affairs nor the pertinent provincial body rubber-
stamp such recommendations. Rather, these decision makers take into account a variety
of facts in addition to TEAC/FTEAC recommendations. In any event, the Investor can make
and has successfully made representations to the Minister and the Minister's decisions
can be judicially reviewed in federal courts. The rules concerning extensions of export
permits have not been changed arbitrarily.
179. Canada further asserts in this respect that none of the aspects about which the
Investor complains reach the necessary threshold to be in breach of customary
international law. Canada argues further that the regime is transparent, because remote
areas have been reasonably defined and known to all log exporters and normal market
practices are established and understood by the industry and not by regulation under
Notice 102.
180. Neither is Canada responsible for “blockmailing” nor special targeting by
competitors. Indeed, it has taken all necessary measures to prevent and discipline these
practices, including on those occasions where a matter was brought to the attention of
the Minister of Foreign Affairs by the Investor. The log export regime creates in Canada's
view a stable legal and business environment that cannot be compared to cases where
such environment was completely transformed by government measures.
181. In concluding its argument, Canada maintains that no legitimate expectations of the
Investor could have been frustrated as no representations have been made. There is also
no abuse of rights, because TEAC/FTEAC do not approve offers below the fair market
value, within a 5% variation. If there is no arbitrariness and there is transparency, there is
no insecure legal and business environment, the Investor's legitimate expectations have
not been frustrated and there is no abuse of rights, then there can be no breach of the
fair and equitable treatment standard under Article 1105(1).
2.7.3 The Tribunal's Findings
a The Intricacies of the Applicable Law (103)
182. The most complex and difficult question brought to the Tribunal in this case is that
concerning fair and equitable treatment. This is so because there is still a broad and
unsettled discussion about the proper law applicable to this standard, which ranges from
the understanding that it is a free-standing obligation under international law to the
belief that the standard is subsumed in customary international law. NAFTA and
investment treaty tribunals have had the occasion to discuss this question under
different legal frameworks. Under either view, the difficulties associated to this question
are further compounded because of the need to determine the specific content of the
standard. In addition, in this case there is a particular difficulty in assessing the facts and
how they are related or unrelated to the governing law.
183. The Tribunal first notes that Article 1105(1) provides for the treatment of another
Party's investors “in accordance with international law”. It goes on to indicate that such
treatment includes fair and equitable treatment and full protection and security. Under
the methods of interpretation generally accepted under international law, in particular
Article 31 of the Vienna Convention on the Law of Treaties, a treaty “shall be interpreted
in good faith in accordance with the ordinary meaning to be given to the terms of the
treaty in their context and in the light of its object and purpose”. (104) Consistent with
this use of terms, NAFTA Article 1131(1) directs NAFTA tribunals to decide the issues in
dispute in accordance with “this Agreement and applicable rules of international law”.
184. The meaning of international law can only be understood today with reference to
Article 38(1) of the Statute of the International Court of Justice, where the sources of
international law are identified as international conventions, international custom,
general principles of law, and judicial decisions and the teachings of the most highly
qualified publicists as a subsidiary means for the determination of the rules of law. The
Investor's understanding of the role of Article 38(1) of such Statute in the context of this
particular discussion is correct. In fact, the reference that Articles 1105(1) and 1131(1)
make to “international law” must be understood as a reference to the sources of this legal
order as a whole, not just one of them.
185. Had a more limited meaning been intended it would have had to be specifically
identified in the terms of the Agreement, which was not the case. The Max Planck
Encyclopedia of Public International Law has concluded in discussing the minimum
treatment standard that its development “has been through customary international law,
judicial and arbitration decisions, and treaties”. (105)
186. To the extent relevant, it is thus possible for this Tribunal to examine various sources
of international law in the effort to identify the precise content of this standard. Treaties
and international conventions, however, are not of great help to this end, as for the most
part, they also contain rather general references to fair and equitable treatment and full
protection and security without further elaboration. This is the case with most bilateral
investment treaties and multilateral instruments. More important, besides the NAFTA
Agreement itself, there does not appear to be in this matter relevant treaties to which all
three NAFTA members are parties, which is where the standard could have been spelled
out in greater detail. This leaves customary international law as the other principal
source to be applied.
187. The Tribunal must note that general principles of law also have a role to play in this
discussion. Even if the Tribunal were to accept Canada's argument to the effect that good
faith, the prohibition of arbitrariness, discrimination and other questions raised in this
case are not stand-alone obligations under Article 1105(1) or international law, and might
not be a part of customary law either, these concepts are to a large extent the expression
of general principles of law and hence also a part of international law. Each question will
have to be addressed on its own merits, as some might be closely related to such
principles while other issues are not. Good faith and the prohibition of arbitrariness are
no doubt an expression of such general principles (106) and no tribunal today could be
asked to ignore these basic obligations of international law. The availability of a secure
legal environment has a close connection too to such principles and transparency, while
more recent, appears to be fast approaching that standard.
188. The same holds true for the role of the subsidiary sources indicated above. Judicial
decisions, while not a source of the law in themselves, are a fundamental tool for the
interpretation of the law and have contributed to its clarification and development. The
teaching of highly qualified publicists has a similar role. The fact that both parties have
made extensive use of the jurisprudence and the views of writers in their pleadings is
sufficient evidence to demonstrate this role. Here again, cases and writers have to be
considered on their own merits, as some might be related to different legal frameworks
and applicable law. Yet, on the whole, they all contribute one way or the other to the
same end of identifying the content of customary law and other sources.
189. The jurisprudence of NAFTA tribunals has dealt directly and indirectly with the
question whether fair and equitable treatment is linked to a particular source of
international law, notably customary law, or is a concept that can be applied in some
autonomous manner. (107) In linking fair and equitable treatment with the requirement of
transparency under international law, but not identifying a specific source of this
requirement, the Metalclad tribunal appears to have relied on some kind of autonomous
role of fair and equitable treatment, (108) a view that was not shared by the reviewing
court. (109) This also appears to have been the case of S.D. Myers in emphasizing the
relationship between fair and equitable treatment and international law generally. (110)
These interpretations prompted the Free Trade Commission Notes of Interpretation of
July 31, 2001, noted above, to the effect of linking fair and equitable treatment with
customary law only and to the effect of de-linking it from breaches of other NAFTA articles
or separate treaties.
190. While NAFTA tribunals have thereafter followed the FTC Interpretation in the light of
its binding character, as provided for in Article 1131(2), the first major question as to the
meaning of customary international law in this matter, is whether the customary
international law minimum standard of treatment of aliens has been frozen in time since
the 1920's or has evolved accordingly with current international law. Mondev (111) and
ADF, (112) while accepting that fair and equitable treatment had to be understood within
customary international law, favored a dynamic interpretation of the content of this
source, the first in conjunction with the role of investment treaties and the second, it
appears, more generally on state practice, judicial and arbitral case law or other sources
of customary or general international law. (113) This evolutionary approach was also
endorsed by Waste Management II (114) and Gami. (115)
191. The second major question which the Tribunal requires to address is the meaning of
customary international law regarding fair and equitable treatment and full protection
and security. And as to this, the Tribunal is mindful of the FTC Interpretation referred to
above, as well as Canada's Statement of Implementation, which understood Article 1105 as
a minimum standard of treatment under customary law.
192. However, the binding character of the FTC Interpretation does not mean that that
interpretation necessarily reflects the present state of customary and international law.
As the Investor has argued, the FTC Interpretation seems in some respect to be closer to
an amendment of the treaty, than a strict interpretation. In any event, the Tribunal is
mindful of the evolutionary nature of customary international law, as discussed below,
which provides scope for the interpretation of Article 1105(1), even in the light of the Free
Trade Commission's 2001 interpretation.
193. In spite of arguments to the contrary, there appears to be a shared view that
customary international law has not been frozen in time and that it continues to evolve in
accordance with the realities of the international community. No legal system could
endure in stagnation. The issue is then to establish in which direction customary law has
evolved. State practice and opinio juris will be the guiding beacons of this evolution.
194. Canada has maintained that, to the extent that an evolution might have taken place,
it must be proven that it has occurred since 2001, when the FTC Interpretation was issued,
and this almost certainly has not happened. (116) Such a view is unconvincing. The FTC
Interpretation itself does not refer to the specific content of customary law at a given
moment and it is not an interpretative note of such content. Accordingly, the matter
needs to be examined in the light of the evolution of customary law over time.
195. The concept of a minimum standard of treatment of aliens was born over a century
ago. After 1840, about sixty claims tribunals were established to resolve claims by foreign
citizens. (117) The concept became paramount in the context of the work of international
claims commissions, particularly as a result of the work of the Mexico-United States
Claims Commission. This is how it came to be identified with the oft-cited Neer case, (118)
which has been paramount in Canada's pleadings in other NAFTA cases. (119) The Tribunal
notes, however, that that decision has not been invoked by Canada in the instant case,
perhaps because of its contention that arbitral awards do not form part of customary
international law.
