Federal-provincial relations are being tested on the free-trade front once again with the awarding of $17.3-million in damages to two U.S. oil companies over a requirement they spend research money in Newfoundland and Labrador.
A tribunal at the International Centre for Settlement of Investment Disputes (ICSID) recently decided on the amount to be awarded to Exxon Mobil Corp., the largest oil company in the United States, and Murphy Oil Corp., almost three years after a NAFTA panel ruled against Ottawa.
The amount is considerably less than the more than $60-million the companies were claiming. But it is another decision putting Ottawa on the hook for international trade-related payments to be made as a result of actions taken by provincial governments.
In 2010, the federal government had to pay AbitibiBowater, now known as Resolute Forest Products, $130-million to settle a NAFTA complaint after former premier Danny Williams's decision to expropriate the company's mill in the province.
Prime Minister Stephen Harper said at the time he intended to "create a mechanism" under which Ottawa could reclaim money it was forced to pay because provincial actions violated the North American free-trade agreement.
"Ottawa and the provinces need to get together to resolve this issue so that it doesn't continue to be a problem in the future," Toronto trade lawyer Lawrence Herman said.
"It's a political issue rather than a legal one, it seems to me, and requires Ottawa and the provinces to settle it amongst themselves."
In the decision in favour of Exxon Mobil and Murphy, the panel found that a research-spending rule established by the Canada-Newfoundland and Labrador Offshore Petroleum Board contravenes the trade pact.
The companies challenged the rule after changes were made to it in 2004 requiring them to make additional research and development expenditures in the province related to their Hibernia and Terra Nova offshore oil projects.
The 2004 toughening up of the rule was based on the conclusion that the companies were not meeting their R&D commitments, said Scott Sinclair, senior research fellow at the Canadian Centre for Policy Alternatives.
As in the AbitibiBowater case, Newfoundland refuses to foot the bill for the payment ruling. It has also stated it has no intention of changing the offshore petroleum research spending rules.
And Ottawa could be held accountable for more payments: Exxon Mobil has filed a second claim with ICSID for the 2012-2014 time frame, company spokeswoman Margot Bruce-O'Connell said.
Department of Foreign Affairs and International Trade spokesman John Babcock said in an e-mail message the AbitibiBowater and Exxon Mobil cases are "2 different matters, each assessed on a case by case basis, based on individual facts" but that Ottawa is "considering all options" for decisions arising strictly from provincial policy or legislation.
Over the past 20 years, of the $175-million awarded under Chapter 11 of NAFTA to protect foreign investors' interests, "the vast majority was from one case (AbitibiBowater)," Mr. Babcock said.
With files from reporter Shawn McCarthy in Ottawa