What does the Northern Gateway pipeline proposal have in common with the government of Argentina's attempts to restructure its bonds?
While both sagas have stoked national passions, the answer is that both are struggles over property rights. And both illustrate a vexing problem in law and economics: the holdout problem. Amazingly, a controversial Canadian legal doctrine is an elegant, if unwitting, solution.
The holdout problem is a problem of co-operation. When one person needs to consolidate the legal rights of a group of people in order to make a project work, the last person to agree can extract tremendous concessions, in theory, up to the full value of the project.
The Northern Gateway pipeline project looks like a classic example of the holdout problem. The Enbridge proposal to build a pipeline from Alberta's oil sands to the West Coast, which was recently quashed by the Federal Court of Appeal, has faced a number of hurdles from the start.
In order for the pipeline to work, Enbridge must acquire a strip of continuous land from the Alberta oil fields to the B.C. coast. If the land were owned unencumbered by a single entity such as the Canadian government, Enbridge could negotiate a deal and build the pipeline with relative ease. If each parcel of land was owned by individuals with strong property rights, any landholder could extract concessions from Enbridge because each landholder could block the project.
Often, the holdout problem becomes a major issue of public policy. And, in each case, the law deals with the problem a bit differently. Controversial U.S. eminent domain laws allow the government to seize private property for "public use" – which may include selling blighted, privately held lands to developers – for "just" compensation.
Similarly, when drafting bond indentures, attorneys generally include a "collective action clause" which allows debtors to modify the terms of a bond if a supermajority of bondholders agrees with the changes. Argentina's sovereign debt crisis can be traced to the country's failure to include these clauses in its government bonds. This allowed a group of hedge funds holding only 7 per cent of Argentina's bonds to thwart Argentina's proposed restructuring and force the country into default.
The Northern Gateway pipeline faces a unique Canadian variant of the holdout problem. The potential "holdouts" in the best position to block the project are a diverse group of First Nations bands with claims to the land of varying strength. Although Canadian constitutional tradition provides that the Crown has ultimate title to all Canadian lands, the Crown's ability to dispense with its lands are limited by aboriginal treaty rights or, where there are no treaties, Aboriginal Title, a legal doctrine that nobly, if imperfectly, attempts to reconcile First Nations practices with European legal traditions.
First Nations don't have an absolute right to hold out like Argentine bondholders, but the government can't simply transfer the land to Enbridge through eminent domain. Courts are stuck attempting to balance two important, but often conflicting, policy concerns: the rights of aboriginals to use their and the right of the Crown to exercise its underlying title to the land as it sees fit.
The upshot is that First Nations can collectively or individually object to a Crown plan but can't hold out in the classic sense. The Crown's rights are also limited by imposing a duty to consult First Nations over their substantive claims and grievances. Far from being token discussion, as the Federal Court of Appeals' decision to effectively quash the Northern Gateway Pipeline illustrates, consultation must be "real" and "meaningful".
The Crown's duty to consult, while often criticized for being complicated, cumbersome, and vague, has, in a quintessentially Canadian way, removed any issues of the holdout problem from what seems like the conventional holdout problem. The Crown can no more use the blunt-force of eminent domain to acquire land than any First Nations group can extract concessions simply by being the last to agree.
Our law transforms an issue of price into an issue of consultation. What could be more Canadian than that?
Adrian Myers is a lawyer at Torkin Manes LLP.