Public Version IN THE MATTER OF AN ARBITRATION UNDER CHAPTER ELEVEN OF THE NORTH AMERICAN FREE TRADE AGREEMENT AND THE UNCITRAL ARBITRATION RULES BETWEEN: WILLIAM RALPH CLAYTON, WILLIAM RICHARD CLAYTON, DOUGLAS CLAYTON, DANIEL CLAYTON AND BILCON OF DELAWARE INC. Claimants AND: GOVERNMENT OF CANADA Respondent GOVERNMENT OF CANADA REJOINDER MEMORIAL ON DAMAGES November 6, 2017 Trade Law Bureau Government of Canada Lester B. Pearson Building 125 Sussex Drive Ottawa, Ontario K1A 0G2 CANADA CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 I. INTRODUCTION ..................................................................................................................1 A. Overview of Canada’s Rejoinder Memorial on Damages ............................................1 B. Materials Filed By Canada ............................................................................................6 II. THE CLAIMANTS DO NOT HAVE STANDING UNDER ARTICLE 1116 TO BRING A CLAIM FOR THE DAMAGES THEY SEEK ...................................................11 A. A Proper VCLT Analysis Reveals that Claims for Reflective Loss May Not Be Brought By Investors Under Article 1116 .............................................................12 1. The Ordinary Meaning of Article 1116 Does Not Permit Investors to Bring Claims For Reflective Loss .....................................................................12 2. The Context of Article 1116 Does Not Support Interpreting It to Allow Investors to Bring Claims For Reflective Loss .................................................13 (a) Article 1121(1) Does Not Support Interpreting Article 1116 to Allow Investors to Bring Claims For Reflective Loss .............................14 (b) Article 1117(3) Does Not Support Interpreting Article 1116 to Allow Investors to Bring Claims For Reflective Loss .............................17 (c) Permitting Reflective Loss Under Article 1116 Would Render Article 1117 Redundant ...........................................................................18 3. The Object & Purpose of NAFTA Does Not Support Interpreting Article 1116 to Allow Investors to Bring Claims For Reflective Loss .............19 4. The Subsequent Agreement and Practice of The NAFTA Parties Confirms That Article 1116 Does Not Allow Investors to Bring Claims For Reflective Loss ............................................................................................20 B. The Limited Jurisprudence On Article 1116 Does Not Permit the Tribunal to Ignore the Distinction Between the Standing Available under Articles 1116 and 1117 ......................................................................................................................21 C. It Would Be Inappropriate to Reformulate the Claimants’ Claim on Their Behalf At This Late Stage ...........................................................................................25 D. Conclusions .................................................................................................................26 III. THE CLAIMANTS HAVE NOT DISCHARGED THEIR BURDEN OF PROVING THAT THE IDENTIFIED NAFTA BREACH CAUSED THE DAMAGES THAT THEY CLAIM......................................................................................................................26 A. The Claimants Fail to Properly Apply International Law Principles Requiring that They Prove the Breach Caused Their Claimed Damages ....................................28 B. But For the NAFTA Breach the JRP Could Have Reasonably Found That the Whites Point Project Would Have Resulted in Likely Significant Adverse Environmental Effects that Could Not be Mitigated and Could Have Recommended that the Project be Rejected ................................................................30 i CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 1. The Tribunal Is Not Precluded by Res Judicata From Conducting a Proper But-For Analysis ....................................................................................31 2. Mr. Estrin’s Various Critiques of Dr. Blouin’s and Ms. Griffiths’ Findings Do Not Undermine Their Conclusions ...............................................35 (a) A But-For Analysis Requires Consideration of the Whites Point JRP’s Potential Findings and Recommendations Because the Whites Point Project Was Still Required to Undergo a Panel Review Absent the NAFTA Breach .........................................................36 (b) The Fact that No Government Officials Told the JRP that the Whites Point Project Would Likely Cause Significant Adverse Environmental Effects or Adverse Environmental Effects Did Not Determine the Outcome of the Panel’s Review .......................................36 (c) Mr. Estrin’s Approach of Comparing the Findings and Recommendations in Other EAs Is Inappropriate ...................................38 (d) Even if the Whites Point JRP Was Required to Consider the Findings and Recommendations of Other Projects, Dr. Blouin’s and Ms. Griffiths’ Conclusions Would Not Change ................................39 C. But For the NAFTA Breach, Decision-Makers in the Nova Scotia or Federal Governments Could Have Reasonably Taken Decisions Resulting in the Whites Point Project Not Proceeding..........................................................................41 1. Decision-Makers Had Broad Statutory Discretion and Were Not Compelled to Approve the Whites Point Project...............................................43 2. An Incomplete Report Does Not Legally Compel Approval ............................45 D. Conclusions .................................................................................................................46 IV. IN THE ALTERNATIVE, THE CLAIMANTS ARE ONLY ENTITLED TO RECOVER THE AMOUNT IT WOULD HAVE COST TO MITIGATE THEIR DAMAGES ..........................................................................................................................46 A. The Claimants Were Under a Duty to Mitigate Their Damages By Applying for Judicial