Canada wins NAFTA dispute over Ontario mine dump

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A U.S. businessman involved in an abandoned project to throw Toronto's garbage into a disused Northern Ontario mine has lost a bid to extract more than $350-million in compensation out of the Canadian government under a controversial clause of the North American free-trade agreement.

Five years ago, a little-known Pennsylvanian businessman, Vito Gallo, claimed to be an investor in the site, which had been promoted as a solution to Toronto's garbage crisis through the 1990s and early 2000s by Canadian entrepreneurs.

Mr. Gallo challenged the Ontario government's ban on using the former iron mine as a landfill, launching a case under NAFTA's Chapter 11, a clause that allows foreign investors to sue governments before a special panel of arbitrators. He demanded at least $355-million in damages, plus other costs.

Now, a three-member panel of arbitrators has tossed out Mr. Gallo's case, siding with Canadian government lawyers who argued that he could not prove he was an investor in the controversial Adams Mine project at the time the Ontario government passed a law to scrap it.

Some lawyers who follow NAFTA cases say this and other wins for Ottawa show that warnings from anti-free-trade activists that the controversial Chapter 11 provisions would be open to abuse have not come true.

The ruling has not yet been made public, but its result has been reported on Investment Arbitration Reporter (iareporter.com), a website that tracks arbitrations between investors and governments. Governments typically delete sensitive commercial information before releasing NAFTA arbitration rulings. There was no word on Tuesday when the government would make the ruling public.

For much of the 1990s, a plan to ship Toronto's garbage to the abandoned, water-filled Adams Mine near Kirkland Lake, Ont., dogged municipal politics. In 2001, after talks with the mine's promoters collapsed, the city declared the proposal dead, calling it a "dark ages" concept.

In 2004, the newly elected Ontario Liberal government moved to end the Adams Mine plan for good, passing what opposition critics described as draconian legislation to cancel any chance of its use as a dump on environmental grounds, citing the danger of pollutants leaking into the water supply. Local native people as well as environmentalists had opposed the landfill, which had failed to secure all of the needed regulatory approvals.

But in 2007, Mr. Gallo – who till then, according to government documents, had never met with any officials in connection with the mine – surfaced with his NAFTA claim. The original promoter of the plan, businessman Gordon McGuinty, had sold the site to a numbered company in 2002. According to Mr. Gallo's statement of claim, he became owner of that Ontario numbered company in September, 2002, when a single share was transferred to him, at no cost, by Brent Swanick, a lawyer and the company's president.

The government argued that Mr. Gallo's NAFTA claim should be thrown out because he was not really an investor, having paid nothing for his share of what was otherwise a Canadian company. "This claim is essentially brought by Canadians against Canada," the government's statement of defence reads. It also noted that Mr. Gallo's company did not seek the compensation offered to other affected companies by the Ontario government when it quashed the dump site.

Charles Gastle, a Toronto-based lawyer for Mr. Gallo, declined to comment on Tuesday. In a statement, the Department of Foreign Affairs said it welcomed the decision.

Toronto lawyer Lawrence Herman, a partner with Cassels Brock & Blackwell LLP and an expert in international arbitration, said the decision shows that arbitration panels will not put up with attempts by domestic investors to manufacture a NAFTA challenge.

"There's a fairly consistent trend here. It shows that these tribunals are not going to be easily convinced [by investors]" Mr. Herman said, adding that most of the claims made against Canada since NAFTA's inception, and all of those made against the United States, have either been thrown out or abandoned.

Canada has had to pay out settlements in NAFTA cases in the millions of dollars, including the recent move to pay forestry giant AbitibiBowater Inc. $130-million to settle a claim that the company's assets in Newfoundland and Labrador were illegally seized by the province. But Mr. Herman said that in cases that didn't settle before a ruling, Canada has only actually been ordered by NAFTA tribunals to pay investors a total of about $7-million, out of hundreds of millions of dollars in total prospective claims.

He also said that U.S. or Mexican investors who decide to take Canada to court under NAFTA will think twice after seeing that the panel also ordered Mr. Gallo to pay $900,000 (U.S.) to cover the costs of the arbitration, although it stopped short of demanding Mr. Gallo pay the Canadian government's legal bill too.

Gus Van Harten is an associate professor at York University's Osgoode Hall Law School and a critic of NAFTA's Chapter 11 and other investment treaties like it. He said he hopes the decision is a sign that NAFTA arbitration panels aren't going to look kindly on Canadian investors who bring in U.S. partners to make a NAFTA claim.

But he noted that Canadian governments are still vulnerable to pressure from U.S. investors who threaten to use NAFTA to demand compensation for environmental or other legislation that conflicts with their interests.

"I hope this is the arbitrators signalling that we're not going to entertain this kind of creativity," Prof. Van Harten said. "… But I think to suggest that this case alleviates wider concerns about the structure of NAFTA and how NAFTA can be used in more serious cases is totally far-fetched."