196. The Commission in the Neer case referred to a breach of the minimum standard of
treatment of aliens as requiring treatment that amounts “to bad faith, to willful neglect of
duty, or to an insufficiency of governmental action so far short of international standards
that every reasonable and impartial man would readily recognize its insufficiency”. (120)
A few other historical cases applied that or a similarly worded standard in connection
with treatment to aliens. (121)
197. The Tribunal notes, however, that all such cases were dealing with situations
concerning due process of law, denial of justice and physical mistreatment, and only
marginally with matters relating to business, trade or investments. This was also the case
of the International Court of Justice decision in ELSI. This oft-cited decision also set a high
threshold requiring “wilful disregard of due process of law, an act which shocks, or at
least surprises, a sense of judicial propriety”. (122)
198. In the NAFTA context, a number of tribunals have adopted that demanding standard.
Pope & Talbot, in particular, applied the Neer standard to conduct that would “shock and
outrage every reasonable citizen in Canada”. (123) The same holds true of the more recent
Loewen case, where a NAFTA tribunal identified the minimum standard with “manifest
injustice in the sense of lack of due process leading to an outcome which offends a sense
of justice…”. (124) Similarly, the Thunderbird tribunal required a finding of conduct that
amounts “to gross denial of justice or manifest arbitrariness falling below acceptable
international standards” for there to be a breach of the standard. (125)
199. Waste Management also identified unfair and inequitable treatment with conduct
that is arbitrary, grossly unfair, unjust or idiosyncratic which, in so far as it also
encompasses questions of due process, leads to an outcome which “offends judicial
propriety”. (126) Even before the FTC Notes of Interpretation the S.D. Myers tribunal
required unjust or arbitrary treatment unacceptable from the international perspective.
(127)
200. It is also quite evident that NAFTA jurisprudence has stiffened since the FTC
Interpretation. For example, the recent Glamis Gold decision relied on the Neer standard
requiring an act which is “egregious” and “shocking”. (128)
201. The approach of the Neer Commission and of other tribunals which dealt with due
process may best be described as the first track of the evolution of the so- called
minimum standard of treatment. In fact, as international law matured and began to focus
on the rights of individuals, the minimum standard became a part of the international
law of human rights, applicable to aliens and nationals alike. (129) This evolution led to
major international conventions on human rights as well as to the development of rules of
customary law in this field. A second track, which shall be discussed below, is also
discernable in so far it concerns business, trade and investment.
202. The early work of the International Law Commission on the principles of international
law governing state responsibility was well aware of the evolution that characterized
customary law in this matter, (130) gradually evidenced by the increasing obsolescence of
the traditional (first track) standard of minimum treatment in the light of different and
more recent standards. (131) Similarly, the Asian African Legal Consultative Committee
concluded in 1961 that the “minimum standard of treatment” had become outmoded and
that, in the context of human rights, what now mattered was “fair treatment” to nationals
and foreigners alike. (132)
203. The work of highly qualified writers and associated codification efforts also patently
reflected the evolution that was taking place. Although issues concerning the minimum
standard of treatment (particularly regarding questions of due process) were prominent
in the first decades of last century, particularly in Borchard, (133) the early approach was
subject to criticism in the work of the International Law Commission on State
Responsibility in the late 1950's and early 1960's. Thereafter it has been scarcely
mentioned in the principal works concerning the codification of the law of state
responsibility, particularly the draft articles prepared by Baxter and Sohn (134) and,
more recently, the Commentary on the Articles on State Responsibility approved by the
United Nations General Assembly on the basis of the draft of the International Law
Commission. (135)
204. This development was indicative of the fact that state practice was increasingly seen
as being inconsistent with the first track concept of an “international minimum standard”.
State practice was even less supportive of the standard referred to in the Neer case. And
in the absence of a widespread and consistent state practice in support of a rule of
customary international law there is no opinio juris either. No general rule of customary
international law can thus be found which applies the Neer standard, beyond the strict
confines of personal safety, denial of justice and due process.
205. As foreshadowed above, just as there was a first track concerning the evolution of the
minimum standard of treatment of aliens in the limited context indicated, there was also
a second track that concerned specifically the treatment of aliens in relation to business,
trade and investments. This other standard, which was much more liberal, is evidenced
by the tendency of states to support the claims of their citizens in the ambit of
diplomatic protection with an open mind, and without requiring a showing of
“outrageous” treatment before doing so. Parallel to the development of this second track,
diplomatic protection gradually gave way to specialized regimes for the protection of
foreign investments and other matters. (136)
206. The digest of cases concerning state responsibility in respect of acts of legislative,
administrative and other state organs, published by the United Nations Secretariat in
1964 unequivocally illustrates a new liberal approach. (137) Indeed, a host of successful
claims were made without conceptual restrictions dealing with interference with and
annulment of private rights, (138) the breach of concession contracts by the state, (139)
acquired rights under the law in force at the time of the investment, (140) the entitlement
to money wrongfully withheld, (141) the entitlement to the value of money orders, (142)
and the refusal to grant an export permit. (143) In many instances, it was the
commissions, courts or tribunals that had to make a determination on the applicable
legal principles. This is another good reason why judicial decisions, as a subsidiary means
for the determination of the rules of law, are not lightly to be dismissed.
207. The trend towards liberalization of the standard applicable to the treatment of
business, trade and investments continued unabated over several decades and has yet
not stopped. The examination of claims brought by many governments for settlement by
agreement is also illustrative of such open-minded standard, including all kinds of
property, rights and interests. (144) The Iran-United States Claims Tribunal has also
significantly contributed to this trend. (145)
208. Conduct which is unjust, arbitrary, unfair, discriminatory or in violation of due
process has also been noted by NAFTA tribunals as constituting a breach of fair and
equitable treatment, even in the absence of bad faith or malicious intention on the part
of the state. (146) Transparency as noted was unsuccessfully linked to this concept and
legitimate expectation has been discussed in several cases, although not endorsed on
questions of fact and evidence. (147)
209. State practice with respect to the standard for the treatment of aliens in relation to
business, trade and investments, while varied and sometimes erratic, has shown greater
consistency than in respect of the first track, as it has generally endorsed an open and
non-restricted approach to the applicable standard to the treatment of aliens under
international law. At the same time it shows that the restrictive Neer standard has not
been endorsed or has been much qualified. The parties have extensively discussed
whether the customary law standard might have converged with the fair and equitable
treatment standard, but convergence is not really the issue. The situation is rather one in
which the customary law standard has led to and resulted in establishing the fair and
equitable treatment standard as different stages of the same evolutionary process.
210. A requirement that aliens be treated fairly and equitably in relation to business,
trade and investment is the outcome of this changing reality and as such it has become
sufficiently part of widespread and consistent practice so as to demonstrate that it is
reflected today in customary international law as opinio juris. In the end, the name
assigned to the standard does not really matter. What matters is that the standard
protects against all such acts or behavior that might infringe a sense of fairness, equity
and reasonableness. Of course, the concepts of fairness, equitableness and
reasonableness cannot be defined precisely: they require to be applied to the facts of
each case. (148) In fact, the concept of fair and equitable treatment has emerged to make
possible the consideration of inappropriate behavior of a sort, which while difficult to
define, may still be regarded as unfair, inequitable or unreasonable.
211. In the context of the FTC Interpretation, the Tribunal accepts that it cannot be said
that fair and equitable treatment is a free-standing obligation under international law
and, as concluded in Loewen, its application will be related to a finding that the
obligation is part of customary law. As to this latter point, Canada has argued that the
existence of the rule must be proven. But against the backdrop of the evolution of the
minimum standard of treatment discussed above, the Tribunal is satisfied that fair and
equitable treatment has become a part of customary law.
212. The Tribunal also notes that if the FTC Interpretation was construed so as to narrow
the protection against unfair and inequitable treatment to an international minimum
standard requiring outrageous conduct of some kind, then consistency would demand
that the same standard be followed in respect of such claims made by the NAFTA States
in respect of the conduct of other countries affecting business, trade or investments
interests of their citizens abroad. Yet, this is not the case under current international
practice. Customary international law cannot be tailor made to fit different claimants in
different ways. To do so would be to countenance an unacceptable double standard.
213. In conclusion, the Tribunal finds that the applicable minimum standard of treatment
of investors is found in customary international law and that, except for cases of safety
and due process, today's minimum standard is broader than that defined in the Neer
case and its progeny. Specifically this standard provides for the fair and equitable
treatment of alien investors within the confines of reasonableness. The protection does
not go beyond that required by customary law, as the FTC has emphasized. Nor, however,
should protected treatment fall short of the customary law standard.
b The Facts of the Case in the Light of Fair and Equitable Treatment
214. The Tribunal has had the occasion to examine most of the facts of this case in
connection with the other standards provided for under Chapter Eleven. The conclusions
reached in that context are for the most also applicable to the question of fair and
equitable treatment. No breach of national treatment has occurred in this case, and
neither have performance requirements been imposed by Canada. To that extent, at
least in so far those conclusions may be taken beyond the meaning and extent of the
specific articles discussed, it would not be possible to find that there is a breach of the
fair and equitable treatment required under Article 1105(1) in that respect.
215. The Tribunal has also concluded in respect of expropriation that a potential and
eventual benefit relating to export prices cannot be affected by an alleged act of taking
because it has not materialized in an existing contract and there is thus no actual
contractual right that can be protected as an intangible interest. The Permanent Court of
International Justice dealt with this issue in Oscar Chinn, noted above, concluding that
while there is an obligation under international law to respect the vested rights of
foreigners, the possession of customers and the possibility of making a profit that Mr.
