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Lawyers, other representatives, expert(s), tribunal’s secretary

Award

TABLE OF ABBREVIATIONS
2004 Guidelines Guidelines for Research and Development Expenditures adopted by the Canada-Newfoundland Offshore Petroleum Board in November 2004
Arbitration Rules Arbitration (Additional Facility) Rules of 2006
BNA Ben Nevis Avalon
Board Canada-Newfoundland Offshore Petroleum Board
C-CORE Center for Cold Ocean Research
CA Claimants' Authorities
CE Claimants' Exhibits
Claimants Mobil Canada and Murphy Oil
CNLOPB or the "Board" Canada-Newfoundland and Labrador Offshore Petroleum Board
Counter-Memorial on Respondent's Counter-Memorial on Damages of October
Damages 19, 2012
CRA Canada Revenue Agency
Cl. Mem. Claimants' Memorial of August 3, 2009
Cl. Mem. on Damages Claimants' Memorial on Damages of July 23, 2012
Cl. Reply Claimants' Reply Memorial of April 8, 2010
Cl. Reply on Damages Claimants' Reply on Damages of November 30, 2012
Cl. P. Brief Claimants' Post-Hearing Brief (Redacted) of January 7, 2011
Cl. Reply P. Brief Claimants' Reply Post-Hearing Brief of January 31, 2011
Damages Hearing Hearing on damages of April 23, 2013
E&T Education and Training
HMDC Hibernia Management and Development Company Ltd.
Mobil Canada Mobil Investments Canada Inc.
MUN Memorial University of Newfoundland
Murphy Oil Murphy Oil Corporation

NAFTA North American Free Trade Agreement
NL Province of Newfoundland and Labrador
Parties Claimants and Respondent
POA Production Operations Authorization
Projects Hibernia and Terra Nova
R&D Research and Development
RA Respondent's Authorities
RE Respondent's Exhibits
Rejoinder on Damages Respondent's Rejoinder on Damages of January 25, 2013
Respondent Government of Canada
SR&ED Scientific Research and Experimental Development

I. INTRODUCTION

1.
On May 22, 2012, the Tribunal issued a Decision on Liability and on Principles of Quantum ("Decision"). By a majority, the Tribunal decided that the Guidelines for Research and Development Expenditures adopted by the Canada-Newfoundland Offshore Petroleum Board in November 2004 ("2004 Guidelines"), as applied to the investment projects Hibernia and Terra Nova ("Projects"), are not covered by Canada's reservation under Article 1108(1) of the North American Free Trade Agreement ("NAFTA") and therefore violate Article 1106 of the NAFTA. The majority of the Tribunal also concluded that the Claimants are entitled to recover damages incurred as a result of the breach, provided that the Claimants submit evidence of any such damages no later than 60 days of receipt of the Decision and that the Tribunal finds such evidence persuasive.
2.
Professor Philippe Sands Q.C. issued a Partial Dissenting Opinion ("Dissent") concluding that there was no breach of Article 1106 of the NAFTA and that, therefore, the question of damages does not arise. The Decision and Dissent are incorporated into this Award as Annex 1.

II. PROCEDURAL HISTORY

3.
The procedural history of this case leading up to the issuance of the Decision is contained in its paragraphs 7-33. This section provides the procedural history from the date of the Decision until the date of this Award.
4.
In accordance with the Tribunal's Decision, on July 23, 2012, the Claimants filed a Damages Submission ("Cl. Mem. on Damages"), accompanied by the Fourth Witness Statement of Paul Phelan and exhibits CE-249 to CE-337, as well as legal authority CA-267.
5.
On September 7, 2012, pursuant to Article 41(2) of ICSID Arbitration (Additional Facility) Rules ("Arbitration Rules"), the Respondent requested that the Tribunal order the Claimants to produce certain documents. By letter of September 17, 2013, the Claimants objected to the production. On October 3, 2012, the Tribunal decided to grant the Respondent's requests and ordered the Claimants to produce the relevant documents and information within one week from receipt of the Tribunal's decision. As a result, the Respondent was granted an extension to file its response to the Cl. Mem. on Damages. The Tribunal further invited the Parties to file a second round of written pleadings on damages.
6.
On October 10, 2012, the Claimants informed the Tribunal that they had no documents responsive to the Respondent's requests, as granted by the Tribunal. The Claimants therefore proposed that the Respondent file its response on damages within one week. On October 11, 2012, the Respondent countered that, in view of the fact that the Claimants had produced no documents, there be no Reply and Rejoinder. On October 16, 2012, the Tribunal directed the Respondent to file its response by October 24, 2012 and confirmed its previous directions concerning a Reply and Rejoinder.
7.
On October 19, 2012, the Respondent filed its Reply to the Claimants' Submission on Damages ("Counter-Memorial on Damages"). The submission was accompanied by a Fourth Expert Report of Richard E. Walck (including Annexes 1 and 2) and exhibits RE-65 to RE-72.
8.
Following a request for an extension granted by the Tribunal, the Claimants filed their Reply on Damages on November 30, 2012 ("Cl. Reply on Damages"), including a Fifth Witness Statement of Paul Phelan, Witness Statements of Paul Durdle and Ryan Noseworthy, exhibits CE-338 to CE-359 and legal authorities CA-268 to CA-271.
9.
Due to the extension of time for the filing of the Reply and Rejoinder, the Tribunal consulted the Parties and postponed the date for a potential hearing on damages (initially scheduled to January 15 and 16, 2013) to April 23, 2013.
10.
On January 25, 2013, the Respondent filed its Rejoinder on Damages ("Rejoinder on Damages"), accompanied by a Fifth Expert Report of Richard E. Walck, exhibits RE-73 to RE-96 and legal authorities RA-171 to RA-173.
11.
On March 27, 2013, following requests by the Parties concerning the conduct of the hearing on damages and admissibility of new documents, the Tribunal issued its Procedural Order No. 3 addressing these matters. In addition, the Order invited the Parties to comment on a number of questions posed by the Tribunal. The Parties subsequently responded to the Tribunal's queries by letters of April 9, 2013.
12.
On April 5, 2013, in accordance with Procedural Order No. 3, the Claimants sought to introduce ten new documents into the record. By letter of April 10, 2013, the Respondent objected to the admissibility of eight of the new documents.
13.
On April 12, 2013, the Tribunal issued Procedural Order No. 4 on the admissibility of the Claimants' new documents. It admitted exhibits CE-360 and CE-361 on certain conditions, reserved its position as to two other exhibits and declined to admit the remaining documents.
14.
On April 17, 2013, pursuant to the conditions in Procedural Order No. 4, the Claimants submitted exhibits CE-362 to CE-367 and CE-370 to CE-372.
15.
The Tribunal held the hearing on damages in Washington D.C. on April 23, 2013 ("Damages Hearing"). Pursuant to the Parties' agreement, the hearing was not open to the public. In addition to the Tribunal and the Secretary, the following persons were present:

