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TransCanada NAFTA ISDS Option Might Prove a Point, but is Unlikely to Happen

Posted March 04, 2015

In the second installment (the first can be read here) of his argument debunking some of the common myths surrounding the controversial investor-state dispute settlement (ISDS) mechanism that prominently features in two high-profile trade agreements currently being negotiated, Forbes writer John Brinkley hopes the Canadian company that would have built the Keystone XL Pipeline if the Obama administration hadn’t deep-sixed the project will actually follow through on its threat to challenge the president’s veto in an international arbitration forum. Such a proceeding over a high-profile public policy issue would, he suggests, “shed light on a system that is badly misunderstood.”

Under the ISDS-like provisions of the North American Free Trade Agreement (Chapter 11) foreign investors are allowed to bring claims against the three signatory countries for compensation when actions taken by their governments (including at the subnational level) violate international law. Specifically, the agreement states that each NAFTA country must grant to foreign investors “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.”

Some ISDS experts like the Cato Institute’s Simon Lester feel that because these provisions are so “vague and general” in nature and there being nothing more specific in NAFTA that TransCanada could rely on, it seems doubtful the company would even try making a claim. Canada’s dismal track record when it comes to investment dispute claims against the U.S. certainly doesn’t offer much encouragement in this regard. Over the last 20 years, the U.S. government has yet to lose a single NAFTA arbitration, with most of the 19 recorded cases being dismissed (generally on procedural or jurisdictional grounds) or withdrawn by the complainants.

Others however feel that TransCanada has a legitimate basis to make on the grounds of having not received “fair and equitable treatment” from the Obama administration in its handling of the Keystone XL issue. Todd Weiler, an independent barrister specializing ‎in investment treaty arbitration, set out the argument in Monday’s Globe & Mail. “Washington has approved numerous pipeline projects over the years many of which involved circumstances similar to those of Keystone XL,” he says, noting that the approval process typically takes 500-600 days, whereas Keystone XL “will have passed the 2,500-day mark before year’s end.” A NAFTA ISDS proceeding would “force the government to either provide a cogent explanation for this manifest difference in treatment to an independent, impartial tribunal, or pay compensation for the harm it has caused.” Weiler suggests this would be difficult for the government to explain the discrepancy in its treatment as being anything other than the result of “partisan political exigency” and as such, a prohibited exercise of legitimate regulatory authority for improper purposes.

Weiler’s sanguine view however seemingly overlooks the fact that since its inception, the controversial tar sands pipeline has been a magnet for heated opposition, not only from environmental groups but other voices including Congress, mayors, landowners, indigenous groups, and others. In recent years, the project has been the target of a number of lawsuits, including a legal challenge to a Nebraska pipeline siting law related to concerns over the project’s impact on that state’s environmentally sensitive Sand Hills wetland ecosystem that was only resolved this past January. As well, the environmental impact assessments carried out by the State Department over the years have been repeatedly criticized by the Environmental Protection Agency and others as being strikingly flawed and inadequate, resulting in the necessity for supplemental studies being made.

The foregoing factors, together with other concerns about Keystone XL contributing to delays in the approval process, would have existed irrespective of TransCanada being a “foreign investor” and in this regard it is worth noting that the project was originally developed in partnership with ConocoPhillips. Although the Houston based oil conglomerate sold its interest in the pipeline in 2009, it seems doubtful had they not that the treatment the project received from the administration in this matter would have been any different than what has transpired since.    

Bottom line is that it seems highly unlikely that a NAFTA dispute proceeding will materialize, unfortunately depriving Mr. Brinkley of his hope to see TransCanada “undoubtedly lose” and thereby demonstrate to critics of trade deals like the TPP and TTIP that “ISDS isn’t the Frankenstein monster they think it is.”