Review in Canadian Courts .....................................................................47 1. The Claimants Inappropriately Base Their Arguments on a Mistaken Interpretation of Canadian Law Rather than on the Duty to Mitigate as it Exists in International Law ............................................................................47 2. The Issue of Mitigation is Separate and Distinct from the Exhaustion of Local Remedies Rule .........................................................................................50 3. The Issue of Mitigation Was Not Decided in the Merits Phase ........................51 B. The Claimants Have Failed to Present Any Argument or Evidence to Establish that the Duty to Mitigate Did Not Apply in this Case .................................52 C. Conclusions .................................................................................................................56 ii CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 V. IN THE FURTHER ALTERNATIVE, THE CLAIMANTS ARE ONLY ENTITLED TO RECOVER THE AMOUNT BILCON OF NOVA SCOTIA INVESTED IN THE JRP PROCESS .....................................................................................................................58 A. The Claimants Do Not Object to Canada’s Use of Historical Costs Data to Compute JRP Process Costs .......................................................................................59 B. Canada Properly Defined Costs Invested in the JRP Process .....................................59 C. The Claimants Have Not Further Substantiated the Amount Bilcon of Nova Scotia Invested in the JRP Process .............................................................................61 D. Conclusions .................................................................................................................63 VI. IN THE FURTHER ALTERNATIVE, THE CLAIMANTS ARE ONLY ENTITLED TO RECOVER THE AMOUNT BILCON OF NOVA SCOTIA INVESTED IN THE WHITES POINT PROJECT ................................................................................................63 A. Using a DCF Model to Calculate Lost Profits is an Inappropriate Way to Value the Claimants’ Lost Opportunity ......................................................................63 1. Bilcon of Nova Scotia Did Not Have a Legal Right to Exploit the Whites Point Project ..........................................................................................64 2. Bilcon of Nova Scotia Was Not a Going Concern and Did Not Have a History of Dealings ............................................................................................66 B. The Amount Bilcon of Nova Scotia Invested in the Project Reflects the Value of the Lost Opportunity More Appropriately Than a DCF .........................................72 C. Conclusions .................................................................................................................73 VII. IN THE FINAL ALTERNATIVE, THE CLAIMANTS’ CALCULATION OF THE ALLEGED LOST PROFITS OF THE WHITES POINT PROJECT MUST BE REJECTED...........................................................................................................................73 A. The Claimants Continue to Ignore Basic Project Development and Permitting Risks ............................................................................................................................74 1. The Market Was Uncertain................................................................................74 2. The Project Was at an Early Stage of Development .........................................74 3. The Claimants Did Not Possess a Right to Develop the Project .......................76 B. The Claimants Incorrectly Value the Project’s Potential Profits as of the Date of the Damages Award Instead of the Breach Date ....................................................77 C. The Claimants Continue to Overlook the Impact of Competition on Future Prices ...........................................................................................................................80 D. The Claimants Understate the Operating and Capital Costs of the Project ................81 1. Freight Costs ......................................................................................................82 2. Labour and Other Operating Costs ....................................................................83 iii CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 3. Capital and Maintenance Costs .........................................................................84 E. The Claimants’ Excessive Valuation of the Whites Point Project is Confirmed by Market Evidence ....................................................................................................84 1. The Claimants’ Analysis is Excessive Compared to Market Indications of the Whites Point Project’s Value ..................................................................85 2. The Claimants’ Analysis Results in Profit Margins that Far Exceed Those of Publicly Traded Market Leaders ........................................................86 F. Correcting All of the Flaws in the Claimants’ Lost Profits Calculation Results in a Significantly Lower Estimate of the Project’s Potential Profits ..........................87 G. The Claimants Are Not Entitled to a Tax “Gross-Up” ...............................................87 H. The Claimants Are Not Entitled to Pre-Award Interest ..............................................89 I. Conclusions .................................................................................................................90 VIII. ORDER REQUESTED ........................................................................................................90 iv CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 I. INTRODUCTION A. Overview of Canada’s Rejoinder Memorial on Damages 1. A finding by a tribunal that a State has breached a treaty obligation is not a blank cheque on which a claimant can fill any amount it desires. Damages in international law are not about either rewarding investors or punishing States. They are about providing compensation for the losses caused by a State’s wrongful conduct. 