On behalf of the Claimants :

Mr. David W. Rivkin, Debevoise & Plimpton LLP

Ms. Samantha Rowe, Debevoise & Plimpton LLP

Ms. Mary Grace McEvoy, Debevoise & Plimpton LLP

Mr. Tomasz J. Sikora, Exxon Mobil Corporation Mr. Nathan Baines, ExxonMobil Canada Mr. Roger Landes, Murphy Oil Corporation Mr. Paul Phelan, Witness

Mr. Paul Durdle, Witness Mr. Ryan Noseworthy, Witness

On behalf of the Respondent :

Mr. Nick Gallus, Counsel, Trade Law Bureau Mr. Mark Luz, Counsel, Trade Law Bureau

Mr. Adam Douglas, Counsel, Trade Law Bureau

Ms. Heather Squires, Counsel, Trade Law Bureau

Ms. Melissa Perrault, Paralegal, Trade Law Bureau

Ms. Annette Tobin, Senior Policy Advisor, Natural Resources

Mr. Matthew Tone, Senior Trade Policy Analyst, Department of Foreign

Affairs and International Trade

Mr. Jeff O'Keefe, Manager Resource Management, Chief Conservation

Officer, Canada-Newfoundland and Labrador Offshore Petroleum Board

Mr. Richard (Rory) E. Walck, Expert

16.
The hearing was recorded and a verbatim transcript was made.
17.
On May 14, 2013, the Tribunal requested that the Parties provide information on certain matters that arose at the Damages Hearing. The Parties subsequently responded to the Tribunal's queries by letters of May 28, 2013. The Respondent requested an opportunity to respond to certain points raised in the Claimants' letter of May 28, 2013 and this request was granted by the Tribunal on May 30, 2013. The Respondent submitted a further response by letter of June 12, 2013.
18.
On August 1, 2013, the Tribunal notified the Parties that it expected the Respondent to indicate its final position on a proposal made by the Claimants in relation to an aspect of their claim by August 16, 2013 (the "Proposal").
19.
The Parties each filed a statement of costs on August 14, 2013. The Claimants subsequently objected to the format of the Respondent's statement of costs.
20.
On September 12, 2013, the Tribunal directed the Respondent to file a statement of costs which was similar to that filed by the Claimants on August 14, 2013. Following an enquiry from the Respondent, on September 17, 2013, the Tribunal clarified that it did not wish to receive the Parties' arguments on the allocation of costs at that stage.
21.
On August 28, 2013, the Respondent wrote to the Claimants seeking further information to assist them in considering the Proposal. By letter of September 12, 2013, the Tribunal informed the Parties that it could not consider any further information that was provided in the letter from the Respondent or that might be provided in response to that letter.
22.
On September 17, 2013, the Respondent indicated that it could not accept the Proposal.
23.
On November 27, 2013 the Claimants were invited by the Tribunal to file observations on specific aspects of the Respondent's statement of costs filed on August 14, 2013. The Tribunal also indicated that the Respondent would be permitted to file a response to any submission the Claimants made. The Claimants subsequently requested, and were granted, an extension, filing their submission on costs on December 27, 2013. The Respondent filed a further response on January 17, 2014.
24.
The proceeding was closed on January 21, 2014.
25.
On January 22, 2014, the Parties informed the Tribunal that they had agreed on a standstill of the arbitral proceedings to pursue settlement discussions. They requested that the Award be released only in the event that the standstill were terminated. The Parties specified that the standstill could be terminated by either Party on providing notice to the other Parties and the Tribunal, and that the Tribunal may subsequently issue the Award after two weeks. By letter of January 22, 2014, the Tribunal took note of the Parties' agreement and confirmed that it would continue drafting its Award, which would be rendered after two weeks from the date of a notification by either Party that the standstill was terminated.
26.
On February 4, 2015, counsel for the Claimants notified the Tribunal of the termination of the standstill of the proceeding and requested that the Tribunal issue its Award as soon as possible after February 18, 2015. Accordingly, by letter of February 18, 2015, the Tribunal confirmed that it would proceed accordingly.

