On 10 January 2019, a United Nations Commission on International Trade Law (UNCITRAL) Arbitral Tribunal awarded USD7 million to American investors, Clayton and Bilcon of Delaware Inc. (the Claimants), in a claim against Canada relating to a mining project.
In 2002, the Claimants acquired an interest in a quarry in Whites Point, Nova Scotia, with the purpose of developing the quarry and a marine terminal. The governments of Canada and Nova Scotia set up a Joint Review Panel to assess the environmental suitability of the project. In October 2007, the project was ruled incompatible with “community core values”.
In May 2008, the Claimants filed a Notice of Arbitration under Articles 1116 and 1120 of the North American Free Trade Agreement (NAFTA), alleging that the Canadian federal and provincial governments acted unfairly in conducting their Environmental Assessment (EA).
Despite the lack of trading history, the Claimants requested USD443 million in compensation for loss of profit over the life of the project (50 years). The Claimants considered that had they been treated fairly they would have passed the EA and the Whites Point project would have been profitable in the favourable market conditions.
The Claimants chose the date of the award as their valuation date to include the events and conditions that had actually taken place in the 10 years since the breaches. They adopted the Discounted Cash Flow (DCF) method to calculate loss of profit, arguing that the project could have been reasonably expected to generate future cash flows.
The Respondent pointed out that the intention of EA was not certain and that the project could have failed anyway regardless of the NAFTA breaches. Consequently, the Respondent argued the Claimants could only be reimbursed for its sunk investment costs at most. The Respondent also submitted that in the absence of certain causation and because the Claimants only claimed compensation for loss of profit, the Claimants should not be awarded any damages at all.
The Tribunal considered that the Claimants failed to prove that there was a sufficient degree of certainty that the EA would have been granted or that the project would have been economically viable. The Tribunal concluded that, although neither party disputed the breaches, causation had not been proven and therefore the Claimants had suffered no further damage beyond the lost opportunity.
To assess the value of the lost opportunity, the Tribunal took into account two indicators of value: the amounts expended by the investors and past transactions regarding the quarry site. Acknowledging that no rational businessperson would invest in a project unless they expected to make a return over and above investment costs, the Tribunal considered past transactions involving the Whites Point quarry to determine what reasonable margin could have been expected. The Tribunal considered the value of the investors’ opportunity when they lost it, i.e. in late 2007.
On that basis, the Tribunal valued the lost opportunity at USD7 million.
This case shows that Tribunals are willing to dismiss claims for lost future profits in situations of factual uncertainty, e.g. where the probability of obtaining necessary permits and/or generating sustained profits is not sufficiently high. In this case, the Tribunal awarded damages for lost opportunity based on a review of sunk costs and previous transactions.
By Angela Schoales and Lisa Mazzucotelli.
For further information on quantum matters please contact Marion Lespiau.
Claimants: William Richard Clayton, Douglas Clayton, Daniel Clayton and Bilcon of Delaware Inc.
Respondent: The Government of Canada
Case ref: PCA Case No. 2009-04
Judge Bruno Simma, President
Professor Donald McRae
Professor Bryan P Schwartz
Dr Dirk Pulkowski
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