2. After the Claimants ignored the issue of causation in their Memorial, Canada highlighted it in its Counter-Memorial. Now, in their Reply, the Claimants pay lip-service to the legal principles governing causation. Both Canada and the Claimants agree1 that the question the Tribunal must answer in this phase is the following: but for the acts giving rise to the NAFTA breach—namely “the distinct, unprecedented and unexpected approach taken by the JRP to ‘community core values’ in this particular case”2—did the Claimants suffer the losses that they claim? 3. However, while the Claimants acknowledge the controlling legal principles regarding causation and damages at international law, the proper application of these principles seems lost on them. In their Reply, the Claimants continue to advance a claim for the lost profits, now in the amount of US $458,609,734, that they allege they would have realized if the NAFTA breach had not been committed. This is not a request for compensation. This is a request for a completely unjustifiable windfall. 4. Indeed, the Claimants’ claim, and all of the expert opinions and witness statements they have filed in support of it, rest on the same flawed assumption that has been at the heart of their submissions throughout this phase of the arbitration—that but for the NAFTA breach found by the majority of the Tribunal, the Whites Point project would have, without question, been approved, permitted, constructed, and profitably operated for the 50-year life of the project. However, their but-for approach to making out this claim is to simply excise the Whites Point 1 Canada’s Counter-Memorial on Damages, June 9, 2017 (“Canada’s Counter-Memorial on Damages”), ¶¶ 40-46. Claimants’ Reply Damages Memorial, August 23, 2017 (“Claimants’ Reply Damages Memorial”), ¶ 287. 2 Award on Jurisdiction and Liability, March 17, 2015 (“Award”), ¶ 601. 1 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 Joint Review Panel’s (“JRP’s”) reliance on community core values (“CCV”) from its report (the “JRP Report”). On the basis of a CCV-free version of the Report, the Claimants assert that there was but one lawfully mandated outcome of the Whites Point environmental assessment (“EA”) process—project approval. Both their lost profits claim and the assumption upon which it is based are untenable given the factual record before the Tribunal, the specifics of the majority’s liability finding, and the most basic principles governing causation of damages in international investment law. 5. In attempting to make out their case, the Claimants assert that the Whites Point JRP Report not only identified just one likely significant adverse environmental effect (“SAEE”) of the project – inconsistency with CCV – but also definitively determined that all other potential project effects were not likely SAEEs.3 This is wrong on a plain reading of the JRP Report. Moreover, in factual findings that cannot now be re-litigated, the Tribunal has already recognized that this was not the case. In its Award, the majority specifically faulted the JRP for not “carry[ing] out its mandate to conduct a ‘likely significant effects after mitigation’ analysis to the whole range of potential project effects.”4 The majority found that, by failing to consider other potential project effects in its Report, the JRP “arrived at its conclusions without having fully discharged a crucial dimension of its mandated task,” and that government decision-makers were consequently “not provided with all the information that could have provided a proper foundation from which to arrive at their own final conclusions.”5 In light of these findings, a proper but-for analysis must consider the findings and recommendations that could have reasonably been made by the JRP had it not relied on the wrongful CCV-based approach, and had it properly considered the whole range of potential project effects. 6. In their Reply submissions, the Claimants go even further than misconstruing the conclusions of the JRP Report. They also misrepresent the finding of the majority in its Award, and then claim that their misrepresentation of the finding is res judicata between the parties. In particular, the Claimants wrongly assert that the Award concludes that government decision- 3 Claimants’ Reply Damages Memorial, ¶¶ 287(b), 291. 4 Award, ¶ 452 (emphasis added). 5 Award, ¶ 452. 2 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 makers rejected the project on the sole basis of CCV, and that the Tribunal has thus precluded further consideration of how the EA process might have unfolded in the absence of the NAFTA breach.6 The majority made no such finding. In fact, it found the exact opposite, making clear that it was not offering a conclusion at all on what the result of the EA of the Whites Point project should have been.7 The Claimants have inexplicably ignored the core finding in the majority’s decision—that in adopting its CCV-based approach, the JRP failed to consider the whole range of potential project effects and denied government decision-makers the information that they should have been provided.8 This determination of the majority is itself res judicata between the parties and again, it requires the Tribunal to consider at this stage how the Whites Point JRP might have assessed other project effects in discharging its mandate, the recommendations that it could have reasonably made in doing so, and the government decisions that could have reasonably followed. 7. Finally, the Claimants assert that decision-makers in both the federal and Nova Scotia governments would have been legally compelled to approve the Whites Point project if the JRP had not committed the NAFTA breach.9 This is an indefensible proposition under any but-for scenario given the discretionary nature of the federal and provincial decision-making processes legislated under the Canadian Environmental Assessment Act (“CEAA”) and the Nova Scotia Environment Act (“NSEA”). 