Chinn claimed for, did not constitute a genuine vested right because “[f]avourable
business conditions and good-will are transient circumstances, subject to inevitable
changes;…No enterprise…can escape from the chances and hazards resulting from
general economic conditions”. (149)
216. In the instant case, however, unlike Oscar Chinn, the Investor is not trying to escape
from general business conditions but, to the contrary, is seeking to be allowed to operate
under those conditions and not to be prevented from so doing in light of the regulations
in force. In the absence of actual contracts, however, the question arises as to what is the
specific intangible interest to be protected.
217. The principal argument of the Investor, as explained above in respect of
expropriation, is that the whole regime is geared towards providing low cost raw material
for domestic sawmills in British Columbia at the expense of private log producers. While
not qualifying as an act of expropriation, it is still necessary to examine whether this
particular situation could result in the breach of fair and equitable treatment, as the
ability of the Investor to conduct its business without undue interference might be
unreasonably hindered.
218. The Tribunal is mindful of Canada's argument that the Tribunal's task is to determine
whether there has been a breach of the fair and equitable treatment standard and not to
pass judgment on the legitimacy of the legislation or the regulations in force. The
Tribunal fully accepts that view. However, in considering this question, the consequences
of those regulatory measures on the Investor's business and the related issue of damages
should not be ignored.
219. The Tribunal has considered a possible breach of the protections provided by
Article 1105(1) under two different scenarios. The first is based on the Investor's view that
the protection provided by Article 1105(1) is significant and that the threshold to be
applied to establish breach is a comparatively low one, and thus the log export regime's
interference with its business could readily result in a breach of Article 1105(1). The
second scenario, while not relying on the Neer or some other similarly high threshold, is
based on the view that for there to be an 1105(1) breach, a state's wrongful conduct or
behavior must be sufficiently serious as to be readily distinguishable from an ordinary
effect of otherwise acceptable regulatory measures. In either case, as will be discussed
further below, assuming breach be found, it is also necessary to determine whether the
state's conduct or measures have resulted in damages to the Investor.
c The First Scenario
220. Under the first scenario it is appropriate to note the Investor's argument that the log
export control regime originated in emergency and extraordinary measures adopted in
time of war and its immediate aftermath, a fact which does not appear to be disputed.
This could be considered a question of necessity so as to guarantee the supply of logs to
the local and Canadian industry. The regime, however, has been kept in force thereafter
in one form or another until the current regulations under Notice 102. Jurisprudence has
generally not favored extraordinary measures kept in force for a long period after the
originating circumstances have come to an end. (150)
221. To the extent that such regulations constitute a form of subsidy directed to benefit
the local industry and which negatively affect the Investor's ability to conduct its
business, it is possible that the fair and equitable treatment standard might be placed in
issue.
222. In this case, however, there is no direct subsidy or transfer of funds. (151) The benefit
to the local industry follows a different path in that the impugned regulations require log
producers who wish to export to offer their logs for sale in the local market as a condition
for applying for an export permit. (152)
223. In examining each aspect of the regime about which the Investor complains, the
Tribunal notes that some of its requirements are entirely unrelated to any benefit to the
local industry, some are doubtful in that respect, and yet others translate into some form
of direct benefit to the local sawmills processors. The difference lies in the objectives
and purposes of those regulations.
224. Some aspects of the impugned regulation are directed to benefit society as a whole,
as is the case of environmental, safety, conservation or sanitary regulations, among
others. On the other hand, some aspects of the regime are specifically designed to
benefit a particular industry. It is the latter, under this first scenario, that could
compromise Canada's obligation to ensure fair and equitable treatment. Customary
international law has for long recognized that the minimum standard of treatment may
be curtailed for reasons of public policy, (153) which necessarily has to pursue a genuine
public policy.
225. In so far as the specific acts complained of are concerned, the Tribunal accepts that
the Canadian government does not have the constitutional authority to grant standing
exemptions. It also accepts that regulations concerning remote areas and minimum and
maximum volume requirements, which may cause considerable inconvenience to a
would be exporter, are responsive to the specific economic and transportation
conditions of those areas. Similarly, scaling in the metric system cannot properly be
subject to criticism as it is the normal measurement system in use throughout Canada.
This kind of regulations, even when considered under the first scenario, could not be held
in breach of fair and equitable treatment.
226. However, other aspects of the log export regime appear to be geared towards
ensuring some form of benefit to the local industry. The mandatory cutting and sorting of
timber in accordance with the needs of the local industry, for example, is designed to
address the requirements of a particular potential local consumer. It is imposed on the
Investor by regulation, not market forces.
227. More serious issues arise in connection with the functioning of the log market. The
first concerns the composition of TEAC/FTEAC, the membership of which is said to be
heavily weighted in favor of the local industry that is the beneficiary of the regulations
and upon which it is required to make recommendations. While there is no reason to
doubt the professional competence of the members of these bodies, entrusting very
significant components of the implementation of the log export regime to its domestic
beneficiaries is facially troubling.
228. A truly independent body would be able to ensure the impartiality of the decisions
taken. Although formally the decision on the issue of an export permit lies with the
Minister of Foreign Affairs, the advice gathered in the decision-making process will
generally have a predominant (if not determinative) influence on those decisions, even if
other factors may be taken into account. And the record shows that these other factors,
while not absent, are marginal and are not often resorted to. The fact that the TEAC and
FTEAC memberships are the same, except that in the latter case where a federal
representative is added, does not contribute materially to the independence of FTEAC.
229. The record also indicates that TEAC/FTEAC operates so as to favor domestic log
purchasers. This occurs as a result of the committees' policy according to which offers
below the market price but within 5% of that price are still considered a fair market
price. The benefit to domestic purchasers and the prejudice to would be exporters is
apparent. An entirely different result would obtain if, for example, the local industry
would have a right of first refusal to purchase logs contracted for sale by the Investor to
foreign customers, as it would ensure both the secure supply and the prevailing true
market price. (154)
230. The market distorting nature of the regulations is further illustrated by the existence
of “blockmailing”. Canada has persuasively explained that “blockmailing” is a private
practice which cannot be attributed to the government and that, whenever possible, it
has made efforts to discipline this practice. However, the very existence of the practice
proves that Canada's export log regime is used by domestic purchasers as a tool for
extracting benefits from the logs exporters. (155)
231. The Investor's arguments concerning transparency also require to be considered in
the context of the first scenario. And while a requirement for transparency may not at
present be proven to be part of the customary law standard, as the judicial review of
Metalclad rightly concluded, it is nonetheless approaching that stage. Indeed, it would be
difficult today to justify the appropriateness of a secretive regulatory system. In the
instant case, some aspects of the log export regime appear to meet the need for
transparency in a satisfactory manner. The Tribunal accepts, for example, Canada's
explanation of the industry understanding about what is to be regarded as a remote area
or as normal market practices. As regards other aspects of the regime, the situation is not
entirely satisfactory. Examples include TEAC/FTEAC holding closed meetings and not
publishing their minutes.
232. The stability of the legal environment is also an issue to be considered in respect of
fair and equitable treatment. State practice and jurisprudence have consistently
supported such a requirement in order to avoid sudden and arbitrary alterations of the
legal framework governing the investment. In this case, if stability were to be measured
in the context of the framework existing when the investment was made in 1906,
important alterations have indeed taken place. Yet, that would be a significantly
exaggerated approach. A number of the changes that have intervened were well justified
in the light of emergency war measures. The continuation of these measures under
different modalities, but with the same objective, cannot in a contemporary perspective
be considered an abrupt change of the legal environment. To the extent that it was
adverse, it has been continuously and stably adverse. As such, the stability is not an issue
in itself in this case.
233. The Investor raises the violation of its legitimate expectations as another issue.
While it is clear that no representations have been made by Canada to induce the
Investor to make a particular decision or to engage in conduct that is later frustrated, any
investor will have an expectation that its business may be conducted in a normal
framework free of interference from government regulations which are not underpinned
by appropriate public policy objectives. Emergency measures or regulations addressed
to social well-being are evidently within the normal functions of a government and it is
not legitimate for an investor to expect to be exempt from them. Yet, regulations which
end-up creating benefits for a certain industry, to the detriment of an investor, might be
incompatible with what that investor might reasonably expect from a government.
d The Second Scenario
234. Having concluded that certain aspects of the Investor's case for breach of the
applicable standard must fail even if the Tribunal were to conclude that the scenario one
threshold were to apply, (156) we consider here, in connection with scenario two, only
those aspects of the Investor's case that relate to:
(a) the fact that the regime, in application, may be said to benefit local sawmill
processors;
(b) the regime's cutting and sorting requirements for timber;
(c) the make-up and operations of TEAC/FTEAC;
(d) “blockmailing”; and
(e) the Investor's legitimate expectations.
235. As to the fact that the regime may, in design and/or application, benefit a particular
domestic industry, namely the sawmills, to the detriment of the Investor, there is a
substantial argument in Canada's favor that this reflects a legitimate public policy
objective: i.e., the creation of domestic employment and the retention in Canada of part
of the timber value chain that would otherwise go to foreigners as a result of the export of
unprocessed logs. Bearing in mind that Canada's export regime treats Canadian owners of
timberland, who are minded to export logs, in precisely the same fashion as it treats
foreign timberland owners, it is difficult to see how either Notice 102 (which is not under
attack as such), or its implementation (which is questioned) could be seen to constitute
sufficiently adverse behavior by Canada against an alien investor so as to breach a
minimum standard of treatment of aliens which carries the sort of threshold associated
with this second scenario.
