Trade Compliance

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TransCanada Keystone XL Lawsuit Puts Spotlight on ISDS

Posted January 15, 2016


Two months after President Barack Obama announced that his administration had rejected approval for the politically-charged Keystone XL pipeline, ostensibly on environmental grounds, stating that it “would not serve the national interest of the United States,” the company behind the pipeline, Calgary based TransCanada Corporation, has initiated two legal actions challenging the decision as it seeks to recover $15 billion in costs and damages that it claims to have suffered.

The lawsuit filed last week in a federal court in Texas alleges that President Obama overstepped his authority in rejecting the Keystone XL and asserts that the decision was driven primarily by political expediency rather than on the actual merits of the pipeline.

“The denial reflected an unprecedented exercise of presidential power and intruded on Congress’s power under the constitution to regulate interstate and international commerce,” a statement issued by TransCanada said.

Of more relevance to trade observers is the action filed under Chapter 11 of the North American Free Trade Agreement, the investor-state dispute provisions of which allow multinational corporations to sue governments if they feel they have not been treated the same as a domestic company would have been.

According to a statement released by TransCanada, their NAFTA claim asserts that the company had “every reason to expect its application would be granted as the application met the same criteria the U.S. State Department applied when approving applications to construct other similar cross-border pipelines – including the existing Keystone pipeline, which was approved in under two years, in contrast with the seven years the Administration took to make a decision on Keystone XL.” TransCanada notes that existing Keystone Pipeline System has now safely transported more than 1.1 billion barrels of Canadian and American oil through Canada and the United States.

Environmental campaigners naturally cheered the president’s decision to reject the Keystone XL and were quick to denounce TransCanada for suing the government. Together with free trade opponents, they also pointed to the lawsuit as being precisely the sort of “attack on U.S. environmental policy that the president insisted could never happen under the controversial Trans-Pacific Partnership trade deal.” In a press release, the Sierra Club claimed that the TPP “would empower more foreign fossil fuel corporations to challenge U.S. environmental protections in unaccountable tribunals.”

Michael Brune, the group’s executive director blasted the “destructive” investor-dispute provisions of NAFTA, saying they showed exactly why the North American trade agreement was wrong and “why the dangerous and far-reaching Trans-Pacific Partnership is worse and must be stopped in its tracks.”

Even so, the lawsuit presents somewhat of a dilemma for environmentalists and other foes of free trade deals. While their hopes are squarely against TransCanada succeeding in its multi-billion dollar case – otherwise, it would be an admission that the administration illegitimately overstepped its authority and/or acted in an unfairly arbitrary manner – at the same time a loss would undermine one of the key arguments being made against the TPP.

In the event that a tribunal was to eventually rule against TransCanada – as many experts suggest is likely to be the most probable outcome – such a result in the high-profile case would be sure to call into question the validity of the more strident assertions about the severe nature of the threat to sovereignty, democracy and public policy posed by the ISDS in free trade agreements like the TPP.  

The Obama administration too finds itself in an awkwardly nuanced position on the issue; at once defending itself against the TransCanada lawsuit while at the same time strenuously arguing that such lawsuits won’t be a threat to U.S. domestic policies under the TPP deal that it is actively championing.