8. In determining whether the Claimants have discharged their burden of establishing the requisite causal link between the NAFTA breach identified in the Award and their claim for lost profits, the Tribunal must assess the soundness of the Claimants’ theory as to the situation that would have existed had the Whites Point JRP not taken an approach that was found to be wrongful under NAFTA. Canada’s Rejoinder Memorial on Damages, and the supporting expert and witness evidence that it has filed, explain why the Claimants’ theory of causation is 6 Claimants’ Reply Damages Memorial, ¶¶ 304-310, 316. 7 Award, ¶¶ 602, 697. 8 Award, ¶ 452. See also, ¶¶ 514, 527, 535, 546, 547. 9 Claimants’ Reply Damages Memorial, ¶¶ 294-299. 3 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 fundamentally unsound and make clear the result that must follow—dismissal of the Claimants’ claim in its entirety and an award of no damages. 9. Canada has structured its Rejoinder Memorial as it did its Counter-Memorial in order to place the Claimants’ claim in its appropriate context, and to provide answers to the questions of the injury and loss that were actually incurred as a result of the NAFTA breach. First, as Canada explained in its Counter-Memorial, the Claimants do not have standing under NAFTA Article 1116(1) to bring a claim for the damages allegedly suffered by their investment, Bilcon of Nova Scotia. In their Reply, the Claimants persist in claiming the lost profits of Bilcon of Nova Scotia on the ground that these profits would have been distributed as dividends to Bilcon of Delaware and ultimately to the individual Claimants as shareholders of Bilcon of Delaware.10 However, the language of NAFTA is clear—a claim for damages based on the losses allegedly incurred by the enterprise investment could only be advanced under NAFTA Article 1117(1). In pursuing their inflated claims, the Claimants fail to properly interpret Article 1116(1) in accordance with the Vienna Convention on the Law of Treaties11 (“VCLT”), and the basic tenets of corporate law that were outlined in Canada’s Counter-Memorial. The Claimants have no standing to make the claim that they do under Article 1116(1). As they expressly disclaim any intention of advancing a claim for their own damages as required under Article 1116, they have left the Tribunal with only one choice: to dismiss the claim for damages in its entirety. Canada explains why in Part II of its Rejoinder Memorial below. 10. In Part III, Canada explains why the Claimants’ lost profits claim must also be dismissed because the excessive sum claimed bears no causal relationship at all to the NAFTA breach identified in the Award, nor to the injury that the majority found the breach to have caused— denial of the Claimants’ opportunity to have their proposal considered, assessed, and decided in accordance with applicable laws.12 The Claimants’ theory of the limited but-for analysis that this Tribunal must undertake, and the singular conclusion that they say must follow, are both 10 Claimants’ Reply Damages Memorial, ¶ 386. 11 CA-44, United Nations, Vienna Convention on the Law of Treaties, May 23, 1969, United Nations, Treaty Series, vol. 1155, Article 31. 12 Award, ¶ 603. 4 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Rejoinder Memorial on Damages November 6, 2017 meritless. Their failure to satisfy the basic requirements of the principles governing causation warrants only one result here: the outright rejection of their claim, and an award of no damages. 11. However, even if the Tribunal were to proceed further and attempt to assess an appropriate quantum of damages in the face of the Claimants’ failure to do so, an award should amount to no more than the costs the Claimants would have incurred had they taken steps to mitigate their losses. The Claimants had available to them a cost- and time-effective means of fully mitigating any losses that they might have suffered as a result of the NAFTA breach. An application for judicial review in Canada’s domestic courts would have fully restored the opportunity inherent in a lawfully compliant EA process. In their Reply, the Claimants argue they had no duty to mitigate. They are wrong. Canada explains why in Part IV below, and consequently why the Claimants are entitled to an award of no more than the costs that they would have incurred in pursuing judicial review in order to restore their lost opportunity. 12. If the Tribunal were to disagree with Canada’s position regarding the issues of standing and causation, and were to conclude that the Claimants were not under a duty to mitigate their losses, then it would have to determine how to properly value the loss of their opportunity in having the Whites Point project considered, assessed, and decided in accordance with applicable laws. As Canada explained in its Counter-Memorial, the only appropriate measure of these losses could be the costs that Bilcon of Nova Scotia incurred in the JRP process that resulted in the NAFTA breach. For the most part, the Claimants have not challenged Canada’s calculation of those losses. Instead, the Claimants confirmed that they were advancing just one damages claim—for the “loss of demonstrated profits”—and that they were not claiming “‘sunk costs’ in developing the Whites Point Quarry project.”13 In Part V below, Canada provides further support for its calculation of the JRP-related costs of Bilcon of Nova Scotia that can be substantiated by the documentary evidence produced in the arbitration. 13. Finally, Canada explained in its Counter-Memorial why, if the Tribunal were to disagree with Canada’s position regarding the issues of standing, causation, mitigation, and Bilcon of Nova Scotia’s sunk costs in the JRP process, the Claimants’ lost opportunity cannot be credibly 13 Claimants’ Reply Damages Memorial, ¶ 221. 5