236. It is non-controversial that the Tribunal's task is not to pass judgment on the policy
legitimacy of Canada's log export regime, but only to determine in this case whether its
application breaches the minimum standard of treatment for aliens. Canada clearly feels
it is in the country's national interest to promote local processing of its timber. The fact
that its chosen regulatory instrument imposes a degree of constraint on the freedom of
other Canadian based businesses, particularly the timberland owners, to export their
unprocessed logs may properly be seen as a legitimate public policy consequence of its
chosen industrial policy. Indeed, it would be hard to see the imposition of such a non-
discriminatory policy in respect of foreign investors as sufficiently reprehensible to
amount to a breach of a minimum standard with the substantial threshold considered
under scenario two. Such policy could not be fairly described in this context as meeting
any of the adjectives that have been used over the years, such as egregious, outrageous,
arbitrary, grossly unfair or manifestly unreasonable.
237. Turning to the Investor's complaints regarding the cutting and sorting requirements
of Notice 102, if it is legitimate public policy for a state to have a log export control
regime which is aimed at preserving local value and ensuring a sufficient supply of logs to
domestic sawmills, whether Canadian or foreign owned, it would seem hard to base a
breach of a scenario two type international minimum standard on the implementation of
that policy objective by a requirement that logs for which an export permit is sought be
advertised and made available to potential domestic bidders in a format that is
compatible with local market custom and usage. (157)
238. The make-up and modus operandi of TEAC/FTEAC, which was considered possibly to
give rise to more serious questions under a scenario one analysis, looks to be of
considerably less concern under the second scenario - especially when considered
against the backdrop of the following uncontradicted evidence:
(a) of the seven members of TEAC/FTEAC specifically identified for criticism by the
Investor by reason of partiality towards local sawmills, the two who were once
employed by BC sawmills have now become independent consultants and log
brokers, the third is the manager of a log broker which exports logs, the fourth
purchases rough sawn lumber rather than logs, but is also a logging contractor
whose interest is to get the highest possible price for logs and the fifth and sixth
each have responsibilities in their respective organizations which would either
favor allowing more exports and/or high prices for logs. (158) In short, six of the
seven industry representative members of TEAC/FTEAC who were singled out for
criticism do not appear to have a particular interest in keeping log prices
artificially low;
(b) on a number of occasions, following consultation with private landowners, including
the Investor, representatives of private landholders have been invited by BC and
Canada to become members of TEAC/FTEAC, but they have always declined; (159)
(c) TEAC/FTEAC have clear guidelines to deal specifically with any potential or
perceived conflict of interest which require, inter alia, that any committee member
who has any business relationship with an advertiser or an offering mill to leave the
committee meeting before any discussion of the matter starts. This has been the
consistent operational practice of the committees and it means that those
 members will not know the reason behind any acceptance or rejection
recommendation; (160)
(d) at each meeting of the relevant committee, and prior to any review of offers, the
committee members engage in a detailed “log market review” which establishes the
market price, during the period of advertisement, for an established range of logs of
various types and grades. The market level is established by reference to what has
been paid in the market; not what purchasers and sellers would have liked to pay or
receive. This review is carried out at every meeting of the committee, regardless of
whether offers for advertized logs are to be considered;
(e) logs typically are sold at prices around the median range of market prices for the
relevant period. Ranges of price exist because prices vary even for logs of a similar
type and quality. This occurs because of the nature of the log market where criteria
such as the location of logs, transportation and weather considerations can affect
price. An offer is thus considered fair if it falls within 5% of the current domestic
market value. And while not set out in Notice 102, the 5% benchmark has long been
in use and known to the industry; (161) and
(f) contrary to the Investor's assertions, the federal representative is always in
attendance at meetings of FTEAC at which there are offers to consider for logs
harvested from federal lands, either in person of via conference call. (162)
239. On the basis of this evidentiary record, (163) it would seem to be something of a
stretch to suggest that the implementation of the log export regime is entrusted to its
beneficiaries who operate in a sufficiently non-transparent, arbitrary and unfair manner
such that it can be said that Canada's implementation of Notice 102 contravenes the
threshold of the minimum standard as understood under the second scenario. (164)
240. The fact that the federal Minister usually accepts the recommendation of FTEAC
really does not add much to the Investor's case unless: (a) the FTEAC process can also be
shown to have had serious fundamental failures of due process, which, under the second
scenario would be unlikely; (b) the Minister can be shown to have had a closed mind to
expressions of concerns expressed by log exporters, the evidence on this being to the
contrary; and (c) the Minister's decisions were not subject to judicial review, which they
were.
241. Dealing next with “blockmailing”, having regard to the fact that the practice is
carried out by private parties, that Canada disapproves and actively seeks to discipline
the practice, and that truly “low ball” offers will not prevent an export permit, (165) it
would again be difficult to conclude that Canada's implementation of Notice 102 falls
short of the minimum standard of protection as understood in this scenario.
242. Finally, the Tribunal comes to the Investor's case based on the question of legitimate
expectations. Faced with a complete absence of evidence of any representation by
Canada to the Investor which might be said to have induced or even encouraged its
investment, if it were necessary to reach a decision on the question, the Tribunal would
be likely to conclude, as with all the other arguments considered in relation to a scenario
two threshold, that Canada had not contravened the provisions of Article 1105(1). But, for
reasons explained below, the Tribunal puts aside a definitive conclusion on the alleged
contravention by Canada of Article 1105(1) as interpreted by the FTC Notes of July 31, 2001.
243. Before determining which of the two above scenarios should guide the conclusions of
the Tribunal and whether, under either such scenario, Canada may be said to have
breached its Article 1105(1) obligations, matters on which there were different opinions,
the Tribunal considers it advisable first to determine whether the Investor has proven it
was damaged by Canada's alleged breaches.
244. The Tribunal proceeds in this fashion being mindful that international responsibility
for the breach of an international obligation has traditionally been identified with the
concepts of “liability” and “responsabilité civile” and thus with the duty to make
reparation for the damage sustained. (166) While, for specific purposes, responsibility has
occasionally been de-linked from the occurrence of damages, so as to enlarge the scope
of its application, the fact is, as stated by the Permanent Court of International Justice in
the Chorzów Factory (Jurisdiction) case, that “[i]t is a principle of international law that
the breach of an engagement involves an obligation to make reparation in an adequate
form … Reparation therefore is the indispensable complement of a failure to apply a
convention”. (167) (Tribunal's emphasis added.) Liability has thus become inextricably
associated with the occurrence of damages. This has also been the approach followed by
the early academic efforts at the codification of the rules of State responsibility (168) and
the diplomatic conferences and other official work on the matter. (169) Waste
Management II was also explicit in linking the infringement of fair and equitable
treatment with “conduct attributable to the State and harmful to the claimant…”. (170)
245. In the commentaries to the International Law Commission Articles on State
Responsibility, the issue of whether a wrongful act could exist in the absence of damage
being caused was considered. The commentaries state that “whether such elements
[damages] are required depends on the content of the primary obligation, and there is no
general rule in this respect”. (171) Valid as that conclusion may be as far as state
responsibility is concerned, in the case of conduct that is said to constitute a breach of
the standards applicable to investment protection, the primary obligation is quite
clearly inseparable from the existence of damage. Indeed, a finding of liability without a
finding of damage would be difficult to explain in the context of investment law
arbitration and would indeed be contrary to some of its fundamental tenets.
246. In these circumstances, and because of the different opinions within the Tribunal on
the applicable scenarios and their corresponding thresholds, and whether, under either
scenario, there has been a breach, we consider it appropriate first to determine the
Investor's claim for damages.
2.8 The claim for damages
2.8.1 The Investor's Claim for Damages
247. The Investor has submitted with its Reply two expert reports on which it bases its
claim for damages. The first Report, prepared by Mr. Douglas A. Ruffle (172) reviewed the
Harvest Plan prepared by Merrill & Ring, and concluded that the potential harvest
volume from the Investor's lands was lower than that originally estimated by the Investor.
In the end, the earlier reports submitted with the Investor's Memorial in respect of
damages were withdrawn. In the second report, on the basis of the revised harvest plan,
Mr. Robert Low calculated the damages for which compensation is claimed. (173)
248. Taking into account the projected volumes, the quality of the rafts, the historical
percentage of logs exported and other technical factors, the Investor identified three
categories of loss. The first concerns past losses of export premiums between December
2003 and December 2008. The second concerns future losses of export premiums. And the
third addresses the incremental costs of compliance with the regulatory regime in force.
Export premiums are defined as the higher prices exporters of logs from British Columbia
would receive “if they could sell like rafts of logs in the export market rather than in the
domestic BC market”. (174) Various witness statements by Messrs. Schaaf, Stutesman,
Kurucz, and Ringma, all noted above, addressed issues associated with export premiums.
249. The Investor then applied notional export premiums to past actual sales and to the
estimated sales through 2016, the last year of its operations. Estimates of future losses
were based on the same types of losses the Investor had historically incurred. (175) The
Investor also claims for additional costs of compliance with the regulatory regime in
connection with incremental timber management costs, towing and storage costs, boom
materials, inventory holding costs, scaling costs, sales commissions, fee-in-lieu payments
and staffing costs.