III. THE MAJORITY'S ANALYSIS

A. INTRODUCTION

27.
By a majority (the "Majority"), the Tribunal has found that the 2004 Guidelines, as applied to the Projects, breach Article 1106 of the NAFTA and this "gives rise to a right to claim compensation."1
28.
The Majority emphasized in the Decision that the Claimants must prove "that a call for payment has been made or that damages have otherwise occurred (i.e. that they are "actual")."2 The Decision indicated that money need not have been expended for compensation to be due, but there must, at minimum, be a "firm obligation to make a payment."3
29.
The Claimants claim losses in two distinct categories. First, claimed losses for "incremental spending" represent amounts that the Claimants have already spent on R&D or E&T4 as a result of the Guidelines. Such spending, according to the Claimants, would not have been undertaken in the ordinary course of business in the absence of the Guidelines. Second, the Claimants advance "shortfall" losses, being the difference between spending undertaken pursuant to the Guidelines and the spending required by the Guidelines.5 For the Claimants, the fact that they have been informed of the shortfall for Hibernia through to April 2012, and for Terra Nova through to December 2011, means that compensation is required as an actual call for payment has occurred. Thus, they should be compensated for both their incremental expenditures and the identified shortfall.
30.
The Respondent asserts that a significant portion of the Claimants' incremental spending is in fact spending which occurred in the ordinary course of business. The Claimants dispute this. Additionally, the Respondent argues that if any incremental spending is compensable, it should be reduced to reflect certain benefits that the Claimants have received as a result of such spending. These alleged benefits result from the Scientific Research & Experimental Development program ("SR&ED"), under which the Claimants receive tax credits for eligible R&D spending, and a Provincial program whereby R&D and E&T spending reduces the royalties payable to the Province on Project revenue.
31.
The Majority deals first with the Claimants' incremental spending claim, followed by the impact of the SR&ED and royalty deduction programs, and then turns to the claim resulting from the shortfall.
32.
By way of general remarks, the Majority notes that it has faced various difficulties in assessing the Claimants' losses. As the Claimants themselves have noted, the situation in these proceedings is a novel one. The regulatory regime from which the Claimants' alleged losses flow continues to operate. Thus, the situation involves a continuing or ongoing breach as applied to these Claimants, and (to the Majority's knowledge) has not been litigated before a NAFTA arbitral tribunal previously.6 The Decision dealt with some of the peculiarities that arise from this with regard to future damages, but other difficulties resulting from this fluid situation remain to complicate the Majority's task.7 The Tribunal has been asked in several instances to take into account events which have not yet occurred, which therefore by nature require a degree of conjecture, as a future event can never be supported completely by evidence or information.8 Conscious of this conjecture, the Majority has had to consider carefully the evidence that relates to or indicates the likelihood of a future event, and whether that evidence can meet the standards set forth in the Decision.9
33.
The Majority also notes that whilst it has not influenced its decision herein, some of the uncertainty surrounding this claim10 would not have arisen if the Claimants had opted to pay the amount of spending required under the Guidelines into a fund administered by the Board. Business imperatives apparently dictated otherwise.11 The consequence, however, of not having taken that approach has required an extensive examination of the rationale behind previous and ongoing expenditures without a clear baseline.
34.
The Majority's task at this stage in the proceeding has largely been an evidence-based one. Few purely legal matters remain between the Parties12 as the Decision sought to lay out principles which would apply to the determination of compensation and because the Parties were invited by the Tribunal in the Decision to submit evidence, rather than further legal argument.13

B. INCREMENTAL SPENDING

35.
The Claimants claim [REDACTED]14 in compensation for their incremental spending.15

(a) Parties' Positions

36.
The Claimants have sought to fulfill their obligations under the Guidelines in part via spending on R&D and E&T projects in the Province.16
37.
The fundamental disagreement between the Parties therefore, is whether expenditures claimed as incremental, can be said to be solely motivated by the Guidelines, and whether the Claimants would have abstained from such spending "but for" the Guidelines.17
38.
The Respondent says that in fact, a large part of the Claimants' spending would have taken place in the ordinary course of business in the absence of the Guidelines, or was motivated by other imperatives, and is thus not compensable. For the Respondent, there is therefore no causal link between the Guidelines and much of the spending for which the Claimants seek compensation.
39.
The Claimants accept that "ordinary course"18 spending is not compensable and claim compensation only for expenditures that they submit "would not have been made in the ordinary course of business in the absence of the Guidelines."19 Thus, the Claimants confirm that whatever spending they considered to be in the "ordinary course" has already been deducted from their claim.20 The Respondent holds that the Claimants have made insufficient deductions on this basis and "ordinary course" spending improperly remains part of the Claimants' damages claim.21
40.
The following categories are the different bases on which the Respondent says the Claimants spending is not incremental.22

(i) "Consistent with the Needs"

