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Sandy Cove, which sits near a planned basalt rock quarry project by Bilcon, is seen in Digby Neck, N.S., in September.


Lawyers representing the federal government were in court on Monday arguing to quash a $500-million NAFTA arbitration award to an American company in a case that highlights the ability of foreign investors to challenge Canada's environmental approvals process under the North American free-trade agreement.

In the federal court hearing, Department of Justice lawyer Roger Flaim said the three-person NAFTA arbitration panel overstepped its jurisdiction when it concluded a federal-provincial review panel had discriminated against Bilcon of Delaware Inc. and recommended against approving the quarry it planned to build on Nova Scotia's Digby Neck.

The NAFTA arbitrators found the review panel did not follow Canadian law during the proceedings, a determination that would properly be made in domestic courts, Mr. Flaim argued. Bilcon lawyers are scheduled to make their arguments defending the NAFTA arbitrators' decision on Tuesday.

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The court hearing came as Liberal Foreign Affairs Minister Chrystia Freeland met her American and Mexican counterparts in Montreal for a session on NAFTA renegotiation. Canada is proposing an improved chapter on investor-state disputes that Ottawa says would create more experienced and professional arbitration panels that would be less likely to exceed their authority.

American negotiators have indicated the United States wants to opt out of the Chapter 11 investor-state regime, but Ottawa is proposing to keep it in place for Canada and Mexico, while not allowing American companies to seek redress in this country or Mexico unless the United States is fully committed to the system, The Globe and Mail's Adrian Morrow reported on Monday.

Environmental groups – which were granted intervenor status in the federal court hearing Monday – said the Bilcon case demonstrates why Canada should scrap Chapter 11 altogether, rather than trying to improve it.

"Being able to regulate our own environmental impacts is essential to Canadians well-being and way of life, so anything that jeopardizes that is totally out of step with our values," Catherine Abreu, a board member with East Coast Environmental Law association, said outside the courtroom. "And this case makes it clear Chapter 11 jeopardizes Canada's ability to enforce our own regulations."

Even if Federal Court Justice Anne Mactavish overturns the NAFTA arbitration award, American corporations continue to have access to a route for challenging Canadian environmental regulations that is unavailable to domestic companies, said Gretchen Fitzgerald, director of the Atlantic branch of the Sierra Club Canada Foundation.

Canada has lost several Chapter 11 suits and more than $200-million to claimants, leaving critics to question Ottawa's insistence on maintaining the so-called investor-state dispute settlement mechanism. However, Canadian resource companies are major investors in developing countries and Ottawa has championed such protections in all its trade-and-investment agreements.

In the Bilcon case, the federal-provincial review panel concluded that a quarry and marine terminal would cause adverse environmental impacts but was also not in keeping with "core community values" of the people who lived on the rustic Digby Neck, a spit of land jutting into the Bay of Fundy.

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The NAFTA arbitrators seized on the panel's use of "core community values," and said such concept was nowhere included in federal or provincial environmental assessment regulations, which do, however, require assessment of social-economic and cultural issues.

However, Mr. Flaim argued the NAFTA chapter only guarantees companies that they will be granted a minimum standard of treatment that is customary under international laws. That protection does not permit arbitrators to assess whether domestic laws are properly enforced.

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