NAFTA tribunal in Westmoreland v. Canada declines jurisdiction, finding that the claimant did not own or control the investment at the time of the alleged breach

Westmoreland Coal Company v. Government of Canada, ICSID Case No. UNCT/20/3

Background and claims

The dispute pertained to an investment made by Westmoreland Coal Company (WCC), a U.S.‑incorporated company, in two Canadian enterprises in April 2014. These enterprises owned three mine‑mouth coal mines (i.e., mines developed adjacent to and in conjunction with a power plant) in Alberta, Canada. In December 2014, certain first-tier lien holders provided WCC with USD 700 million in debt financing.

In November 2015, Alberta announced its Climate Leadership Plan, which included provisions to phase out greenhouse gas emissions from coal-fired electricity generation by 2030. At this time, six coal-fired generating units were expected to operate in Alberta beyond 2030, which would have to transition to other fuel sources or technologies. In November 2016, Alberta announced that it had entered into agreements to make transition payments to the companies operating these units. No such payment was offered to WCC. According to Canada, transition payments were only made in respect of coal-fired generation units and not in respect of coal mines, coal mining not being the object of Alberta’s emissions reduction policy. In November 2018, WCC filed a notice of arbitration against Canada under NAFTA Chapter Eleven, challenging the Climate Leadership Plan and Alberta’s transition payments.

However, WCC filed for bankruptcy in the United States in October 2018. Its first-tier lien holders agreed to purchase certain assets, including its investment in the aforementioned Canadian enterprises and its NAFTA claim, through an acquisition vehicle. These assets were subsequently transferred to Westmoreland Mining Holdings LLC (Westmoreland, or the claimant), incorporated under the laws of Delaware in January 2019. In July 2019, WCC withdrew its NAFTA claim against Canada and in August 2019, Westmoreland filed a Notice of Arbitration and Statement of Claim against Canada on its own behalf under Article 1116 of the NAFTA and on behalf of the Canadian Enterprises under Article 1117. At the time of the hearing on jurisdiction, WCC was undergoing dissolution but was still in existence.

Based on its interpretation of the ratione temporis requirements in the treaty, the tribunal rejects the claimant’s standing, including as an assignee or a successor.

Canada raised three jurisdictional objections, namely that (i) the claimant was not a protected investor at the time of the alleged breaches as required by Articles 1116(1) and 1117(1) of the NAFTA; (ii) the claimant had not made out a prima facie damages claim under Articles 1116(1) and 1117(1); and (iii) the challenged measures did not “relate to” the claimant or its investment under Article 1101(1) of the NAFTA. Noting that each of Canada’s objections involved analyses of similar issues, the tribunal decided to consider these together under the general heading of Canada’s “temporal objections” (para. 103).

For the tribunal, a fundamental question raised by Canada’s temporal objections was whether Westmoreland should have owned or controlled the investment at the time of the alleged treaty breach to bring a claim under NAFTA Chapter Eleven. According to the tribunal, none of the cases cited by the parties directly addressed this issue. The tribunal nevertheless drew the following principles from these cases: “(i) a sham transaction will be fatal to jurisdiction, (ii) just because a transaction is bona fide does not in itself guarantee jurisdiction; and (iii) there must be beneficial ownership at all relevant times with a NAFTA investor” (para. 195).

With respect to Article 1116 (titled “Claim by an Investor of a Party on Its Own Behalf”), the tribunal found the title of the article to suggest that a claim must be brought by the entity affected by the alleged treaty breach. The tribunal was also guided by the text of Article 1116(1) (“[a]n investor of a Party may submit to arbitration under this Section a claim that another Party has breached an obligation … and that the investor has incurred loss or damage by reason of, or arising out of, that breach”). For the tribunal, the use of the word “the” in this article “directs the reader to the clear understanding that the investor which brings the claims must be ‘the’ investor which has suffered loss” (para. 200). Accordingly, the tribunal held that to have jurisdiction under Article 1116(1), the investor must be claiming on its own behalf and that same investor must have suffered loss or damage. The tribunal further noted that Article 1117(1) “contains the same requirements” (para. 200). The tribunal found its construction to be consistent with the object and purpose of the NAFTA, reasoning that “an investor must have taken a risk by making an investment in order to be assured of treaty protection” (para. 201).

The tribunal next considered whether Westmoreland could bring a NAFTA claim as WCC’s assignee. Recalling its interpretation of Articles 1116(1) and 1117(1), the tribunal held that “only the party which owned the investment at the time of the alleged treaty breach has jurisdiction ratione temporis to bring a claim” (para. 209). The tribunal also highlighted that each of the NAFTA state parties had submitted this as the correct interpretation of the treaty. In this regard, the tribunal referred to Canada’s arguments in this case, Mexico’s non-disputing party submission in this case, and the United States’ submissions as the respondent in Methanex Corporation v. United States of America. The tribunal attached particular significance to Mexico’s submission, noting that Mexico had no interest in the outcome of this dispute.

Finally, the tribunal dismissed Westmoreland’s argument that it could bring this claim as WCC’s legal successor. While the tribunal stated that a change in corporate identity following a treaty breach would not in itself be a bar to treaty protection, it considered the following facts against the background of U.S. domestic law in arriving at its decision:

1. The interests of WCC and Westmoreland could not be said to be aligned since the assets of the former were transferred to the latter at arm’s length, as found by the U.S. Bankruptcy Court.
2. Westmoreland was not spun out of WCC, nor was there any internal reorganization or change in form. Westmoreland itself referred to the step by which it was inserted into the ownership chain of the assets under consideration as being an “intermediate” step without any significant duration. Westmoreland was only permitted to self-determine the existence of a continuity of interest for tax purposes in the United States.
3. Westmoreland did not take on any successor liability with respect to WCC or acquire all of WCC’s assets.

In addition, Westmoreland had conceded that a third-party purchaser without any interest in the prior iteration of WCC would not have jurisdiction to bring this NAFTA claim. For the tribunal, there was no significant difference between that scenario and the present situation as Westmoreland’s shareholders were only first-tier lien holders of WCC, not its shareholders. Based on the foregoing, the tribunal found that the claimant was not the legal successor of WCC but a separate company.

Decision and costs

The tribunal concluded that it did not have jurisdiction over Westmoreland’s claim. For the sake of completeness, it also briefly addressed Westmoreland’s remaining arguments and found that (i) Westmoreland had not made out a prima facie damages claim under Articles 1116(1) and 1117(1) of the NAFTA; and (ii) the challenged measures did not “relate to” Westmoreland or its investment within the meaning of Article 1101(1) of the NAFTA.

On costs, the tribunal considered that under Article 40 of the UNCITRAL Rules and Article 1135(1) of the NAFTA, it had the discretion to allocate costs other than to the unsuccessful party. While Canada argued that Westmoreland’s case had evolved since Canada first raised its jurisdictional objections, the tribunal noted that this was “not uncommon in proceedings where parties develop and refine their pleaded cases” (para. 248). The tribunal found no evidence of mala fides in the claimant’s conduct but rather was convinced that Westmoreland conducted itself as if it were WCC’s rightful successor for this claim. For these reasons, the tribunal directed each party to bear their own costs of legal representation and share the arbitration costs equally.

The author of this case summary has chosen to contribute anonymously.

Notes: The tribunal was composed of Juliet Blanch (president, appointed by Secretary General with the agreement of the parties, UK national), James Hosking (U.S. and New Zealand national, claimant’s nominee), and Zachary Douglas (respondent’s nominee, Australian national). The award is available at https://www.italaw.com/sites/default/files/case-documents/italaw16469.pdf.