41.
The Respondent argues that any spending which is "consistent with the needs" of the Projects or directly relates to the "specific needs" of the Projects (such as, inter alia, expenditure to increase oil production or to improve safety) should be classified as "ordinary course" and is therefore not compensable.
42.
The Respondent says that the fact that spending is related to the needs of the Projects is evidenced in several ways, including: that it was "previously budgeted" in the Claimants' records;23 that it may benefit the Projects;24 that it was subject to an economic incentive,25 or that it was in line with a previously stated research aim or area of R&D.26 Moreover, the Respondent submits that safety-related spending was clearly ordinary course spending, inter alia because such spending was necessary.27
43.
The Claimants argue that "consistent with the needs of" the Projects is not necessarily synonymous with "ordinary course" and that by focusing on criteria such as this, the Respondent has "re-characterized" the relevant test.28 Claimants admit "that they have sought, in the first instance, to comply with their Guidelines obligations by undertaking incremental expenditures that would relate to the needs of the Projects" (emphasis added).29 Indeed, as their witness Mr. Phelan indicated "[s]ince the money must be spent in any event, we are actively looking for opportunities to undertake work that could at least be of some benefit to the project, even if it is unnecessary."30 For the Claimants, the relevant criterion is not whether spending is related to or benefits the Projects, but rather whether it was motivated by the Guidelines.
44.
The Claimants reject the Respondent's argument that R&D and E&T directed at enhancing oil production or the safety of the Projects is all ordinary course spending. Relying on the evidence of Mr. Noseworthy, they posit that the "idea that Claimants are in the business of undertaking R&D simply because it might ‘enhance oil recovery'" goes against common sense and the evidence.31 Similarly, while safety is a key concern for Exxon Mobil generally, there is a limit to spending on safety in the ordinary course.32 The Claimants also point to Exxon Mobil's strong safety record in the oil industry (which means that less R&D and E&T spending on safety is necessary). They allege they have in fact not sought compensation for the "vast majority of their safety-related expenditures."33

(ii) Spending Which Pre-dates the Guidelines

45.
The Respondent asserts that spending that was already ongoing or was conceived of prior to the Guidelines has not, by its very nature, been motivated by the Guidelines.34
46.
The Claimants argue that the Guidelines have precipitated a change in the character of the relevant spending or that the expenditure was entirely different to begin with. For the Claimants this is evidenced in several ways: that the spending was restructured, for example where it was transferred from the Project operator to the joint account of the Project owners (so it could be applied against the Guidelines), and/or the amount of spending was increased;35 or, that, despite a similar or the same description for preGuidelines versus post-Guidelines expenditures, it is in fact different in substance.

(iii) Spending Which Pre-dates 2009

47.
The Claimants' witness, Mr. Phelan, stated that "neither Hibernia nor Terra Nova made any incremental expenditures during the 2004-2008 period"36 (emphasis added). The Respondent thus concludes that R&D and E&T expenditure on projects which began before 2009 cannot be incremental.
48.
The Claimants argue that the expenditure that falls under this argument by the Respondent is either a) not the same expenditure that began prior to 2009;37 or b) if it is expenditure that began prior to 2009, only a portion of the costs involved in the overall expenditure (specifically costs related to transferring the expenditure to the Province) are claimed.38

(iv) Spending in Line with the Accord Acts and Benefit Decisions

49.
The Respondent argues that the Claimants were already obligated to spend on R&D and E&T prior to the implementation of the Guidelines.39 Therefore, any spending compatible with the Accords Acts and Benefits Decisions fails the "but for" test and must be deducted from the damages claimed.
50.
The Claimants, however, highlight that the Accord Acts and Benefit Plans set no ceiling or floor for spending, and argue (relying upon the language of the Decision) that the 2004 Guidelines, by contrast, require the Claimants to spend "millions of dollars beyond that which would have likely been spent but for the 2004 Guidelines."40 The Claimants' spending in 2000 and 2001, ranging between [REDACTED]41 was deemed consistent with the Benefits Plans by the Board.42 This spending level has, since the introduction of the Guidelines, been far exceeded; the Claimants say the timing of this increase indicates a causal link to the Guidelines. The Claimants further hold that even if the Accord Acts and Benefits Plans required R&D and E&T spending, the Respondent's argument would still fail, as "[e]xpenditures on specific R&D projects were never required by the Board before, or even since, the Guidelines, and Canada has not introduced any evidence that suggests otherwise."43