250. Losses in connection with the breach of Article 1102 were claimed to amount to CND$
16,804,068. The same amount was claimed, in the alternative, for the breach of
Article 1105. In addition, or in the alternative, losses said to be due for the breach of
Article 1106 were estimated at CND$ 16,756,272, and those due for the breach of
Article 1110 at CND$ 18,682,368.
2.8.2 Canada's Opposition to the Claim for Damages
251. In support of its opposition to the Investor's claim for damages, Canada filed
Supplemental Expert Affidavits from Messrs. Jendro (176) and Reishaus (177) and a
Supplemental Report from Mr. Bowie. (178) Canada contends that the Investor has not
proved how any specific loss flows from and was caused by any of the specific measures
alleged to constitute a breach of its NAFTA obligation and that the Investor relied on only
one measure of loss regardless of which element of the Regime might be in breach of
NAFTA. The Investor has thus failed to establish causation as required under
Article 1116(2).
252. Canada also says that a “but for” assumption, based on the Investor operating
outside of the regime while all other log exporters in British Columbia are subject to its
measures, is unrealistic. Indeed, the only realistic “but for” scenario would see every log
exporter operating outside the regime with the Investor facing increased competition in
international markets.
253. Canada also objects to the concept of an export premium which is based on sales
prices allegedly achieved by other Merrill & Ring operations, which are located
principally in the United States and which were not subject to the Canadian regime. It
pointed out that, in a number of instances, the “best market” price used to calculate the
export premium was actually achieved on sales of logs exported from Canada that had
been subject to the regime. Thus, rather than damaging the Investor, the regime
appeared in those cases to have benefitted it, an aspect that had been ignored in the
Investor's argument. Canada also asserts that the Investor's “best market” price did not
compare like sales, but was simply based on the highest price achieved for a given sort
and time period not considering the many differences that influence the price and value.
254. Having regard to these criticisms of the Investor's methodology, Canada asserts that
its claim for future losses is entirely speculative and lacks a sufficient degree of certainty.
In any event, no causal connection has been established between the regime and the
alleged loss for export premiums.
255. Finally, Canada contested the reliability of the Investor's calculation of costs of
compliance, arguing that most of the costs claimed appear to be normal costs associated
with the day-to-day operations of the Investor and that no causal link had been
established with specific breaches.
2.8.3 The Tribunal's Findings on the Claim for Damages
256. Having concluded that the Investor has failed to make a case for breach of NAFTA
Articles 1102, 1106 and 1110, its only possible claim for damages concerns the alleged
breach of Article 1105. This claim, in the amount of CND$ 16,804,068, is considered next.
257. The Tribunal has discussed above, in connection with both expropriation and fair and
equitable treatment, the specific nature of the interest for which the Investor is claiming
protection and particularly whether, in the absence of affected contractual rights, it is
possible to identify an intangible interest which could be affected by the measures
complained of. This question goes to the heart of the Investor's claim for damages. If, for
example, a contract for the export of logs had been executed but its performance had
been affected by the regulatory measures, by requiring, for example, that a preference to
local producers be observed, as a result of which the Investor obtained a lower price for
the logs concerned, that contract would have been the intangible interest to be
protected and the difference in price could have offered an objective measure of the
damages suffered.
258. But this, as has been explained, is not the case. No such contracts exist and the
expectation that they could have been available in the near future is an uncertain fact,
not supported by the evidentiary record submitted to the Tribunal. Such an uncertain
expectation, like the goodwill considered in Oscar Chinn, does not appear to provide a
solid enough ground on which to construct a legitimately affected interest. Nor does the
Investor's general business outlook, while a perfectly legitimate and valid concern,
constitute such an interest for the purpose of calculating damages.
259. Another difficulty with the Investor's damages claim arises from its choice of its
Harvest Plan as the basis for estimating its damages. In this regard, we find Canada's
criticism of the Harvest Plan, which was based on information supplied by Merrill & Ring,
to be valid. Neither the Ruffle Report, which simply re-evaluated the information
supplied by the Investor and the ensuing adjustments introduced, appears to contribute
an independent source of evaluation. Without for a moment questioning the professional
competence of those intervening at one stage or another, the fact is that objectivity and
impartiality might be compromised in such studies.
260. The Tribunal is also troubled by the use of the “but for” scenario to quantify the
Investor's alleged losses. Here again, Canada's criticism is persuasive. Either all log
exporters from British Columbia are outside the regulatory regime or they are all in. One
cannot selectively place different exporters in different categories of the scenario. If the
“but for” places all exporters outside the regime, competition in foreign markets will
inevitably increase and prices will be likely to be influenced. The same is true of the
competitive prices that would have to be offered by local producers so as to ensure the
appropriate supply. In these circumstances, the “export premium”, which the Investor
used as a basis for its calculations, may or may not have been available.
261. More difficult still is the identification of the appropriate benchmarks to be used to
estimate the prices for the logs in exports markets and the prices that would have been
obtained in the local market. While, in principle, past prices can offer such a benchmark,
the main question will be how does one compare, and adjust for, different volumes and
qualities of the logs sold in one market or another, an exercise that would seem almost
impossible in view of the fact that these factors rarely coincide. Technical issues have
been discussed by the parties in this context showing how complex any comparison
might be. Also, the fact that the Investor has chosen the prices it obtained for certain
exports from its operations in the United States as the appropriate benchmark does not
make it any easier to establish a comparison with the situation that might have
characterized its operations in British Columbia. Canada points out that the use of that
benchmark ignores sales in which the “best market price” was obtained by the Investor
from operations in British Columbia which were subject to the regulatory regime, casts
another element of doubt on how to identify the benchmark and draw the appropriate
comparison.
262. In light of the above considerations, the Tribunal cannot conclude with any certainty
that the Investor would have achieved any “export premiums” for past operations.
Accordingly, such a methodology does not support the Investor's claim for past damages.
In any event, the “past” in this case is rather limited in view of the time limits governing
NAFTA claims. This element, coupled with the uncertainty as to the intangible interest to
be protected, necessarily leads to a conclusion that does not allow for damages.
263. The situation concerning future losses is not any more certain. The problems noted in
respect of past losses means that the Investor's claimed past loss figure cannot simply be
extended into the future. Even if the Investor's past loss figures were accurate, there is no
way of knowing whether the situation in the future will be identical or altogether
different. Indeed, the fact that for the 2008-2009 period of economic crisis a different
basis for estimating damages had to be used, in order to accommodate the collapse of
the construction industry and the consequential demand for logs in world markets,
evidences how difficult it is to make any realistic projections in this matter. What the
future of such markets might be until 2016 is entirely speculative.
264. Of course, there is always some element of uncertainty involved in future scenarios,
and even in often used valuation methods, such as the discounted cash flow, future
estimates are based on assumptions. But these are inevitably drawn from specific
information provided by a historical record of profitability, or other elements that allow
for an educated estimate. In the instant case, such an educated estimate is not possible
because the record of profitability on the Investor's British Columbia operations has
been inextricably and permanently related to the existence and application of the
regulatory regime. There is thus no measure of profitability relating to the period before
the measures were adopted. However, in these circumstances, the future scenario will be
characterized more by speculation than by educated estimates, an approach which has
not been favored by arbitration tribunals, (179) and upon which this Tribunal would not
be prepared to base an award of damages.
265. A third type of damage that the Investor claims for is the cost of compliance with the
regime. The Tribunal is in no doubt that there has indeed been a cost of compliance - this
is the case with every regulatory regime. However, this cost is no different from that which
every entity subject to the regime must pay and does not appear to be out of the
ordinary in such a context. Compensation for such costs, particularly in the absence of a
finding of specific, past or future, damages is not possible.
2.8.4 Conclusion in Respect of Damages and Liability Concerning Fair and Equitable
Treatment
266. As explained above, the Tribunal has considered two scenarios in respect of possible
liability for breach of the fair and equitable treatment standard: one with a low threshold
favored by the Investor and the other with a high threshold favored by Canada. While the
Tribunal held different views in respect of both the applicable threshold and possible
breach thereof, when it examined the question of damages, the Tribunal has had no such
difference of views. Even if the scenario most favorable to the Investor were to be
adopted, and breach of the Article 1105(1) obligation assumed, damages have not been
proven to the satisfaction of the Tribunal. In these circumstances, the Tribunal both
dismisses the Investor's claim for damages and concludes that Canada has not been
shown to have breached Article 1105(1) since one and the other are inextricably related
and, as previously noted, an international wrongful act will only be committed in
international investment law if there is an act in breach of an international legal
obligation, attributable to the Respondent that also results in damages.
2.9 The time bar provision of NAFTA Article 1116(2)
267. The parties have also extensively discussed the meaning and extent of NAFTA
Article 1116(2) in so far as it establishes the critical date for the applicable three year
time limitation period which is to be applied to Chapter 11 claims, that is the date on
which the Investor “first acquired, or should have first acquired, knowledge of the alleged
breach and knowledge that the Investor has incurred loss or damage”. Expert opinions
were submitted from Professor Michael Reisman (180) and Robert Howse (181) in support
of the parties' respective arguments on the matter, and the pertinent NAFTA decisions
and awards were competently discussed. (182) Submissions under Article 1128 were also
made on this matter by Mexico and the United States. (183)
268. As noted above in the procedural section of this Award, the Tribunal decided at the
outset of the proceedings to join its consideration of this issue to the merits, since the
three-year time limitation period would have to be examined in light of the specific
breaches that might have been found to exist and also in light of the relationship of such
breaches to the date on which the Investor first acquired knowledge of it having incurred
loss or damage. The inextricable relationship between breach and damages is
emphasized again in this context as the guiding criteria to establish liability and
compensation.
