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 COUNTER-MEMORIAL ON DAMAGES June 9, 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 Counter-Memorial on Damages June 9, 2017 I. INTRODUCTION ..................................................................................................................1 A. Overview of Canada’s Damages Counter-Memorial ....................................................1 B. Materials Filed by Canada ............................................................................................4 II. THE CLAIMANTS HAVE NO STANDING UNDER ARTICLE 1116 TO RECOVER THE DAMAGES THEY SEEK .........................................................................8 A. Under Article 1116, Investors May Only Recover Losses They Incur, Not Losses Their Investments Incur ....................................................................................8 1. The Ordinary Meaning of Article 1116 Does Not Allow Investors to Recover Losses Suffered by Their Investments ..................................................9 2. The Context of Article 1116 Confirms that NAFTA Does Not Permit an Investor to Recover Losses Suffered by Its Investment ....................................11 3. A Strict Separation of Articles 1116 and 1117 is Required to Achieve the Object and Purpose of NAFTA ...................................................................14 4. Subsequent Agreement and Practice Also Confirm that the NAFTA Parties Did Not Intend for Article 1116 to Encompass Reflective Loss ...........15 B. The Claimants May Not Recover the Damages They Seek in This Arbitration Because Those Damages Have Been Incurred by Bilcon of Nova Scotia ..................16 C. Conclusions .................................................................................................................18 III. THE CLAIMANTS ARE NOT ENTITLED TO ANY DAMAGES AS THEY HAVE FAILED TO MEET THEIR BURDEN TO PROVE THAT THE IDENTIFIED NAFTA BREACH CAUSED THE DAMAGES THEY CLAIM ................19 A. The Claimants Bear the Burden of Showing that the Identified NAFTA Breach Factually and Legally Caused the Specific Losses They Seek to Recover .......................................................................................................................21 B. The Claimants Have Failed to Meet Their Burden of Proving that the Identified Breach Caused Bilcon of Nova Scotia’s Alleged Loss of Profits ..............24 1. The Breach of NAFTA Identified by the Tribunal ............................................26 (a) The Claimants’ Allegations and the Majority’s Findings with Respect to the Breach of Article 1105 .....................................................26 (b) The Claimants’ Allegations and the Majority’s Findings with Respect to the Breach of Article 1102 .....................................................29 2. The Process Breach Identified by the Tribunal Did Not Cause Bilcon of Nova Scotia’s Alleged Lost Profits ...................................................................29 (a) The Government Decisions to Reject the Whites Point Project, Not the JRP’s NAFTA Breach, Were the Reason that the Whites Point Project Did Not Proceed .................................................................30 i CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 (b) The Expert Testimony Filed by Canada Explains Why the NAFTA Breach Was Not the But For Cause of the Whites Point Project Not Proceeding ............................................................................32 i. But For the NAFTA Breach, It Would Have Been Reasonable for the JRP Report to Have Contained Findings and Made Recommendations that Were Not Supportive of Project Approval .............................................................................32 ii. But For the NAFTA Breach, it Would Have Been Reasonable for Government Decision-Makers Not to Have Approved the Whites Point Project ................................................37 C. Conclusions .................................................................................................................41 IV. IN THE ALTERNATIVE, THE CLAIMANTS ARE ONLY ENTITLED TO RECOVER THE AMOUNT IT WOULD HAVE COST TO MITIGATE THEIR DAMAGES ..........................................................................................................................42 A. The Claimants Had a Duty to Mitigate Their Losses..................................................43 B. Judicial Review Was an Available and Effective Remedy that Would Have Fully Restored the Value of the Claimants’ Lost Opportunity ...................................45 C. Conclusions .................................................................................................................48 V. IN THE FURTHER ALTERNATIVE, THE CLAIMANTS ARE ONLY ENTITLED TO RECOVER THE AMOUNT BILCON OF NOVA SCOTIA INVESTED IN THE JRP PROCESS .....................................................................................................................49 A. The Identified NAFTA Breach Caused, at Most, the Loss of Bilcon of Nova Scotia’s Investment in the JRP Process ......................................................................50 B. The Claimants Can only Recover Costs Bilcon of Nova Scotia Invested in the JRP Process that Are Substantiated by Evidence ........................................................51 C. Conclusions .................................................................................................................52 VI. IN THE FURTHER ALTERNATIVE, THE CLAIMANTS ARE ONLY ENTITLED TO RECOVER THE AMOUNT BILCON OF NOVA SCOTIA INVESTED IN THE WHITES POINT PROJECT ................................................................................................52 A. Using a DCF Model to Value an Opportunity to Develop a