In the past, communications between Canadian businesses and federal and provincial governments on regulatory measures intended to support and protect Canadian industries and jobs have often been withheld from judicial and public scrutiny. The bases for withholding such communication have been legislative provisions that restrict full disclosure. The resulting, protectionist measures have typically been justified on public policy grounds, including environmental or health concerns, without significant review of such claims.

With the recent decisions of NAFTA Chapter 11 Arbitral Tribunals in S.D. Myers, Inc. (SDMI) and Pope and Talbot, Inc. (Pope & Talbot), the landscape for conducting government relations activities and lobbying has changed. In these cases, internal ministerial communications, as well as communications between corporate lobbyists and various ministries, became the subject of legal scrutiny in determining whether protectionist intent existed. As a result, previously confidential communications will no longer be allowed to always remain secret on the basis of cabinet privilege and other statutory bases for restricting disclosure .

The Tribunal in the SDMI arbitration, in determining the Canadian government’s intent in closing the border to PCB waste disposal in Ohio, analyzed numerous memoranda between the Ministry of the Environment, and the Canadian PCB disposal industry and its lobbyists. From these communications, it determined that Canada had violated its Chapter 11 obligations by discriminating against SDMI, a U.S. investor in Canada, in order to protect the Canadian PCB disposal industry.


Using Chapter 11 of the NAFTA is perhaps one of the most effective ways for corporations operating in NAFTA countries to challenge trade barriers adversely affecting their investments in either Mexico, Canada or the United States. The reasons are twofold. Firstly, Chapter 11 is revolutionary in that it allows private interests, rather than only national governments, to gain standing to initiate an action against the governments of any one of the three NAFTA countries. This unique investor-state remedy is in addition to the government-to-government remedy generally available under NAFTA and the WTO. Secondly, NAFTA provides wide-ranging protection for investors and investments made in NAFTA countries, including the possibility of substantial damages, even where governments justify these measures as necessary for environmental and health reasons.

Some of the obligations undertaken by NAFTA countries pursuant to Chapter 11 include the requirement to provide “national treatment.” This means that investors in NAFTA countries (or investments of such investors) are to be a c c o rded “treatment no less favourable” than is accorded, “in like circumstances,” to local investors (Article 1102). In addition to providing “national treatment,” NAFTA countries also have to provide investors in NAFTA countries treatment that is no less favourable than is accorded, in like circumstances, to investors of another country, including another NAFTA country (i.e., “most-favoured-nation tre a tment) (Article 1102). There is also a requirement to provide the better of “national treatment” and “most-favoured-nation treatment” to each NAFTA investor, thus ensuring that all investments are treated equally and without discrimination (Article 1104). NAFTA countries must also grant investments of investors “treatment in accordance with international law, including fair and equitable treatment and full protection and security” (Article 1105). NAFTA countries also cannot impose or enforce certain performance requirements, such as requirements to purchase, use or accord a preference to goods or services produced in a NAFTA country ’s territory (Article 1106).

Furthermore, Article 1110 prohibits NAFTA countries from directly or indirectly “nationalizing or expropriating” an investment of an investor of another NAFTA party, or taking measures “tantamount to nationalization or expropriation” of such investments, unless such measures are undertaken: (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law; and (d) upon payment of compensation which must be paid without delay, be fully realizable, and at fair market value. The term “investment” is broadly defined to include an enterprise, an equity security of an enterprise, certain types of debt security of an enterprise and certain types of loans to an enterprise.

A claim may be submitted to arbitration when an investor of a NAFTA country incurs loss or damage due to another NAFTA country’s breach of its obligations. An action commences by the filing of a Notice of Intent to Submit a Claim to Arbitration, which must be filed at least 90 days before the claim for arbitration is submitted. It should be noted that the determination of injury and damages is bifurcated. At the first stage, the Tribunal deter mines liability issues, and issues as to the principles on which damages should be awarded, leaving the quantification of such damages to a second stage.

Although the Arbitral Tribunal does not have the ability to force a NAFTA country to refrain from conduct considered to be in violation of Chapter 11, it does have wide discretion to award monetary damages, and any applicable interest and/or restitution of property.


The recent decision against the Government of Canada in the Chapter 11 claim launched by SDMI serves as a warning to Canadian corporations, as well as corporations in Mexico and the United States: Previously confidential communications used for lobbying provincial or federal government ministries to pass regulations which favour locally owned businesses, under the guise of environmental or health concerns or other public-policy concerns, could become subject to legal and public scrutiny. In this particular case, discussions between the Ministry of Environment and Chem-Security and Cintec, the primary Canadian competitors of SDMI (a U.S. corporation based in Ohio), showed that the resulting ban on cross-border exports of PCB waste had more to do with protecting Canadian corporations from competition than with environmental concerns. Of significant importance was the extent to which potentially privileged documents were open to analysis by the Tribunal. This led, in large part, to the finding against Canada that it had violated its NAFTA obligations of national treatment, as well as fair and equitable treatment, and full protection and security.

The roots of the dispute were as follows. SDMI invested in Canada in the hope of increasing its share of the PCB waste-treatment market in Eastern Canada, envisaging that Canadian businesses requiring PCB waste disposal would contract for the treatment of their waste in Ohio based on geographic and economic reasons. (The main Canadian competitors in the PCB waste-treatment business, ChemSecurity and Cintec, were both located in Western Canada, whereas the majority of PCB waste was produced in Eastern Canada. Thus, SDMI possessed a significant cost advantage over its largest Canadian competitors.) Although the U.S. closed its borders to the import and export of PCBs and PCB waste in 1980, the U.S. Environmental Protection Agency issued an enforcement discretion to SDMI, valid from Nov. 15, 1995, to Dec. 31, 1997, allowing it to import PCBs and PCB waste from Canada for disposal in the United States. Thus, SDMI invested in Canada, primarily through Myers Canada, to attract potential customers.