269. Having now concluded that even if liability were established under either of the
scenarios considered by the Tribunal, and that any such breach did not give raise to
demonstrable damages, the Tribunal believes it to be unnecessary to consider the
question of the time limitation period. Indeed, the time the measures were adopted or
applied, or whether such measures might be considered of a continuing character,
becomes irrelevant in the absence of proven breach and liability for damages.

III Costs
270. The parties have duly submitted their respective claims for costs. The Tribunal is of
the view that the Investor had in some respects plausible arguments and indeed raised
question of particular interest for the Tribunal to consider both under NAFTA and
international law. Professional competence characterized the submissions, allegations
and arguments of both parties at all times.
271. Because of this, the Tribunal concludes that each party should bear equally the costs
of the arbitration and that each shall pay for its own costs. For the purposes of UNCITRAL
rules, it is noted that the total costs of the arbitration, including administration fees and
expenses and the expenses and fees of the Tribunal amount to US$ 959,500. (184)

IV Operative Part
In the light of the above considerations the Tribunal ORDERS and AWARDS as follows:
1. The claim is dismissed.
2. The parties shall bear the costs of the Arbitration in equal shares and any remaining
balance will be refunded to the parties equally by the administering institution.
3. Pursuant to Article 40(3) of the UNCITRAL Arbitration Rules, the Tribunal fixes the
following amounts as costs of the arbitration:
Administering institution charges and expenses: US$ 138,595.25
 Tribunal's fees and expenses: US$ 820,904.75
Professor Orrego Vicuña's fees: US$ 365,200.00
Professor Dam's fees: US$ 169,675.00
Mr. Rowley's fees: US$ 235,895.00
Tribunal's expenses: US$ 50,134.75
Total costs of the arbitration: US$ 959,500.00
Place of Arbitration: Washington D. C., United States of America.
Date of the Award: March 31, 2010.
Prof. Kenneth W. Dam
Arbitrator
J. William Rowley QC
Arbitrator
Prof. Francisco Orrego Vicuña
President

References
★ ) Charles H. Brower II: University of Mississippi School of Law
1) Mr. Dean discontinued his functions at ICSID in December 2007.
2) The witnesses and experts heard were the following: Mr. Schaaf, Mr. Kurucz, Mr.
Stutesman, Mr. Ringma, Mr. Cook, Ms. Korecky, Mr. Bustard, Mr. Low, Mr. Ruffle, Mr.
Reishus, Mr. Jendro, Mr. Bowie and Mr. Howse.
3) British Columbia Forest Act, R.S.C.B. 1996, c. 157.
4) Notice to Exporters, Export and Import Permits Act, Serial No. 102, Apr. 1, 1998.
5) R.S., 1985, c. E-19.
6) Notice to Exporters, Export and Import Permits Act, Serial No. 23, Jan. 1, 1986.
7) Investor's Witness Statement of Robert Boeh, December 3, 2008 (single page).
8) Investor's Witness Statement of Norm Schaaf, February 12, 2008, paras. 24-43; and
Reply Witness Statement of Norm Schaaf, December 12, 2008, paras. 6-9.
9) Evidentiary Hearing, Opening Statement of Mr. Barry Appleton on behalf of the
Investor, May 18, 2009, at 24-27.
10) Canada's Affidavit of Michael Falkiner, May 5, 2008, paras. 8-10.
11) Canada's Counter-Memorial, paras. 7-57.
12) Canada's Witness Statement of Brian Bustard, March 19, 2009, paras. 11-19, with
reference to the regulation of offers.
13) Canada's Affidavit of Judy Korecky, May 10, 2008, paras. 23-24; and Supplemental
Affidavit, March 19, 2009, paras. 21-29.
14) Evidentiary Hearing, Opening Statement of Ms. Sylvie Tabet on behalf of Canada,
May 18, 2009, at 46-49.
15) Investor's Memorial, paras. 47-49.
16) Investor's Expert Report of Peter H. Pearse, February 6, 2008, para. 27.
17) Investor's Witness Statement of Tony Kurucz, February 11, 2008, paras. 52 et seq.; and
Reply Witness Statement of Tony Kurucz, December 14, 2008, paras. 8-27, with
particular reference to the question of remote areas.
18) Evidentiary Hearing, Witness appearance of Mr. Tony Kurucz on direct examination
by Mr. Greg Nash on behalf of the Investor, May 18, 2009, at 215-216.
19) Evidentiary Hearing, Witness appearance of Mr. Norm Schaaf on direct examination
by Mr. Greg Nash on behalf of the Investor, May 18, 2009, at 86-88.
20) Investor's Witness Statement of Richard Ringma, December 11, 2008, with reference
to the experience of Island Timberlands LP; and Investor's Witness Statement of
Christian Schadendorf, December 11, 2008, with reference to the experience of Pluto
Darkwoods Corp.
21) Investor's Witness Statement of Paul Statesman, February 8, 2008, paras. 3-7; and
Reply Witness Statement of Paul Statesman, December 12, 2008, paras. 2-5.
22) Investor's Legal Expert Witness Statement of James G. Matkin, QC, December 11,
2008, with reference to Canada's constitutional authority to grant standing timber
exemptions, paras. 11-21.
23) Canada's Expert Report of David Reishus, May 9, 2008, Section VII.
24) Canada's Affidavit of Professor Benjamin William Cashore, May 12, 2008, paras. 5-9.
25) Submissions of the United Steelworkers, Communications, Energy and Paperworkers
Union of Canada and the British Columbia Federation of Labour, September 26,
2008.
26) Investor's Memorial, para. 265.
27) Pope & Talbot, Inc. v. Canada, (NAFTA/UNCITRAL), Merits II, Apr. 2001, para. 78
[hereinafter Pope & Talbot, Merits II].
28) S.D. Myers, Inc. v. Canada, (NAFTA/UNCITRAL), Final Award, Oct. 2002, para. 250,
[hereinafter S.D. Myers Final Award].
29) Occidental Exploration and Production Company v. The Republic of Ecuador, Final
Award, London Court of International Arbitration Administered Case No. UN 3467
paras. 173-176 [hereinafter Occidental Award].
30) The Tribunal in Methanex considered in this respect that:
Given the object of Article 1102 and the flexibility which the provision
provides in its adoption of “like circumstances”, it would be as perverse
to ignore identical comparators if they were available and to use
comparators that were less “like”, as it would be perverse to refuse to
find and to apply less “like” comparators when no identical comparators
existed.… the tribunal selected the entities that were in the most “like
circumstances” and not comparators that were in less “like
circumstances”. It would be a forced application of Article 1102 if a
tribunal were to ignore the identical comparator and to try to lever in an,
at best, approximate (and arguably inappropriate) comparator. The fact
stands—Methanex did not receive less favourable treatment than the
identical domestic comparators, producing methanol. Methanex v. United
States, (NAFTA/UNCITRAL), Final Award, Aug. 2005, Part IV-Chap. B, 8-9,
paras. 17, 19, [hereinafter Methanex Award]
See also Canada's comments on this view in its Reply, paras. 299-300.

31) International Thunderbird Gaming Corporation v. Mexico, (NAFTA/UNCITRAL), Final

Award, Jan. 2006, para 177 [hereinafter Thunderbird Award].
32) Investor's Expert Statement of Keith Branter, December 9, 2008, paras. 4-6.
33) Methanex Award, see supra note 30.
34) S.D. Myers, Inc. v. Canada, (NAFTA/UNCITRAL), Partial Award on the Merits, Nov. 2000,
para. 250 [hereinafter S.D. Myers, Partial Award].
35) United Parcel Serv., Inc. v. Canada, (NAFTA/UNCITRAL) Final Award, Jun. 2007, para. 99
[hereinafter UPS Award].
36) Pope & Talbot, Merits II, para. 79.
37) Occidental Award, para. 173.
38) Methanex Award, Part IV-Chap. B, para. 37.
39) Canada, Department of External Affairs, Statement on Implementation: North
American Free Trade Agreement, vol. 128, no. 1, pp. 148-149, 159. (Ottawa: Canada
Gazette, 1994).
40) United States of America, NAFTA Implementation Act, Statement of Administrative
Action, (Public Law 103-182, 140 Stat. 2057).
41) Roy Feldman Karpa v. United Mexican States, (NAFTA/ICSID Case No. ARB(AF)/99/1),
Award, Dec. 2002, para. 166 [hereinafter Feldman Award]; ADF Group Inc. v. United
States of America, (NAFTA/ICSID Case No. ARB(AF)/00/1), Award, Jan. 2003, para. 157
[hereinafter ADF Award].
42) Canada's Affidavit of Darren Tapp, March 20, 2009, paras. 13-16, with reference to
Alberta's regulations of log production.
43) Canada's Rejoinder Memorial, with reference to the proper comparators, paras. 100-
135.
44) S.D. Myers, Partial Award, para. 254.
45) Investor's Reply Memorial, paras. 150 et seq.; Canada's Rejoinder Memorial,
paras. 55-57.