(b) The Individual Expenditures and the Majority's Findings

51.
The Majority starts by observing that the categories outlined above by the Respondent as the basis for construing whether spending is incremental or ordinary can be useful, but are not entirely dispositive. For example, the mere fact that an expenditure may be beneficial to the Claimants or Projects does not definitively answer whether it was undertaken as a result of the Guidelines or not. It is logical that if the Claimants were under an expenditure requirement, they would seek to make the necessary expenditures of some utility. Any sensible investor would not choose to make an expenditure that was wholly superfluous to the investment. If an expenditure was wholly superfluous, or contrived, it would indicate that it is incremental. But as with benefit, this also might not be determinative; the mere identification as superfluous would not necessarily capture the totality of the expenditures that are properly deemed incremental. Similarly, expenditure that predates the Guidelines may properly be seen as ordinary. However, even if an expenditure is related to a Project that predates the Guidelines, this may not in itself definitively answer the question of whether the continued expenditure is ordinary course or incremental. The absence of a clear baseline of pre-Guidelines expenditure has added considerable complexity to the Majority's task. The Majority finds itself thus obliged to consider the particular facts and characteristics of each of the identified and challenged expenditures, together with the related testimony and evidence before us, separately.
52.
Accordingly, the Majority now turns to the individual incremental expenditures and projects. The Majority notes at the outset that the burden of proof to show that each of the incremental expenditures would not have been made in the ordinary course of business in the absence of the Guidelines lies with the Claimants. The Majority has already noted in the Decision that the relevant standard of proof is "reasonable certainty," not "absolute certainty," and that damages must not be too speculative or remote.44
53.
The Majority faces the inherent difficulties of retrospectively applying the definition of "ordinary course" to R&D and E&T spending which was not conceived with this definition in mind. The Majority appreciates that the Claimants have had to conduct their assessment as to what spending was ordinary course subsequent to its occurrence or conception, and have sought to be conservative in doing so.45 Nonetheless, there are difficulties inherent in the kind of retro-fitting which the Claimants, and now the Majority, have to engage in to assess what spending may have been in the ordinary course. These difficulties however, do not relieve the Claimants of their burden of proof.46 The Majority is similarly not convinced by the Claimants' argument that uncertainty is to be construed against the wrongdoer.47 The Majority does not find this to be an applicable principle of international law as the Claimants allege.48 The Majority has relied upon the evidence it found to be the clearest indicator of spending being either ordinary course or incremental and has applied the "reasonable certainty" standard.49

(i) [REDACTED]

54.
The [REDACTED] was carried out by HMDC in 2010 and 2011 at the [REDACTED] which is "highly faulted,"50 "slot constrained" and "technologically challenged."51 The Claimants submitted that the [REDACTED] sought to understand "possible connectivity, or communication, across faults dividing reservoir blocks."52
55.
The Respondent argues that the [REDACTED] addresses the needs of Hibernia and that the Claimants themselves recognized the need for the study in Benefit and Development Plan Applications, which were subsequently approved by the Board with the [REDACTED] included as a condition.53 The Claimants say that they were required to [REDACTED] but that the [REDACTED] as such does not fall within that obligation.
56.
The Respondent also asserts that the Claimants' own witness (Mr. Graham) has stated that this expenditure was made in the ordinary course of business and that the Claimants' evidence indicates that the [REDACTED] was "previously budgeted" and therefore was made in the ordinary course.54 The Claimants object that the evidence relied upon to make these assertions has been misconstrued and taken out of context. Specifically, they say that Mr. Graham is not referring to the [REDACTED] as the Respondent alleges (he was instead referring to the broader obligation [REDACTED]55) and the label "previously budgeted" refers to a point in time that was part of the post-Guidelines timeframe, rather than pre-Guidelines.56
57.
The Majority accepts the Claimants' explanation of how the [REDACTED] inclusion in an internal accounting document as "previously budgeted" did not necessarily refer to a period pre-dating the Guidelines. The Majority also accepts that the Claimants' witness, Mr. Graham, in stating that the [REDACTED] was "ordinary course," referred instead to [REDACTED].57 The Majority finds, however, that the Claimants have not proven that the [REDACTED] is an incremental expenditure. Lack of clear evidence as to the differentiation between the [REDACTED] (which the Claimants accept was in the ordinary course of business), and the allegedly narrower [REDACTED] prevents the Majority from determining with requisite certainty that the [REDACTED] was not in the ordinary course of business.58

(ii) [REDACTED]

58.
The costs claimed in relation to this project are for the establishment, by HMDC, of a [REDACTED] which will carry out studies of enhanced oil recovery by [REDACTED],59 culminating in a pilot program referred to as the [REDACTED]60 The Claimants are under an obligation to "maximize recovery" at Hibernia pursuant to the Newfoundland Offshore Petroleum Drilling and Production Regulations.61 The [REDACTED] itself will not take place until 2014, and isthe second component of the project.62
59.
The Respondent argues that [REDACTED] has long been an R&D focus at Hibernia and this project is thus ordinary course spending. The Respondent also asserts, as it did with respect to the [REDACTED]63 that the [REDACTED] was "previously budgeted" and therefore was made in the ordinary course.
60.
The Claimants argue that Canada is conflating the [REDACTED] with earlier, unrelated work that was undertaken at Hibernia.64 They say that the evidence relied upon to conclude that the study was "previously budgeted" has been misconstrued and taken out of context. The Claimants' witness Mr. Noseworthy asserted that but for the Guidelines, [REDACTED] would not have been established, [REDACTED]65
61.
The Respondent also argues that the fact that some of the work relating to this project was carried out at [REDACTED] indicates that it is ordinary course expenditure, inter alia, because such expenditure cannot defray the Claimants' Guidelines obligations. The Respondent also points to a discrepancy in Mr. Noseworthy's statement regarding when [REDACTED] which was aimed at identifying whether [REDACTED]66 Mr. Noseworthy says that this [REDACTED] was post-Guidelines, the Respondent says that it was in fact done before the Guidelines.67 The Claimants concede that work relating to this project has been carried ou [REDACTED] but say that this does not indicate that the project is ordinary course. Rather, this can be explained by capacity limitations in the Province and an occasional need to carry out initial R&D elsewhere to get a project "off the ground."68
62.
The Majority finds that the Claimants have proven that this expenditure is incremental. As with the [REDACTED], the fact that the [REDACTED] was included in an internal accounting document69 as "previously budgeted" does not mean that this expenditure pre-dated the Guidelines.70
63.
[REDACTED]71 [REDACTED]72. This duplication is persuasive evidence that [REDACTED] represents an expenditure that was motivated by the Guidelines. It is also significant that initially the Claimants did not apply for pre-approval [REDACTED] this aspect was added later to the [REDACTED] which in turn was hoped would increase the likelihood that this expenditure met the Guidelines and would be pre-approved.73 These factors in combination demonstrate that this expenditure would not have been made in the ordinary course of business in the absence of the Guidelines. The Majority does not consider the fact that some work related to this project may have been carried out [REDACTED] to support that the project is ordinary course. Mr. Noseworthy’s explanations of why this was so are reasonable.74 Nor does the Majority find it significant (for determining whether or not this spending was incremental) that some of the preparatory work for this project may have been carried out in 2008.75 Costs relating to this work are not claimed by the Claimants and therefore this work and its timing and location are not relevant. [REDACTED]

