Investment Arbitration Reporter

By Jennifer M. Cabrera and Luke Eric Peterson

Arbitrators hearing an expropriation claim filed by a US businessman against the Government of Canada have ordered that Canada’s jurisdictional objections to the case should be heard prior to any consideration of the merits.

Canada contends that Pennsylvania businessman Vito Gallo has failed to tender sufficient evidence to prove that he owned a Canadian company at the time that the company’s controversial waste disposal business was allegedly expropriated.

In September of this year, the Tribunal signaled that it would bifurcate the arbitration proceedings, so as to deal with Canada’s jurisdictional objections as a priority matter. Further to this, the Tribunal has requested that the claimant provide any additional evidence that would substantiate amounts contributed to the Canadian enterprise or demonstrate how the claimant “participated in the decision making process” of the enterprise prior to the date of the alleged expropriation.

Oral hearings on the jurisdictional objections are slated for the week of January 31-February 4, 2011.

2004 legislation halted waste disposal scheme

The NAFTA arbitration centers on legislation enacted in 2004 in Ontario, Canada’s most populous province.  The Adams Mine Lake Act prohibited the disposal of waste in a water-filled abandoned mine site in northeastern Ontario. The legislation also revoked previously granted permits conditionally permitting waste disposal at the so-called Adams Mine Lake, and prohibited legal challenges to the Act from being brought in municipal courts. (As is noted below, the Act did provide for compensation).

Mr. Gallo, the current owner of the Canadian-incorporated enterprise that sought to build and operate a landfill at the Adams Mine, argues that Canada is liable for an indirect expropriation of his investments and a violation of his legitimate expectations.  He also claims a denial of justice based on the Act’s nullification of a 2003 legal action for specific performance wherein his company sought to compel Ontario’s Ministry of Natural Resources to sell a parcel of land adjacent to the proposed waste disposal site.

In addition to questioning Mr. Gallo’s standing to bring the claim, Canada counters that the Canadian company lacked the necessary regulatory authorization to operate a landfill, and that a provisional certification of approval, issued by Ontario’s Ministry of the Environment in 1999, was never an investment capable of being “expropriated” under international law.

Canada queries whether Gallo owned Canadian company prior to enactment of law

Mr. Gallo, a businessman and long-time figure in Pennsylvania state government, claims in a heavily redacted section of his publicly-available* Memorial that he incorporated the Canadian enterprise in question in June 2002, and that the Adams Mine was soon after purchased from its previous owners and transferred to his company.  He affirms that he is the “sole and controlling owner” of 100% of the shares in the company.

Canada argues that the Tribunal cannot exercise jurisdiction over Mr. Gallo’s claims, citing a lack of evidence that Mr. Gallo was in any way connected with the Adams Mine waste disposal business prior to the enactment of the Act in April 2004.  Instead, it claims in a somewhat-less-heavily redacted section of its Counter-Memorial that the available evidence points to the Adams Mine having been sold to a Canadian real estate developer in May 2002, who then transferred the Mine to the Canadian company in question, which this Canadian developer had incorporated and controlled with an associate.

Canada also argues that the present lack of evidence points to Mr. Gallo’s claim being an abuse of right, which should deprive Mr. Gallo of standing before the Tribunal.

Dispute over expropriation sees debate as to viability of landfill project

Mr. Gallo argues in his Memorial that the 2004 Act, while technically leaving intact his ownership of the Adams Mine site (and his legal responsibility therefor), served to strip him of all benefits of his ownership.  He claims that a provisional certification of approval obtained in 1999, along with other permits, entitled the enterprise to develop a landfill in compliance with the conditions set out therein. The provisional certification remained in effect until it was extinguished by the 2004 Act.

Canada counters that the conditions contained in the provisional certification were significant and were largely unsatisfied by the enterprise, pointing to a number of permits for which the enterprise had yet to submit a complete application.  Lacking legal authorization to construct or operate a landfill, Canada argues, the Claimant was not deprived of any rights by the 2004 legislation.

Canada has sought to justify the Act as a measure intended to protect local groundwater supplies from leaching contents of the landfill.  Mr. Gallo has dismissed this excuse as “subterfuge,” insisting instead that the Act targeted the controversial landfill project for the political gain of the provincial government. (It is understood that the Canadian backers of the project enjoyed close ties to an earlier government, however relations took a down turn when a new political party came into office in Ontario in 2003).

Gallo claims his legitimate expectations were frustrated

Based on the 1999 provisional certification and other permits issued, Mr. Gallo claims he had a legitimate expectation that his company could establish and operate a waste disposal facility at the Adams Mine site. He says this legitimate expectation was "arbitrarily" deprived by the Adams Mine Lake Act.

Canada argues that neither NAFTA’s investment protections (including its Article 1105) nor customary international law protect an investor’s legitimate expectations, but in any event contends that Mr. Gallo was never given any specific assurances that the Adams Mine site could be used as a landfill.

Conflicting facts underlie Gallo’s denial of justice claim

Mr. Gallo’s denial of justice claim relates to an action brought in 2003 to enforce an offer by the Ontario Ministry of Natural Resources to sell additional land (the so-called Borderlands) necessary for the operation of the landfill under the certificate of approval, and for which the company had already paid over $50,000.00. He claims that the subsequent Act of the Ontario Legislature prohibited him from obtaining any redress for this breach from municipal courts.

Canada argues in response that the action for “specific performance” was settled by the parties prior to enactment of the 2004 legislation.  Indeed, Canada claims that the Canadian enterprise settled the lawsuit in exchange for the incorporation of several amendments into the final version of the legislation.  This account appears to contradict that offered in Mr. Gallo’s Memorial, in which he claims that the company was never consulted either before or after passage of the Act, and that the legislation was presented to the company as a “fait accompli.”

Mr. Gallo also criticizes the provisions of the law which permit investors to petition Ontario courts to award compensation due under the legislation – but not to otherwise challenge the Act.  He characterizes this scheme as inadequate under NAFTA Article 1110, which protects against uncompensated expropriations.  Canada insists the provisions of the Act are adequate, pointing to the fact that compensation under the Act has been offered to and accepted by other parties with an interest in the Adams Mine.

Canada argues that legislation did not cause enterprise’s financial woes

Mr. Gallo has requested damages equaling the fair market value of a “partially developed, but fully-permitted, mega-waste landfill site,” fixing the value at the time of the Act around USD $105 million.

Canada has sought to demonstrate that the venture – which lacked requisite permits and was allegedly encumbered by conflicting legal claims to the site – had “failed” in its project to develop the abandoned Adams Mine into a waste disposal facility. Citing the ICSID arbitration decision in Biwater Gauff v. Tanzania, Canada argues that the Act could not have caused damage to a project that had no value as an operating landfill in 2004, and that Mr. Gallo’s damages should be limited to his sunk investment costs.**

* Documents related to the case can be found here. ** For our reporting on the Biwater case see this link.

Investment Arbitration Reporter is a specialized news publication tracking developments in the area of international investment law and policy.

The publication does not offer legal or financial advice or recommendations of any kind.
 
To offer news-tips or comments, email the Editor, Luke Eric Peterson, at: editor@iareporter.com