46) Investor's Expert Opinion of Professor Robert Howse, December 14, 2008, paras. 4-11,
with particular reference to the concept of “systemic integration”, at para. 9;
Evidentiary Hearing, Witness appearance of Professor Robert Howse on direct
examination by Mr. Barry Appleton, May 22, 2009, at 1290-1294.
47) Canada's Supplemental Expert Opinion of Michael Reisman, February 9, 2009,
paras. 8-16.
48) Canada's Affidavit of John R. Cook, May 7, 2008, paras. 28-30, with reference to the
special transitional case of Pluto Darkwoods.
49) World Bank Administrative Tribunal, Crevier, Decision No. 205, 1999, para. 25.
50) Feldman Award, para. 181.
51) Investor's Reply Memorial, paras. 409-416.
52) Pope & Talbot, Inc. v. Canada, (NAFTA/UNCITRAL), Merits I, Jun. 2000, para. 70
[hereinafter Pope & Talbot, Merits I].
53) S.D. Myers, Partial Award, para. 275.
54) Pope & Talbot, Merits I, para. 79.
55) S.D. Myers, Partial Award, paras. 270-278.
56) Pope & Talbot, Merits II, paras. 96-98.
57) S.D. Myers, Partial Award, paras. 283, 287.
58) Metalclad Corporation v. United Mexican States, (NAFTA/ICSID Case No. ARB(AF)/97/1),
Award, Sep. 2000, para. 103 [hereinafter Metalclad Award].
59) Feldman Award, para. 105 (citing Third U. S. Restatement on International Law,
Section 712, comment g).
60) Mondev Int'l Ltd. v. United States, (NAFTA/ICSID Case No. ARB(AF)/99/2), Award, Oct.
2002, para. 98 [hereinafter Mondev Award].
61) Pope & Talbot, Merits I, para. 98.
62) Id. para. 100.
63) Investor's Expert Report of Peter H. Pearse, February 6, 2008, paras. 20-54.
64) Methanex Award, Part IV, Chapter C, para 275; The Oscar Chinn Case (United Kingdom
v. Belgium), PCIJ, 1934, Series A/B No. 63, para. 280 [hereinafter The Oscar Chinn
Case].
65) Feldman Award, para. 118.
66) Starrett Housing Corp. v. Iran, 4 Iran-U.S. C.T.R. 122, 154, Dec. 9, 1983, at 28, 36.
67) Pope & Talbot, Merits I, paras. 100, 102.
68) Waste Management Inc. v. United Mexican States, (NAFTA/ICSID Case No.
ARB(AF)/00/3), Award, Apr. 2004, paras. 156-60 [hereinafter Waste Management II
Award]; Fireman's Fund Insurance Company v. United Mexican States, (NAFTA/ICSID
Case No. ARB(AF)/02/1), Jul. 2007, para. 176.
69) Evidentiary Hearing, Witness appearance of Ms. Judy Korecky on direct examination
by Ms. Sylvie Tabet on behalf of Canada, May 19, 2009, at 609-612.
70) Investor's Reply Memorial, para. 456.
71) See infra para. 215.
72) Feldman Award, para. 118.
73) S.D. Myers, Partial Award, para. 134.
74) Waste Management II Award, para. 98.
75) Gami Investments, Inc. v United Mexican States, (NAFTA/ UNCITRAL) Final Award, Nov.
2004, para 89, [hereinafter GAMI Award] (citing Waste Management II Award, para.
98).
76) Eureko B. V. v. Republic of Poland, Partial Award, Aug. 2005. United States - Import
Prohibition of Certain Shrimp and Shrimp Products, Report of the Appellate Body,
Oct. 12, 1998, at 177.
77) Robert Azinian and others v. United Mexican States, (NAFTA/ICSID Case No.
ARB(AF)/97/2), Award, Nov. 1999, para. 103.
78) Metalclad Award, para. 99.
79) Waste Management II Award, para. 98.
80) GAMI Award, para. 95.
81) Mondev Award, paras. 116-25.
82) ADF Award, paras. 181-184, 190.
83) Id. at 184.
84) Investor's Reply Memorial, paras. 315-320 (citing Azurix Corp. v. Argentine Republic
(ICSID Case No. ARB/01/12) Award, Jul. 2006, para. 361; Rumeli et al. v. Republic of
Kazakhstan, (ICSID Case No. ARB/05/16), Award, Jul. 2008 para. 611).
85) Canada's Counter-Memorial, para. 557.
86) Mondev Award, paras. 116, 127.
87) Saluka Investments BV v. The Czech Republic, Partial Award, March 2006, para. 460;
Continental Casualty Company v. Argentine Republic, (ICSID Case No. ARB/03/9)
Award, Sep. 2008, para. 254.
88) Investor's Reply Memorial, paras. 348-367.
89) Evidentiary Hearing, Closing Statement by Professor Patrick Dumberry on behalf of
Canada, May 23, 2009, at 1546-1549 (referring to The Loewen Group, Inc. and Raymond
L. Loewen v. United States of America, (NAFTA/ICSID Case No. ARB(AF)/98/3) Award,
Jun. 2003 para. 128 [hereinafter Loewen Award]).
90) United Parcel Service of America Inc. v. Government of Canada, (NAFTA/ UNCITRAL),
Award on Jurisdiction, Nov. 2002, para 84.
91) Mondev Award, para. 121.
92) Canada's Counter-Memorial, paras. 488-491.
93) Canada's Counter-Memorial, para. 539 (citing CMS Gas Transmission Company v.
Argentine Republic, Award, May 2005, para. 274 and Occidental Award, paras. 183,
190).
94) Canada's Counter-Memorial, paras. 552-556 (citing S.D. Myers, Partial Award, para.
261, GAMI Award, para. 97, and ADF Award, para. 190).
95) Case Concerning Elettronica Simula SpA (ELSI) (United States of America v. Italy) ICJ,
Judgement, 1989, ICJ Reports 1989, 15, para. 128 [hereinafter ELSI].
96) S.D. Myers, Partial Award, para. 263.
97) Thunderbird, Award, para. 197.
98) Canada's Counter-Memorial, paras. 645-655.
99) Canada's Supplemental Affidavit of John R. Cook, March 19, 2009, paras. 3-18.
100) Canada's Affidavit of John R. Cook, May 7, 2008, at 16-28.
101) Evidentiary Hearing, Witness appearance of Mr. John Cook on direct examination by
Ms. Sylvie Tabet on behalf of Canada, May 19, 2009, paras. 454-456.
102) Evidentiary Hearing, Witness appearance of Brian Bustard on direct examination by
Professor Patrick Dumberry on behalf of Canada, May 20, 2009, at 798-806.
103) The Tribunal is conscious that it has referred to many authorities that were not cited
by the parties in its analysis on the content of the minimum standard of treatment
of aliens required by customary international law. In the normal course, had its
reliance on these authorities been likely to have had a determinative effect on the
outcome of the case, it would have asked the parties to address them. However,
having regard to the Tribunal's disposition of the case for reasons unrelated to the
applicable minimum standard of treatment, it concluded that there was no need to
do so.
104) Vienna Convention on the Law of Treaties, 1969, Article 31(1).
105) Max Planck Encyclopedia of Public International Law, Max Plank Institute for
Comparative Public Law and International Law, on-line edition, Oxford University
Press, entry on Minimum Standards by Hollin Dickerson, October 2006, para. 6.
106) Bin Cheng: General Principles of Law as Applied by International Courts and
Tribunals, 1953, at 105-160.
107) K. Yannaca-Small: “Fair and Equitable Treatment Standard: Recent Developments”,
in August Reinisch (ed.): Standards of Investment Protection, 2008, 111-130, at 113-
115.
108) Metalclad Award, para. 76.
109) United Mexican States v. Metalclad Corp., (2001), B. C. T. C. 664, 2001, para. 72.
110) S.D. Myers, Partial Award, paras. 259-264.
111) Mondev Award, paras. 116-25.
112) ADF Award, paras. 181-184, 190.
113) R. Dolzer: “Fair and Equitable Treatment: A Key Standard in Investment Treaties”,
The International Lawyer, Vol. 39, 2005, 87-106, at 98-99.
114) Waste Management II Award, para 93.
115) GAMI Award, para. 95.
116) Canada's Rejoinder, para. 168.
117) Encyclopedia, see supra note 105, para 4.
118) LFH Neer and Pauline Neer (USA) v. United Mexican States (1926), 4 RIAA 60.
119) S.D. Myers, Canada's Counter-Memorial, para. 289 et seq.; Pope & Talbot, Canada's
Counter-Memorial, paras. 258 et seq.
120) Neer, see supra note 118, at 61-62.
121) Jan Paulsson and Georgios Petrochilos: “Neer-ly Misled?”, ICSID Review-Foreign
Investment Law Journal, Fall 2007, 242-257, with reference to Faulkner, Roberts and
Chattin, at 253-257.
122) ELSI, para. 128.
123) Pope & Talbot Award, paras. 68-69.
124) Loewen Award, para. 132.
125) Thunderbird Award, para. 194.
126) Waste Management II Award, para. 98.
127) S.D. Myers, Partial Award, para. 263.
128) Glamis Gold Ltd. v. United States of America, (NAFTA/UNCITRAL), Award, Jun. 2009,
para. 616.