Project that is Not a Going Concern and Did Not Have a Right to Be Developed is Inappropriate ........52 B. The Value of the Lost Opportunity is More Appropriately Reflected by the Amount Bilcon of Nova Scotia Invested in the Project ..............................................56 C. The Claimants Can Only Recover the Costs that Are Substantiated by Evidence ......................................................................................................................58 D. Conclusions .................................................................................................................59 ii CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 VII. IN THE FINAL ALTERNATIVE, THE CLAIMANTS’ CALCULATION OF THE ALLEGED LOST PROFITS OF THE WHITES POINT PROJECT MUST BE REJECTED...........................................................................................................................60 A. The Claimants’ Calculation of the Whites Point Project’s Lost Profits is Flawed and Unreliable and Must be Rejected ............................................................60 1. The Claimants Inappropriately Ignore Basic Project Development Risks ........60 (a) The Claimants Ignore Market Conditions ................................................61 (b) The Claimants Ignore the Early Stage of Development of the Project ......................................................................................................62 2. The Claimants Inappropriately Ignore Permitting Risks ...................................63 3. The Claimants Incorrectly Value the Project’s Potential Profits as of the Date of Mr. Rosen’s Report Rather than the Date of the Breach ......................65 4. The Claimants Ignore the Impact of Competition on Future Prices ..................67 5. The Claimants Significantly Understate the Operating Costs of the Project ................................................................................................................68 (a) Freight Costs ............................................................................................68 (b) Labour and Other Operating Costs ..........................................................69 (c) Missing Operating Costs ..........................................................................70 6. The Claimants Understate Capital and Maintenance Costs...............................71 7. The Claimants Incorrectly Calculate the Discount Rate Used in Their DCF ...................................................................................................................71 B. Correcting All of the Flaws in the Claimants’ Lost Profits Calculation Results in a Significantly Lower Estimate of the Project’s Potential Profits ..........................71 C. The Claimants Are Not Entitled to a Tax “Gross-Up” ...............................................72 D. The Claimants Are Not Entitled to Pre-Award Interest ..............................................74 E. Conclusions .................................................................................................................74 VIII. ORDER REQUESTED ........................................................................................................75 iii CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 I. INTRODUCTION A. Overview of Canada’s Damages Counter-Memorial 1. In the Award on Jurisdiction and Liability,1 a majority of this Tribunal found that Canada breached its NAFTA Chapter Eleven obligations on one ground—the Whites Point Joint Review Panel’s (“JRP’s”) “fundamental departure from the methodology required by Canadian and Nova Scotia law”2 in its review of the Claimants’ proposed Whites Point project. The majority held that as a consequence of the NAFTA breach, the Claimants and their investment “were not afforded a fair opportunity to have the specifics of [their proposal] considered, assessed and decided in accordance with applicable laws.”3 However, in finding fault with the acts of the Whites Point JRP, the majority made clear that it was not “deciding what the actual outcome should have been”4 of the Whites Point environmental assessment (“EA”) process. Nor could it. As the JRP served in an advisory role to government, government decision-makers “had the authority and duty to make their own decision about the future of the Bilcon project.”5 A variety of outcomes remained possible notwithstanding the NAFTA breach, including the rejection of the project by the Nova Scotia government, the federal government, or both. 2. In claiming damages for the NAFTA violation found by the majority, the Claimants bear the burden of establishing a causal link between the NAFTA breach and the resultant injury and loss that they claim.6 The Claimants’ case in this regard is simple and clear—“their loss is the loss of the profits they would have earned over the 50-year life of the Whites Point Quarry,” a sum of US$443,350,772.7 Yet, simple and clear as the Claimants’ case is, there is a disconnect 1 Award on Jurisdiction and Liability, March 17, 2015 (“Award”). 2 Award, ¶ 600. 3 Award, ¶ 603. 4 Award, ¶ 602. 5 Award, ¶ 584. 6 RA-47, North American Free Trade Agreement Between the Government of Canada, the Government of Mexico and the Government of the United States, 17 December 1992, 32 I.L.M.289 (entered into force 1 January 1994), (“NAFTA”), Article 1116(1). 7 Claimants’ Damages Memorial, March 10, 2017 (“Claimants’ Damages Memorial”), ¶¶ 12-13. This damages amount is comprised of the project’s alleged profits, a tax gross-up, and pre-award interest. 