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Canada: Government Fights NAFTA Ruling in Court

Environment News Service
February 23rd, 2001

OTTAWA, Canada -- Canada is asking its own federal court to overturn a North American free trade tribunal ruling that Canada breached trade rules when it banned exports of polychlorinated biphenyl (PCB) waste in the 1990s.

The ruling by the North American Free Trade Agreement (NAFTA) tribunal could cost Canada up to $20 million, the amount of damages sought by the U.S. firm S.D. Myers, which brought the case in 1998.

Last November, the tribunal ruled that Canada violated several aspects of NAFTA's investor state chapter - Chapter 11 - when it banned PCB waste exports between November 1995 and February 1997.

PCBs are highly toxic, persistent carcinogenic compounds. They have been used widely as coolants and lubricants in transformers, capacitors, and other electrical equipment.

The Tallmadge, Ohio based S.D. Myers believes its method of PCB disposal via recycling and total thermal destruction is environmentally preferable to management methods in Mexico and Canada, the two other signatories to NAFTA.

The tribunal upheld S.D. Myers' claims that Canada breached its obligations under NAFTA Chapter 11 with respect to National Treatment, and Minimum Standard of Treatment. But it held that Canada did not breach Chapter 11 with respect to Performance Requirements and Expropriation.

November's decision made clear that Canada does not have to change its environmental laws, including its regulations to control PCBs. Its decision referred only to the temporary ban, which was rescinded in February 1997.

"NAFTA members have a right to establish high levels of environmental protection," said the tribunal in its decision. "They are not obliged to compromise their standards merely to satisfy the political or economic interests of other states."

The tribunal has not ruled on whether S.D. Myers has suffered damages. A second phase to hear arguments regarding damages has just begun.

In the meantime, Canada has taken the rare step of asking its own top court to set aside the NAFTA tribunal's decision.

"While Canada agrees with certain aspects of the NAFTA tribunal's ruling, we are seeking this review because we believe the tribunal exceeded its jurisdiction in several key elements of the award," said International Trade Minister Pierre Pettigrew.

Under Canada's Commercial Arbitration Act, decisions of arbitral tribunals, such as NAFTA Chapter 11 tribunals, are subject to statutory review on certain grounds. These grounds include excess of jurisdiction.

Canada believes that elements of the NAFTA tribunal's award exceeded its jurisdiction and conflicted with the public policy of Canada.

In asking the federal court to have the tribunal's decision set aside, Canada will also seek a stay of the tribunal's damages proceedings, the next phase in the S.D. Myers arbitration, pending the result of the review.

If the federal court rules in Canada's favor, the government could avoid paying damages. Government officials and environmental groups argue there is a broader issue at stake, that of a government's right to manage its own hazardous chemicals and ensure environmental safety.

The NAFTA tribunal ruled that Canada imposed the temporary ban to protect a domestic company able to perform the same task as S.D. Myers. The Canadian government argues that it imposed the ban because it was not convinced that the U.S. would dispose of the waste in accordance with the Basel Convention.

Canada is a signatory to the 1989 Basel Convention, which was established in response to a growing problem of hazardous waste trafficking. The U.S. has not signed the convention.

Canada has one facility equipped to handle high level PCB waste, the Alberta Special Waste Treatment Centre at Swan Hills, northern Alberta. Since opening in 1987, it has processed more than 180 million kilograms and 2,000 types of hazardous waste, including PCBs.

Foremost among Canadian lawyers' arguments against damages is expected to be the fact that the U.S. has since imposed an identical ban. Even if S.D. Myers wanted to import PCB waste now it could not because America has closed its borders to PCB waste.

The federal court is unlikely to hear the case before the summer.

Signed in 1992, NAFTA was designed to gradually eliminate most tariffs and other trade barriers on products and services passing between the U.S., Canada, and Mexico, effectively creating a free trade bloc among the three largest countries of North America.

Chapter 11 of the agreement establishes a mechanism to settle investment disputes before an impartial tribunal.

Canada is currently intervening in another Chapter 11 tribunal ruling which has left the Mexican government owing $16.7 million in compensatory damages to U.S. firm Metalclad Corporation.

Metalclad brought the case in 1996 after the Mexican municipality of Guadalcazar refused to grant the U.S. company a municipal licence to operate a hazardous waste treatment facility and landfill site.

Mexico has since filed a petition for statutory review of the tribunal's decision in the British Columbia Supreme Court. That review began in Vancouver this week.

Though not directly involved in the case, Canada has filed a submission intervening in the review because it believes the tribunal's decision contains errors.

"As a member of the NAFTA, Canada has a direct interest in ensuring that interpretations of the investment chapter are consistently and appropriately applied by NAFTA tribunals," said Pettigrew.





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