(iii) [REDACTED]

64.
The Joint Industry [REDACTED] project aims to "develop and test new technologies" which might lead to [REDACTED] the Grand Banks region.76
65.
The Claimants argue that the cost and risks involved are such that it is apparent that this expenditure would not have been undertaken in the ordinary course of business.77
66.
The Respondent argues that this project aims to enhance oil recovery and therefore directly relates to the needs of Hibernia and Terra Nova and is thus in the ordinary course of business.78
67.
The fact that this expenditure was conducted jointly by [REDACTED] supports the Claimants' assertion that the project was not specifically needed at Hibernia, and rather, that it was Guidelines-motivated. The Claimants have convincingly explained that this type of joint approach is unusual and was a novel initiative that was a response to the Guidelines.79 The Majority notes however that the novel nature of this approach stems not only from the fact that it was a joint industry initiative, (this alone might be unsound given that the evidence indicates that the Claimants have been involved in joint projects before the Guidelines came into effect)80 but also because, inter alia, workshops were held to "devise both potential problems and their R&D solutions".81 The documents relating to these workshops clearly indicate that the R&D under discussion at the workshops were being discussed in the context of Guidelines compliance.82 Thus, the discussion of a project in these documents is a strong indicator (in combination with other factors) that it involved incremental spending.
68.
Further, it appears that this project was considered to be high risk and indeed has not been pursued vigorously. These characteristics of the project support the finding that it would not have been made in the ordinary course of business but for the Guidelines.
69.
The Respondent, for its part, has not convincingly rebutted the Claimants' assertion that this project was undertaken as an incremental expenditure and did not discuss this expenditure at the Damages Hearing.
70.
The Majority therefore finds that the Claimants have proven that this expenditure is incremental.

(iv) [REDACTED]

71.
The Claimants argue that they should be compensated pro-rata for a donation made by HMDC [REDACTED].84 For the Claimants, this [REDACTED] is not required for basic safety training and in the ordinary course of business HMDC would not have made this donation.85
72.
Spending on safety, the Respondent argues, however, is necessary for the Projects and therefore is in the ordinary course.86 Moreover, this donation is based on a [REDACTED]87 and would have been made in the absence of the Guidelines.88
73.
The Claimants reply that [REDACTED] was not, however, released until after the donation was made and did not recommend Hibernia's donation.89
74.
The Majority finds that the Claimants have established that this expenditure was incremental. The [REDACTED] that was funded went above and beyond what could be reasonably construed as "ordinary course" safety spending. Mr. Durdle's testimony refuted effectively that this expenditure [REDACTED] He pointed out that the timing of the expenditure did not correspond with [REDACTED] nor did the object of the expenditure.90 [REDACTED] which further confirms that the funding would not be part of the Claimants' "ordinary course" spending on safety.91 The Respondent has failed to show that this expenditure was necessary for safety at Hibernia or Terra Nova and thus would have been made in the ordinary course of business in the absence of the Guidelines.

(v) [REDACTED]

75.
The [REDACTED] which is a joint industry project conducted by [REDACTED]92 trains "workers to respond to emergencies."93 The relevant [REDACTED] are still under development.94
76.
The Claimants argue that any safety procedures or measures that follow from this project will not replace any of the current (ordinary course) training in place at Hibernia, and that this demonstrates that this project was instead precipitated by the Guidelines.95 The Claimants' witness, Mr. Durdle, was convincing in his explanation of how the more basic, "ordinary course" procedures [REDACTED]96 differ from this safety measure, demonstrating that the latter goes beyond ordinary course spending.
77.
The Respondent's arguments largely consist of questioning the statements of the Claimants' witness, rather than offering tangible evidence to refute them. The Respondent argues that spending on safety is necessary for the Projects and therefore would have been undertaken even in the absence of the Guidelines.97 However, it has failed to show that this particular expenditure was in any way specifically necessary for safety at Hibernia and it has not offered convincing rebuttal of the Claimants' assertion that this is incremental spending.98
78.
For the foregoing reasons, the Majority finds that the Claimants have proven that this expenditure is incremental.

