Case Study: SD Myers v. Canada

The decision in SD Myers v. Canada set important precedents in NAFTA investor-state dispute settlement, particularly regarding the interpretation of national treatment and minimum standard of treatment provisions. The case also clarified the approach to damages in non-expropriation cases, emphasizing the importance of causation and the limits of liability for regulatory actions. The Tribunal’s ruling has been cited in subsequent NAFTA and international investment arbitration cases, particularly in disputes concerning environmental regulations and protectionist measures.

Citation: S.D. Myers, Inc. v. Government of Canada, UNCITRAL

Date of Award: 30^th December, 2002

Institution: Ad Hoc Tribunal (UNCITRAL arbitration rules)

Panel: Mr. J. Martin Hunter (President), Mr. Bryan P. Schwartz and Mr. Edward C. Chiasson (Arbitrators)

Facts

The dispute in S.D. Myers, Inc. v. Canada arose from a regulatory decision taken by the Canadian government that significantly affected the operations of S.D. Myers, Inc. (SDMI), a U.S. corporation specializing in the treatment of Polychlorinated Biphenyls (PCB), a highly hazardous environmental pollutant primarily used in electrical equipment. To expand its business and tap into the Canadian market, SDMI established an investment in Canada, named MYERS Canada, with the goal of collecting PCB waste for processing at its U.S. facility.

The origins of the dispute trace back to 1980 when the United States banned the movement of PCB waste across its borders. However, in the fall of 1995, SDMI was granted a temporary exemption by the U.S. government to import PCB waste from Canada for a period of 25 months. Shortly after this development, the Canadian government issued an Order prohibiting the export of PCB waste to the U.S., effectively blocking SDMI and its Canadian investment from engaging in the intended business. This prohibition lasted approximately 16 months, from November 1995 to February 1997, during which time SDMI's operations were severely hampered.

SDMI filed a claim under Chapter 11 of the North American Free Trade Agreement (NAFTA), alleging that Canada’s actions violated multiple NAFTA provisions, specifically:

• Article 1102 – National Treatment: Ensuring that foreign investors receive treatment no less favourable than domestic investors.
• Article 1105 – Minimum Standard of Treatment: Guaranteeing fair and equitable treatment to foreign investors.
• Article 1106 – Performance Requirements: Prohibiting the imposition of performance requirements that distort trade.
• Article 1110 – Expropriation: Protecting investors from direct or indirect expropriation without adequate compensation.

SDMI sought damages ranging from US $70 to $80 million, claiming lost profits, loss of business opportunities, out-of-pocket expenses, and damage to its goodwill and reputation in the Canadian market.

Decision

The Tribunal ruled in favour of SDMI on the claims of breach of Article 1102 (National Treatment) and Article 1105 (Minimum Standard of Treatment) but dismissed the claims under Article 1106 (Performance Requirements) and Article 1110 (Expropriation). The Tribunal determined that Canada's export ban was not genuinely motivated by environmental concerns but was intended to protect the Canadian PCB disposal industry from foreign competition, particularly from U.S. firms like SDMI. As a result, the Tribunal awarded SDMI CAN$6 million in compensation, a significantly lower amount than the US$70 million initially claimed.

The Tribunal’s detailed assessment of damages emphasized several key principles:

• The fair market value standard does not necessarily apply in non-expropriation cases. Instead, compensation should aim to restore the investor to the financial position they would have been in but for the breach, following the Chorzów Factory[1] principle.
• Damage does not have to occur within the host state (Canada) to be recoverable; it must simply be a direct result of the state’s breach of NAFTA obligations.
• Investors can claim remedies under multiple NAFTA provisions, but there should be no “double recovery.”
• The concept of foreseeability, often applied in contract law, was rejected. Instead, damages were assessed based on the proximity of the loss to the breach.

The Tribunal awarded interest on the damages at the Canadian prime rate plus 1%, compounded annually. It also ordered Canada to cover part of SDMI’s arbitration costs but significantly reduced the legal cost recovery, considering that SDMI only partially succeeded in its claims.

Key legal issues discussed

1. Did Canada violate Article 1102 (National Treatment)?

Yes

The Tribunal found that Canada’s prohibition on PCB waste exports disproportionately affected SDMI while favouring domestic Canadian competitors. The evidence indicated that the measure was primarily driven by economic protectionism rather than genuine environmental concerns. By preventing SDMI from conducting its business in Canada while allowing domestic companies to continue, the measure unfairly discriminated against SDMI and was found to be in violation of Article 1102.

2. Did Canada violate Article 1105 (Minimum Standard of Treatment)?

Yes

The Tribunal determined that Canada’s treatment of SDMI was unjust and arbitrary, reaching a level that was deemed unacceptable by international legal standards. The discriminatory nature of the export ban, which targeted SDMI while benefiting Canadian competitors, was found to breach the minimum standard of treatment required under NAFTA.

3. Did Canada violate Article 1106 (Performance Requirements)?

No

SDMI’s claim under Article 1106 was dismissed as the Tribunal found that the Canadian measure did not impose specific performance requirements on SDMI’s investment. The measure restricted trade but did not mandate that SDMI perform certain obligations within Canada, making it inapplicable under Article 1106.

4. Did Canada’s actions constitute an expropriation under Article 1110?

No

The Tribunal ruled that the export ban did not amount to an expropriation because it did not permanently deprive SDMI of its investment. The measure was temporary and regulatory in nature, rather than an outright seizure of property. Therefore, Canada was not found liable for expropriation under NAFTA.

Conclusion

The decision in SD Myers v. Canada has had significant implications for investor-state dispute settlement under NAFTA. The ruling clarified key aspects of national treatment and minimum standard of treatment provisions, particularly regarding regulatory actions taken by host states. The case has been cited in numerous subsequent disputes involving environmental regulations and economic protectionism. Additionally, the Tribunal’s approach to quantifying damages has influenced other international investment arbitration cases, reinforcing the need for clear causal links between a government’s actions and the financial losses suffered by investors.

Overall, this case underscores the balance that investment tribunals must strike between a state’s regulatory sovereignty and the protection of foreign investors’ rights under international trade agreements. The ruling serves as an important precedent for future disputes involving regulatory measures that may indirectly discriminate against foreign investors under the guise of environmental or economic policy.

[1] Factory at Chorzow (Germ. v. Pol.), 1927 P.C.I.J. (ser. A) No. 9 (July 26).

Download