How Kinder Morgan Could Sue Canada In a Secretive NAFTA Tribunal

Kinder Morgan Trans Mountain pipeline

All hell is breaking loose over the Trans Mountain pipeline.

On Sunday, Kinder Morgan announced it was putting all “non-essential spending” on hold until it could be guaranteed “clarity on the path forward.” That sent both the Alberta and federal governments into a near-frenzy — Premier Rachel Notley pledged to buy the entire pipeline if needed, while the federal cabinet held an “emergency meeting” (ministers literally ran from the media afterward).

It’s also come to light that Kinder Morgan could actually sue the government of Canada if it can’t build the pipeline. In a call with investors, Kinder Morgan chair and CEO Steven Kean said that it’s far too premature to consider.

But it certainly wouldn’t be unusual: between 1995 and 2015, Canada has been sued 35 times by investors and paid out at least $170 million.

It is extraordinarily easy for a deep-pocketed company like Kinder Morgan to sue Canada using NAFTA,” said Gus Van Harten, an associate professor at York University's Osgoode Hall Law School and expert in international investment law and arbitration, in an interview with DeSmog Canada.

So what would this look like in practice? And would Kinder Morgan have a serious shot at winning? DeSmog Canada took a look at the details.

How on earth would Kinder Morgan actually sue Canada?

It would happen via the Chapter 11 provision of the North American Free Trade Agreement (NAFTA), which was signed by Canada, the United States and Mexico in 1994.

Here’s how Global Affairs Canada describes the process: “It establishes a framework of rules and disciplines that provides investors from NAFTA countries with a predictable, rules-based investment climate, as well as dispute settlement procedures which are designed to provide timely recourse to an impartial tribunal.”

It also happens to be the most notorious part of NAFTA.

The concept itself is referred to as an “investment-state dispute settlement.”  Basically, if an investor — aka a large corporation — thinks that a government has acted in a way that’s unfair and disadvantaged their ability to make profits by introducing a new policy, it can sue the government for alleged losses.

This ability is baked into many international trade agreements: for example, Canadian mining company Gabriel Resources is currently suing Romania for $4.4 billion because the government denied it permits to construct a large and environmentally destructive mine. U.S. company Bilcon is currently suing Canada for rejecting a quarry in an endangered whale nursery.

In the case of NAFTA, an investor has to be based in a different country than the one it’s suing for damages. So even though Trans Mountain ULC is technically the owner of the pipeline, it would be the Texas-based Kinder Morgan Inc. that would launch the challenge.

Is there another motive at play here?

Well, the most obvious thing would be the potential for a large sum of money. For instance, in 2016 TransCanada filed a lawsuit against the U.S. for a whopping $15 billion over the blocked Keystone XL pipeline (the challenge was withdrawn following the election of President Donald Trump and subsequent approval of the project).

But it can also be used as a tool to pressure governments to back down on policies.

In the present case, a NAFTA claim would allow Kinder Morgan to team up with Alberta and perhaps the federal government too to pressure British Columbia politically,” Van Harten said.

It sounds a bit bonkers, hey? The federal government effectively using a lawsuit against itself to pressure a province to reduce its opposition to a project that it legitimately believes may have calamitous impacts on Indigenous rights and the environment?! Well, it’s worked before.

According to Van Harten, one of the earliest NAFTA cases was against Canada and led to a “humiliating settlement by the federal government.” In 1997, Canada moved to ban a gasoline additive that contained a neurotoxin. The retailer of that additive in Canada then sued the government for $250 million USD. In the end, the government rescinded the ban, apologized, issued a statement saying the toxin wasn’t toxic and then paid the company $13 million USD.

The company didn’t receive the amount of money it was pursuing. In a sense, it received far more than money because of the unique powers that NAFTA provides companies to pressure governments to back down on policies or avoid implementing such policies in the first place.

But why would Kinder Morgan sue the federal government, which supports the project?

It’s the only government that it could actually sue.

NAFTA was signed by the three countries, not provinces or territories. So even if a conflict is between an investor and sub-national government, the lawsuit is still filed against Canada, Mexico or the United States.

Van Harten described the set-up as the “result of bad negotiating decisions in the past by the federal government, advised by federal trade officials who in my experience are often hawkishly pro-investor. For 20 years, Canada has been and still remains the only Western country that allows these aggressive international claims by U.S. multinationals against the country's sovereign and democratic choices. Thus, our exposure to these claims lies primarily with officials in Ottawa, not B.C. or the other provinces sometimes targeted under these trade agreements.”

We’ve seen this pan out recently with the lawsuit by Lone Pine Resources against the federal government for $118.9 million in alleged damages following Quebec’s decision to revoke oil and gas exploration licences beneath the St. Lawrence River. It’s fundamentally a conflict with Quebec, but has to be dealt with by Canada.

Oh, the joys of federalism.

So who actually decides this stuff? Is there a NAFTA court?

Kind of. It’s actually more of a secretive tribunal.

There are three arbitrators on the tribunal. There are no public records available for most of the decision-making process. It’s up to the tribunal to decide if the challenge is legitimate and, if so, how much the government should pay in damages. Asides from the country directly involved, the tribunal doesn’t allow standing for other stakeholders who may be impacted by the decision.

Keep in mind there’s no equivalent process in place for governments to sue investors that damage local environments or economies.

These challenges can take a long time to resolve. The aforementioned Lone Pine lawsuit against Canada was first launched in 2013 and is still ongoing. It also costs a lot of money for both sides. As a result, it might make more sense to view a potential Kinder Morgan challenge as a means of forcing B.C. to back down and prevent it from considering future standoffs that would impede profits.

Where does this leave B.C.?

Wait and see.

There’s no guarantee that Kinder Morgan will pursue this option. The company has issued the specific date of May 31 as the deadline for the standoff to be resolved, after which it may walk away from the project. At that point, it’s conceivable that it could launch a challenge against the federal government.

I would advise people in B.C. not to be bullied in this way and to stick to the position that they think is principled and fair,” Van Harten said. “B.C. has a right to enforce its provincial laws and regulations, in a situation of overlapping constitutional jurisdiction and regulatory responsibility, as Kinder Morgan should have known from the start.

If Canada is sued because of B.C.'s own decisions to protect its environment and economy, the fault lies with the federal government that negotiated and concluded NAFTA, subjecting Canada to these claims by U.S. companies where no other Western country had done then or has done since.”

Photo: Garth Lenz

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