Professor Stephen Clarkson, a leading NAFTA expert at the University of Toronto, said provincial governments may approach treaty challenges differently as a result of the Abitibi outcome.
Last week, the federal government announced it agreed to pay $130 million to Abitibi for hydro dams and other assets the province expropriated. Under NAFTA, if governments expropriate or nationalize assets, they have to pay fair market value promptly.
The Abitibi suit was filed in February 2010, more than a year after the province expropriated the assets.
Because the federal government negotiated and signed the NAFTA treaty, it had to defend against the Abitibi court challenge, not the province.
Clarkson said the settlement caught him off guard.
“I was surprised that they would settle so early,” he said, adding that Ottawa could have dragged out the process for years. “Why not? For one thing, it delays having to pay. You have legal expenses, but there’s so much obstructionism that you can carry out during a legal procedure.”
Clarkson said as a result of the settlement — where Ottawa will pay the $130 million — other provinces may be less fearful of NAFTA consequences.
In the 1990s, the Ontario NDP won an election based partly on a promise to convert the auto insurance sector to a publicly run institution. After forming the government, premier Bob Rae dropped the promise, citing free trade challenges from insurance companies.
“They decided not to keep their promise because they were told they would be subject to this kind of challenge,” Clarkson said. “If (the Abitibi case) had happened before Bob Rae became premier, maybe he would have said, ‘OK, well, Ottawa is going to foot the bill, so why don’t we go ahead with the auto insurance nationalization.’”
Prime Minister Stephen Harper tried to pour cold water on that idea last week, saying that in the future, provinces would have to pay for their own troubles.
“In the future, should provincial actions cause significant legal obligations for the Government of Canada, the Government of Canada will create a mechanism so that it can reclaim moneys lost through international trade processes,” Harper said.
Nonetheless, that may not be the political reality, according to Lawrence Herman, an international trade lawyer, former diplomat with the United Nations, and expert on trade agreements.
“The reality is that by coughing up the money this time, a precedent has been created, politically speaking,” Herman said. “The next time a NAFTA investment dispute panel rules against a provincial measure — or if a settlement is in the offing — the province involved is going to demand equal treatment. Why not?”
None of this has any legal ramifications, only political ones.
Herman pointed out that the NAFTA process does not employ legal precedents, so any decision does not affect the outcome of future decisions. Moreover, a settlement, by its nature, does not create a legal precedent.
The bottom line, Herman said, is that once the two sides agreed the expropriated assets were worth a certain amount, they no longer needed to follow the NAFTA route.
Herman said if it had ended up before a NAFTA tribunal, the discussion likely would have been similar, although the dollar figure might have been different.
“The parties decided to value that property at $130 million,” he said. “At the end of the day, I think that’s what a NAFTA tribunal would have focused on.”