1 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 between it and the majority’s articulation of the NAFTA breach in the Award. Indeed, the Claimants ignore that a variety of scenarios for the outcome of the EA of the proposed project remained possible, and instead ask the Tribunal to now conclude that there was only one possible outcome of a lawfully conducted EA of the project—approval. The Tribunal must refuse this request. The NAFTA violation found by the majority did not cause the Claimants to lose 50 years of profits from the Whites Point project. As explained below, the Claimants’ approach leaves the Tribunal with but one option and outcome in this phase of the arbitration—dismissal of the Claimants’ damages claim in its entirety. 3. As a preliminary matter, the Tribunal must be satisfied the Claimants have standing to make the damages claim that they do. The Claimants submitted their claim to arbitration under NAFTA Article 1116 and, pursuant to this provision, they are entitled to claim the losses they allegedly suffered as investors, as a result of the NAFTA breach. Yet the claim they have advanced makes clear that the alleged losses they seek to recover are those of their investment, Bilcon of Nova Scotia. A claim for the losses suffered by an investment may only be advanced under NAFTA Article 1117. A simple application of the general rule of treaty interpretation and the core tenets of corporate law recognized by advanced legal systems throughout the world, including all three NAFTA Parties, demonstrates that the Claimants’ claim for the losses allegedly suffered by Bilcon of Nova Scotia must be dismissed. As explained by Canada in Part II, the Claimants have no standing to make this claim under Article 1116. 4. In the interest of judicial economy, the Tribunal’s inquiry should stop once it determines the Claimants do not have standing under Article 1116 to seek losses suffered by Bilcon of Nova Scotia. But even if the Tribunal were to continue, the Claimants have also failed to demonstrate the existence of a causal link between the NAFTA breach and the damages they claim. This failure also warrants a dismissal of their case. As Canada explains in Part III, the damages model the Claimants have advanced is one that might typically be seen in an investment arbitration award addressing an uncompensated expropriation of a going concern with a history of profitable operations. In this case, the NAFTA breach found by the majority denied the Claimants neither a going concern, nor even a right to develop a going concern. All that the Claimants were denied was the opportunity to have the project proposal considered, assessed and decided in accordance 2 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 with applicable Canadian laws. As a tribunal “simply cannot compensate [a c]laimant for the deprivation of a right that it never possessed,”8 the Claimants’ claim for the lost profits of a fully permitted Whites Point project, operating over the course of 50 years, must be rejected outright for their failure to demonstrate causation. As a result, the Claimants should be awarded no damages. 5. It is neither the Tribunal’s nor Canada’s role to do the Claimants’ job of pleading a viable theory of causation. However, if the Tribunal were to do so, the appropriate exercise involves establishing the value of the injury caused by the NAFTA breach—specifically, the value of the lost “opportunity to have the specifics of [their proposal] considered, assessed and decided in accordance with applicable laws.”9 As Canada explains in Part IV, in determining this value the Tribunal must take into account the duty to take reasonable steps to mitigate losses. The Claimants and Bilcon of Nova Scotia had available an effective means of mitigation—judicial review of the Whites Point JRP Report in Canada’s domestic courts. Such a review would have entirely restored the lost opportunity. Accordingly, the Claimants are not entitled to recover any more in damages than it would have cost them to fully restore what was lost through the timely and cost-effective remedy of domestic judicial review. 6. If the Tribunal disagrees and finds that the Claimants were not under a duty to mitigate, then it must determine the appropriate measure for valuing the lost opportunity to have the Whites Point project considered and assessed in accordance with Canadian law. As Canada explains in Part V, the most that could possibly be awarded for that opportunity are the actual costs Bilcon of Nova Scotia invested in the Whites Point JRP process. The breach in question did not destroy the value of the entire investment. Compensating the Claimants based on the costs that Bilcon of Nova Scotia invested in the JRP process that was found to breach NAFTA would restore them to the position they were in prior to the breach. 8 CA-316, Gold Reserve Inc. v. Venezuela (ICSID Case No. ARB (AF)/09/1) Award, 22 September 2014 (“Gold Reserve – Award”), ¶ 829. 9 Award, ¶ 603 (emphasis in original). 3 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 7. While for the reasons above Canada believes it is clear that the Claimants’ loss of opportunity should not be valued on the basis of the entire project, in Part VI Canada explains why, if the Tribunal disagrees, the Claimants’ attempt to value their lost opportunity on the basis of the project’s alleged lost profits is entirely inappropriate. The Whites Point project was not developed at the time of the NAFTA breach, and Bilcon of Nova Scotia never had the right to develop the project. At most, the value to the Claimants could be represented by nothing more than Bilcon of Nova Scotia’s investment costs in the project. 8. In the final alternative, even if the Tribunal were to consider the project’s alleged future lost profits in valuing the opportunity it found the Claimants were denied, Canada explains in Part VII why the model underlying the Claimants’ lost profits claim is flawed, unreliable, and must be rejected. Canada also explains how a corrected calculation of the speculative potential lost profits of Bilcon of Nova Scotia produces a significantly lower valuation than the Claimants’. 