(vi) [REDACTED]

79.
The [REDACTED] project is a joint industry project with the ultimate objective of developing [REDACTED]99
80.
The Respondent repeats that spending on safety is necessary for the Projects and therefore this spending would have been undertaken in the absence of the Guidelines.100 For the Respondent, the fact that part of the expenditure on this project was classified as ordinary course is indicative of the fact that the whole project was ordinary course.101
81.
The Claimants admit that certain expenditures in relation to the "exploratory" part of this project, which took place in 2009, are appropriately classified as ordinary course.102 However, as this was in line with the operator's desire to be a "good corporate citizen,"103 it does not mean that the remainder of the spending on this project was likewise in the ordinary course. The project in its final form, the Claimants say, is not necessary for the Projects and would not have been conducted absent the Guidelines.104
82.
The Claimants' witness, Mr. Durdle, convincingly describes how various aspects of this project are above and beyond standard requirements. For example, part of the project is aimed at the development of [REDACTED]105 At Hibernia, at the same time as the development of these [REDACTED] is proceeding, the regular [REDACTED] are being replaced with the same type of regular [REDACTED]. This seems highly suggestive of the exceptional nature of the spending on [REDACTED]. Mr. Durdle also convincingly described how the [REDACTED] equipment may not even ultimately be appropriate for use at either Hibernia or Terra Nova, which further supports the non-ordinary course nature of this project.106
83.
By contrast, the Respondent merely challenges statements by the Claimants and their witness, rather than offering any evidential basis to refute the Claimants' assertion.107 The Respondent has failed to show that this project was necessary for safety and/or in the ordinary course.
84.
For the foregoing reasons, the Majority finds that the Claimants have proven that this expenditure is incremental.

(vii) [REDACTED]

85.
The Claimants claim expenditure for a scoping study commissioned by Terra Nova, which was intended to "investigate/evaluate existing technologies for [REDACTED] propose potential new/enhanced technologies, and develop a plan (roadmap) for future research and development."108
86.
The Claimants point out that this vague project is merely a study to develop future studies, with no specific parameters or specifications, and that such a vague project is not something that would be undertaken in the ordinary course of business.109
87.
The Respondent says that spending on safety is necessary for the Projects and therefore would have been undertaken in the absence of the Guidelines.110 The Claimants' witness Mr. Durdle is unable to point to any specific features of this spending which distinguish it from ordinary course spending, other than that it is vague, and that to "come up with new studies without any defined parameters or specifications" is not a common approach.111 Mr. Durdle is moreover primarily engaged with the Hibernia Project and he appears relatively unfamiliar with this project, which was centered on Terra Nova. Mr. Durdle merely claims to have been "aware of its content".112
88.
The Majority therefore finds that the Claimants have not proven that this is an incremental expenditure.

(viii) [REDACTED]

89.
The [REDACTED]113 It was first created in 1998 and was initially funded by Petro Canada,114 in the amount of [REDACTED] per annum. In 2009 the funding for [REDACTED] was doubled and transferred to Terra Nova's joint account.115
90.
The Respondent says that the Claimants have been funding [REDACTED] since 1998.116
91.
The Claimants dispute this, arguing that they did not fund [REDACTED] prior to 2009.117
92.
The Majority finds that the Claimants have proven that this expenditure was incremental.
93.
The Majority is persuaded that the Claimants did not contribute to the funding of [REDACTED] until the Guidelines came into effect.118 This is significant and probative of a causal link to the Guidelines. Whilst the funding of [REDACTED] was occurring pre Guidelines, it was borne by a different entity and was of a lesser amount. This expenditure was not spending the Claimants themselves were undertaking until the Guidelines came into effect.

(ix) [REDACTED]

94.
The Claimants claim compensation for their donation [REDACTED]"119
95.
The Respondent says that the "Claimants" have been donating [REDACTED] since 2003 and that this is therefore an expenditure that "pre-dates" the Guidelines and should thus not be compensable.120 The Claimants accept that "Petro-Canada has provided relatively minor funding for [REDACTED] since 2003"121 but highlight that the Claimants themselves never contributed to this donation program.
96.
The Majority finds that the Claimants have proven that this expenditure was incremental. Similar to the [REDACTED] it is significant that this donation was not spending that the Claimants were willing to undertake until the Guidelines came into effect.

(x) [REDACTED]

97.
The Claimants request compensation for the costs of [REDACTED]122 In order for this [REDACTED] to occur in Newfoundland, it was necessary to [REDACTED]123
98.
The Claimants are only claiming the costs of relocating the [REDACTED] to the Province as incremental spending (as opposed to the cost of the [REDACTED] itself).124 This part of the spending, the Claimants argue, is clearly linked to the Guidelines. The transfer of this [REDACTED] to Newfoundland, they say, is "an excellent example of the distorted business practices Claimants have been forced to adopt as a result of the Guidelines."125
99.
The Respondent argues that this expenditure relates to an [REDACTED] that "has long been conducted outside of the Province"126 and that this [REDACTED] "pre-dates" the Claimants' attempts to comply with the Guidelines via incremental spending and thus cannot now be construed as incremental.127
100.
The Majority finds that the Claimants have proven that these expenditures are incremental. The evidence offered by the Claimants that this project was moved to Newfoundland so that it would be Guidelines-compliant (combined with the timing of this move) indicates a clear causal link with the Guidelines.128 The fact that the [REDACTED] has been conducted for some time elsewhere is irrelevant in light of the fact that the Claimants claim only the cost of transferring the expenditure to the Province.

