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Calgary-based pipeline company TransCanada has filed a Notice of Intent to Arbitrate (“Notice”) under article 11 of the North American Free Trade Agreement (“NAFTA”). It issued the Notice in response to US president Barack Obama’s November 6, 2015 refusal to grant the necessary approval to complete construction of Keystone XL, a proposed trans-national pipeline that would deliver crude oil from Canada to the US.

As with other international trade and investment treaties — including the proposed Trans-pacific Partnership (TPP) and the Comprehensive Economic Trade and Agreement (CETA), which was recently signed between Canada and the European Union — NAFTA contains a mechanism for investor state dispute settlement. This provides a means through which an investor from one state party can sue a state party in which it has an investment for breach of certain standards relating to the host country’s treatment of the investor and its investment. Host states do not generally enjoy reciprocal or comparable rights as against foreign investors under such agreements. Investor-state disputes, which often result in large sums awarded against host states, are decided by a tribunal of private arbitrators.

TransCanada’s Notice outlines its claim for damages–in the amount of US$15 billion– resulting in the US’s breach of its rights under articles 1102 (national treatment), most favoured nation (1103), minimum standard of treatment  (1105), and 1110 (protection against uncompensated expropriations) of NAFTA.

The company  claims that while approvals for the Keystone XL project appeared initially to be on track, and several permits had been provided, the process became politicized. It claims that environmental activists succeeded ultimately  in turning “opposition to the Keystone XL Pipeline into a litmus test for politicians—including U.S. President Barack Obama—to prove their environmental credentials.”

TransCanada claims that the US Administration “dithered” for years in deciding whether or not to grant approval and that

[t]he Administration concluded that the denial [of the permit] was necessary to demonstrate U.S. leadership on climate change, even though the Administration concluded multiple times that the pipeline would have no significant impact on climate change. The Administration sought to explain this perverse decision by saying that the pipeline was perceived to be bad for the environment, and the Administration had to appease those in the international community who held that (false) belief.

TransCanada has also filed suit in Texas, alleging that in denying approval for Keystone XL Obama exceeded his power under the US constitution.

Environmental decision making and regulation is frequently the object of arbitration under NAFTA. Recently, for example, a NAFTA tribunal determined that Canada had breached its NAFTA obligations to a set of US investors when, after an unfavourable environmental assessment, the federal government denied them the permits necessary to complete a planned quarry and marine terminal near Digby Neck, Nova Scotia. Other examples include US investor challenges to: Quebec’s moratorium on fracking (ongoing), a federal prohibition on a fuel additive over health and environmental concerns (settled), and a federal ban of an agricultural pesticide deemed dangerous to human health and the environment after lengthy study (ultimately unsuccessful).

Whatever the ultimate outcome of such disputes, investor state dispute settlement has been critiqued in the context of environmental regulation for its “chilling” effect upon regulators and its tendency to promote downward regulatory harmonization between two or more jurisdictions with differing standards of environmental protection, among other reasons.

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