9. The Claimants assert that “[t]he law is … simple and clear: the Investors are entitled to full reparation to wipe out all of the consequences of the wrong done to them.”10 In the end, Canada takes issue not with the Claimants’ statement of this general legal principle, but with their application of it. The Claimants have failed to prove that the alleged loss of profits they claim is actually a consequence of the specific wrong done to them. It is the Claimants’ burden to make out their damages claim, and they have failed. Accordingly, the result of this phase of the arbitration should also be simple and clear—a complete dismissal of the Claimants’ claim, with a full award of costs to the Government of Canada. B. Materials Filed by Canada 10.Canada’s Counter-Memorial is accompanied by 172 new exhibits and 39 new authorities, in addition to those exhibits and authorities filed in the liability phase of the arbitration. Canada has also filed Reports by the following experts in support of its Counter-Memorial: 10 Claimants’ Damages Memorial, ¶ 12. 4 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 • TONY BLOUIN, Ph.D is the former Chair of the Nova Scotia Environmental Assessment Board and has served as the appointed chair of several review panels established under the Nova Scotia Environment Act (“NSEA”). In his Expert Report, Dr. Blouin examines the Whites Point JRP Report and public record and provides his opinion on the recommendation that the JRP could have reasonably made to the Nova Scotia Minister of Environment in discharging its mandate under the Nova Scotia EA regime had it not committed the NAFTA breach. • LESLEY GRIFFITHS has served as the appointed chair of five JRPs constituted under the Canadian Environmental Assessment Act (“CEAA”), and was also a member of a federal-provincial EA panel constituted under the NSEA and the federal Environmental Assessment and Review Process (“EARP”). Ms. Griffiths has examined the Whites Point JRP Report and public record and, on the basis of her past expertise as a CEAA review panel member, she provides her opinion on the recommendations that the Whites Point JRP could have reasonably made to federal decision-makers in discharging its mandate under the CEAA had it not committed the NAFTA breach. • PETER GEDDES is a past Manager of Environmental Assessment, past Director of Policy, Planning and Environmental Assessment, and past Environmental Assessment Administrator with the Nova Scotia Department of Environment. He has been responsible for reviewing EA panel reports with the Nova Scotia Minister of Environment and providing the additional advice and analysis necessary for the Minister to make his or her decision on projects. In his Report, Mr. Geddes discusses how the Ministerial decision-making process in an EA is carried out in Nova Scotia, the factors that are considered, and the possible decisions available to the Minister with respect to a project like the Whites Point project. • ROBERT G. CONNELLY is a former Vice President, Policy, and a former Acting President of the Canadian Environmental Assessment Agency. Mr. Connelly has over 38 years’ experience in the EA field, was involved in the design and enactment of the CEAA, and has served as a member or the appointed chair of two CEAA review panels. 5 CONFIDENTIAL Bilcon et al. v. Government of Canada Canada’s Counter-Memorial on Damages June 9, 2017 In his Expert Report, Mr. Connelly explains the process typically followed by the federal government in responding to a JRP report, describes the possible responses that could be made to a JRP report, and provides his opinion as to how the federal government’s decision-making might have unfolded in the case of the Whites Point project had the JRP not committed the NAFTA breach. • THE HONOURABLE JOHN M. EVANS was appointed to the Federal Court of Canada in 1998 and to the Federal Court of Appeal in 1999, where he served until his retirement in 2013. He has substantial experience with the judicial review of administrative action by the Government of Canada and its agencies, having presided over hundreds of judicial review applications and co-authored the treatise Judicial Review of Administrative Action in Canada. He has been described by the Supreme Court of Canada as “a leading scholar in the field of administrative law.”11 In his Expert Report, Justice Evans explains the Canadian law and procedure of judicial review of administrative action both at the federal level and in the Province of Nova Scotia. He also provides his opinion as to how the Claimants could have restored their lost opportunity in the Whites Point JRP process by commencing applications for the judicial review of the JRP Report in Canada’s domestic courts. • SC MARKET ANALYTICS combines Mr. Colin Sutherland’s experience working in the construction materials sector, primarily in cement, aggregates, and concrete products for over 30 years, with Dr. David Chereb’s experience in forecasting North American construction materials markets for over 30 years. Working together with Mr. Michael Power, who has over 40 years’ experience in aggregates sales and marketing, and Mr. James Ward, who has over 40 years’ experience in the heavy building materials and construction products industries, SC Market Analytics provides an opinion on the effect that an increased supply of aggregates from Whites Point would have had on the price of aggregate in the New York market, where the Claimants proposed to sell the majority of the Whites Point project’s aggregate products. SC 11 RE-6, Expert Report of the Honourable John M. Evans, June 9, 2017 (“Evans Report”), ¶ 2. 6