129) International Law Association, Final Report of the International Committee on
Diplomatic Protection of Persons and Property, Toronto, 2006.
130) Yearbook of the International Law Commission, 1961 II, 46; F. V. Garcia-Amador: The
Changing Law of International Claims, Vol. II, 1984, 784.
131) Garcia-Amador, see supra note 130, at 750.
132) Report of the Fourth Session of the Asian African Legal Consultative Committee,
Yearbook of the ILC 1961 II, 78, at 82.
133) E. Borchard: The Diplomatic Protection of Citizens Abroad, 1915; A. Roth: The
Minimum Standard of International Law Applied to Aliens, 1949.
134) Louis B. Sohn and R. R. Baxter: “Draft Convention on the International Responsibility
of States for Injuries to Aliens”, 1961, in F. V. Garcia-Amador, Louis B. Sohn and R. R.
Baxter: Recent Codification of the Law of State Responsibility for Injuries to Aliens,
1974, at 156.
135) James Crawford: The International Law Commission's Articles on State
Responsibility, Introduction, Texts and Commentary, 2002.
136) International Law Commission, Draft Articles on Diplomatic Protection, 2006,
Article 17.
137) Digest of the decisions of international tribunals relating to State Responsibility,
prepared by the Secretariat, Yearbook of the International Law Commission, 1964,
Vol. II, 132.
138) Case Concerning Certain German Interests in Polish Upper Silesia (Merits), PCIJ, 1926,
Series A. No.7, at 19, Digest cit., No. 26; German Settlers in Poland, PCIJ, 1923, Series B.,
No. 6, pp. 19-20, 35-38, Digest cit., No. 27.
139) Aboilard Case, 1925, (Haiti, France), Reports of International Arbitral Awards, Vol. XI,
71, at 79-81, Digest cit., No. 28.
140) Robert E. Brown Case, 1923, (United Kingdom, United States), Reports of International
Arbitral Awards, Vol. VI, 120, at 129-130, Digest cit., No. 32.
141) George W. Cook Case, 1927, (Mexico, United States), Reports of International Arbitral
Awards, Vol. IV, 213, at 214-215, Digest cit., No. 36.
142) Hopkins Case, 1926, (Mexico, United States), Reports of International Arbitral Awards,
Vol. IV, 41, at 46-47, Digest cit., No. 43.
143) Lalanne and Ledoux Case, 1902, (France, Venezuela), Reports of International Arbitral
Awards, Vol. X, 17, at 18, Digest cit., No. 47.
144) Burns H. Weston et al. (eds.): International Claims: Their Settlement by Lump Sum
Agreements, 1975-1995, 1999, at 67-75.
145) Richard B. Lillich and Daniel B. Magraw (eds.): The Iran-United States Claims
Tribunal: Its Contribution to the Law of State Responsibility, 1998.
146) S.D. Myers, Partial Award, para. 263; Waste Management II Award, para. 98.
147) ADF Award, para. 189; Thunderbird Award, para. 147.
148) C. Schreuer: “Fair and Equitable Treatment: Interaction with other Standards”,
Transnational Dispute Management, 2007, 4; Dolzer, see supra note 113; Yannaca-
Small, see supra note 107.
149) The Oscar Chinn Case at 27.
150) François Bellanger: “Droit de nécessité et état d'exception”, in D. Thürer et al. (eds.):
Droit Constitutional Suisse, 2001, 1261, at 1270, where a long period of application of
emergency legislation beyond the war was considered an “abus du droit de
nécessité”.
151) In fact, if this was a direct transfer of funds from the Canadian government to the
industry there might be, mutatis mutandis, a case for an actionable subsidy under
the WTO Agreement on Subsidies and Countervailing Measures. See World Trade
Organization, Agreement on Subsidies and Countervailing Measures.
152) To the extent that this results in the ability for local sawmills processors to purchase
logs at less than the fair market price, it may translate into an objectionable
measure under the WTO, if the effect of the regulations is to require a premium to
be paid by the exporter for the benefit of the local industry in order to obtain an
export permit.
153) Ian Brownlie, Principles of Public International Law, 2008, at 525-528.
154) A witness for Canada explained at the hearing that the regulatory bodies do not take
into account the international price in making a determination of the market price
for offers. Evidentiary Hearing, Witness appearance of Mr. John Cook on cross-
examination by Mr. Greg Nash on behalf of the Investor, May 19, 2009, at 475-476.
155) Evidentiary Hearing, Closing Statement by Mr. Barry Appleton on behalf of the
Investor, May 23, 2009, at 1401-1403.
156) See the Tribunal's conclusions above concerning: (a) the Canadian government's lack
of constitutional authority to grant standing exemptions; (b) the reasonableness of
the regulations pertaining to remoteness, minimum and maximum volume
requirements and metric scaling; and (c) the stability of the log export permit
regime.
157) In any event, on the factual record before the Tribunal, the sorting complaint would
not appear to offer a valid factual basis for criticism of Notice 102. See Canada's
Affidavit of John R. Cook, May 7, 2008, at 54, to the effect that sorting may be done in
any way a log producer wants.
158) Id., paras. 31-38.
159) Id., paras. 47-51.
160) Id., paras. 39-45.
161) Canada's Affidavit of Judy Korecky, May 10, 2008, paras. 112-117.
162) Canada's Affidavit of John R. Cook, May 7, 2008, para. 52.
163) It is important to note that counsel for the Investor did not seek to confront either
Ms. Korecky or Mr. Cook on this evidence.
164) The Investor's assertion that the implementation of Notice 102 is sufficiently flawed
that it can be said to breach the minimum standard as defined by scenario two is
difficult to accept in the face of the evidence of Ms. Korecky that FTEAC has
considered offers from domestic purchasers on only as 7.4% of the 1.834 booms
advertised by the Investor since the inception of Notice 102, and that, after FTEAC
recommendations of permits in the case of invalid or low offers, late offer
withdrawals or further consideration of FTEAC recommendations, the Minister
denied an export license in the case of only 65 (or 3.57%) of the Investor's
applications.
165) It is to be borne in mind that, despite bearing the onus of proof, the Investor
provides no evidence that TEAC/FTEAC had ever recommended against the grant of
a permit for an advertised boon in respect of which it alleged that the relevant offer
was below a fair market price.
166) F. V. Garcia-Amador: The Changing Law of International Claims, Vol. I, 1984, at 88-90.
167) Case Concerning the Factory at Chorzów (Claim for Indemnity) (Jurisdiction), 1927, PCIJ,
Series A, No. 9, at 21, and comments by Ian Brownlie: Principles of Public
International Law, 1990, at 433-435.
168) Institut de Droit International, Responsabilité internationale des Etats à raison des
dommages causés sur leur territoire à la personne et aux biens des étrangers,
Resolution adopted on Sep. 1, 1927, Article 1; 1929 Harvard Draft Convention on
Responsibility of States for Damage Done in Their Territory to the Person and
Property of Foreigners; 1961 Harvard Draft Convention on the International
Responsibility of States for Injuries to Aliens.
169) League of Nations Conference for the Codification of International Law, 1930;
International Law Commission, First Report on Diplomatic Protection by Special
Rapporteur John Dugard, March 7, 2000.
170) Waste Management II Award, para. 98.
171) James Crawford: The International Law Commission's Articles on State
Responsibility, 2002, at 84.
172) Investor's Witness Statement of Mr. Douglas A. Ruffle, December 11, 2008.
173) Investor's Expert Witness Report of Mr. Robert Low, December 14, 2008.
174) Investor's Reply, at para. 279.
175) Losses for 2008 and 2009 were excluded because of the impact of current extreme
market conditions; for this reason, the last two years premiums were based on the
premiums realized in 2008.
176) Canada's Supplemental Expert Affidavit of Mr. David Jendro, March 16, 2009.
177) Canada's Supplemental Expert Affidavit of Mr. David Reishus, March 19, 2009.
178) Canada's Supplemental Report of Mr. Michael D. Bowie, March 25, 2009.
179) Canada's Rejoinder, para. 363 (citing LG&E Energy Corp. et al. v. Argentine Republic
(ICSID Case No. ARB/02/1), Award, Jul. 2007. See also PSEG Global Inc et al. v. Republic
of Turkey (ICSID Case No. ARB/02/5), Award, Jan. 2007, paras. 312-313.
180) Canada's Affidavit of Professor W. Michael Reisman, April 22, 2008; Supplemental
Expert Opinion of Professor W. Michael Reisman, February 9, 2009.
181) Investor's Expert Opinion of Professor Robert Howse, December 14, 2008.
 182) Feldman v. United Mexican States, Interim Decision on Preliminary Jurisdictional
Issues, Dec. 2000; Feldman Award; Grand River Enterprises Six Nations Ltd. v. United
States of America, Decision on Objections to Jurisdiction, Jul. 2006; Mondev Award;
UPS Award.
183) Submission of the United States of America pursuant to NAFTA Article 1128, July 14,
2008; Submission of the United Mexican States pursuant to NAFTA Article 1128, April
2, 2009.
184) The total costs of the proceeding (US$ 959,500) provided by ICSID include an
estimate of the courier services expenses for sending the certified copies of the
Award as well as estimates for the printing and binding costs of the Award.
Therefore, the total amount of the actual final costs will likely be subject to a slight
variation. A financial statement will be provided by ICSID when the account for this
case is financially closed.

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