As a result of SDMI’s entry into the Canadian marketplace, the Canadian PCB disposal industry staged a vigorous lobbying campaign to get Canada to keep its border closed. This led, in November 1995, to Sheila Copps, the Minister of the Environment, signing an interim order that had the effect of banning the export of PCBs from Canada. This was later followed by a final order banning the commercial export of PCB waste for disposal, an action that resulted in the border being closed for about 16 months, from November 1995 to February 1997.

In determining that Canada had breached its NAFTA Chapter 11 obligations, the Tribunal relied heavily on the discussions between the Canadian PCB disposal-industry lobby and various Canadian ministries, as well as some internal ministerial memoranda. Ascertaining what the intent of the government was in passing the interim and final orders became the main focus of the Tribunal hearing. During the examination of the documentary evidence before the Tribunal, it became obvious that the various bureaucrats were split over the logic of preventing waste disposal south of the border. Some Department of the Environment officials recommended that the trans-border shipment of PCB waste be allowed “because it represents a technically and environmentally sound solution for the destruction of some of Canada’s PCBs.” The officials also suggested that an interim order is “not a viable option because it cannot be demonstrated that closing the border is required to deal with a significant danger to the environment or to human health” (page 38). Furthermore, some officials in Industry Canada and Foreign Affairs objected to the closing of the border, as they feared that it would appear to be an unjustifiable restriction on international trade and violate Canada’s NAFTA obligations.

Despite these misgivings, and due entirely to the intense lobbying efforts of the Canadian PCB disposal industry, which focused its arguments on the contention that U.S. competition would threaten its viability, Minister Copps became determined to close the Canadian border to PCB exports. The Tribunal, in analyzing the documentary evidence, was of the view that “Canada’s policy was shaped to a very great extent by the desire and intent to protect and promote the market share of enterprises that would carry out the destruction of PCBs in Canada and that were owned by Canadian nationals” (page 35). The protectionist intent of Minister Copps was, according to the Tribunal, “reflected in decision-making at every stage that led to the ban” (page 35).

Although both the interim and final orders were framed to suggest that they were necessary to deal with a significant danger to the environment and human life and health, the Tribunal determined that protectionist intent was paramount. It reached this conclusion by analyzing the documented discussions between the Canadian PCB disposal industry and the Ministry of the Environment, as well as interdepartmental discussions. What makes this decision most interesting is that these types of discussions, often subject to Crown privilege (state or cabinet privilege), were nevertheless open to analysis in determining governmental intent. No doubt, Minister Copps’s statement in the House of Commons that it was Canada’s policy that the “handling of PCBs should be done in Canada by Canadians” sealed the case for SDMI against Canada. In fact, the Tribunal commented that a “statement by the lead minister in the House of Commons with respect to governmental policy on an issue is ordinarily to be accepted at face value as stating official governmental policy” (page 37).

In the end, the Tribunal made factual conclusions that the interim and final orders favoured Canadian over non-Canadian nationals, and had the practical effect of preventing SDMI and its Canadian operation from carrying on business in Canada. Thus, Canada was found to be in violation of its obligation to accord national treatment (Article 1102). Canada was also found to be in violation of Article 1105. This was because SDMI had been treated in such an unjust or arbitrary manner that the treatment rose to a level unacceptable under the international law as lacking in due process, and failing to provide fair and equitable treatment and full protection and security.


While the SDMI decision warned lobbyists that their attempts to influence government trade policy in a protectionist manner can become subject to great scrutiny under the auspices of a Chapter 11 complaint, the interim Arbitral Tribunal decision in Pope & Talbot ensured that these discussions could not be kept under wraps on the basis of Crown privilege (“cabinet confidences”). In that case, Canada refused to produce certain documents that Pope & Talbot requested be produced, on the grounds that they related to cabinet confidences and need not be produced as per Section 39 of the Canada Evidence Act.

The Tribunal brushed aside Canada’s claims to privilege, stating that Section 39 was not applicable in the specific context of a NAFTA arbitration operating under the chosen United Nations Commission on International Trade Law (UNCITRAL) arbitration rules. An overriding principle of the UNCITRAL Rules requires that the parties in an arbitration hearing be treated equally. Consequently, the Tribunal reasoned that if Canada could simply rely on Section 39, it might be in an unfairly advantaged position under Chapter 11 by comparison with the U.S. and Mexico, which do not have an equivalent to Section 39. Therefore, the Tribunal reasoned that since its jurisdiction a rose from NAFTA and all the parties had to be treated equally, Section 39 had no application; there f o re, all cabinet documentation needed to be produced. Canada’s refusal to produce the “privileged documents” could lead the Tribunal to draw an adverse inference against the Canadian position. This decision puts added pressure on governments of NAFTA countries to disclose any interministerial discussions, as well as discussions with corporate lobbyists.

Thus, corporations need to be aware of the danger that their discussions with government, whether at the municipal, provincial or federal level, could be subject to production at a Chapter 11 arbitral hearing. Corporate lobbyists should consider the findings in the SDMI and Pope & Talbot cases as warnings that their old way of conducting business may need to be altered in light of the relevant NAFTA provisions.