(xi) [REDACTED]

101.
The Claimants claim compensation for costs related to improving the [REDACTED] to improve safety, operational efficiency and capability in existing and Arctic frontier regions."129
102.
The Respondent says that the Claimants have participated in this type of project since 1999 and that this is therefore an ongoing expenditure, conceived of before the Guidelines, and is therefore not incremental.130
103.
The Claimants argue that the Respondent confuses this incremental expenditure with pre-Guidelines work (also focused on [REDACTED]) undertaken by Petro-Canada/Suncor as an individual owner company.131
104.
The Majority finds that the Claimants have proven that this expenditure was incremental.
105.
The [REDACTED] at issue in these proceedings appears to be far more extensive than previous work focused on [REDACTED] both in terms of scope and costs.132 Further, additional factors such as that Hibernia's fundamental structure is not susceptible to [REDACTED],133 and that this project was conceived at a joint industry workshop,134 lead the Majority to believe that this expenditure is properly characterized as incremental.

(xii) [REDACTED]

106.
The [REDACTED] aims to develop new [REDACTED] specifically via the "development of a [REDACTED] for application of [REDACTED]."136
107.
The Respondent refers to the Claimants' witness' testimony to argue that the project began in 2007 and "pre-dates" the Claimants' attempts to comply with the Guidelines via incremental spending and should thus not be compensable.137 Moreover, this project is consistent with ExxonMobil's R&D priorities, which for the Respondent indicates that it is ordinary course spending.138
108.
For the Claimants, the 2007 project was completed that same year and the [REDACTED] that was proposed in 2010, i.e. well after the implementation of the Guidelines, and the commencement of their attempts to comply with them began in earnest, is a separate expenditure.139 However, the Claimants' evidence clearly describes this 2010 project as "Phase II" in several instances.140 The Claimants further argue that ExxonMobil's concomitant R&D priorities elsewhere in the world are irrelevant to assessing whether this Terra Nova expenditure constitutes an incremental expenditure.141
109.
The Majority finds that the Claimants have not proven that this is an incremental expenditure. They have not effectively refuted the Respondent's argument that this project is a phased project that was conceptualized prior to the introduction of the Guidelines. The Claimants have not offered an adequate explanation of this descriptive feature, which suggests that this project originated prior to the time at which the Claimants indicate they began carrying out incremental spending.

(xiii) [REDACTED]

110.
[REDACTED] focused R&D142 is aimed at advancing, inter alia, "the state of " [REDACTED]143 and the [REDACTED]144
111.
The Respondent argues that the expenditures related to these projects fit within the Claimants' pre-Guidelines commitments and therefore cannot be incremental.145 It further asserts that this type of R&D is directed towards the specific needs of the Projects.146
112.
The Claimants say that pre-Guidelines compatibility is irrelevant to the question of whether or not the expenditure was incremental. The Guidelines imposed a threshold for R&D spending.147 This means that even if an expenditure is compliant with the preGuidelines regime, it does not necessary follow that it was not motivated by the Guidelines.
113.
The Majority finds that the Claimants have proven that these expenditures were incremental.
114.
The Majority notes that the R&D spending commitments under the Benefits Plans (the pre-Guidelines regime) were nonspecific.148 It is difficult, and inappropriate, for the Majority to now seek to translate these nonspecific commitments into pre-Guidelines spending requirements which would function as a baseline. The Respondent’s arguments that rely on pre-Guidelines regime spending compliance are thus ineffective.
115.
The Majority also finds several aspects of the Claimants’ evidence persuasive. Foremost, the projects at issue were conceived of at a joint industry workshop. Such a workshop, as the Claimants’ witness Mr. Noseworthy has explained, is not how the Claimants would conduct and plan R&D in the ordinary course.149 Further, the serious nature [REDACTED] in this context150 aligns with Mr. Noseworthy’s statements that this research would have been undertaken earlier were it important, and that the Projects already have systems to address [REDACTED] These various aspects support the Claimants’ assertion that this spending was Guidelines-motivated.

(xiv) [REDACTED]

116.
The Claimants seek compensation for [REDACTED] that will operate under the auspices of the [REDACTED] and will conduct [REDACTED].151
117.
The Respondent submits that this project fits within the Claimants' pre-Guidelines commitments and therefore cannot be incremental.152
118.
The Claimants posit that pre-Guidelines compatibility is irrelevant to the question of whether or not the expenditure was incremental.153
119.
The Majority finds that the Claimants have proven that [REDACTED] entails incremental expenditure.
120.
[REDACTED] functions as an [REDACTED] which, as the Claimants point out, is accessible to all and can be used by their competitors.154 The Majority finds particularly convincing the Claimants' observation that this type of sharing arrangement is not representative of the manner in which Projects normally carry out "ordinary course" R&D spending. The finding that this expenditure is incremental is also supported by the timing of its inception (which was in 2010),155 which is clearly in line with the time period when the Claimants began to comply with the Guidelines in earnest.156
121.
Further, the Majority again notes that the R&D spending commitments under the Benefits Plans (the pre-Guidelines regime) were general and unspecified. It is inappropriate for the Majority to now seek to translate these pre-Guidelines spending requirements into a particular baseline. The Respondent's arguments are thus unconvincing in this regard.

(xv) [REDACTED]

122.
The Claimants’ spending on this [REDACTED] in 2011 entails funding which will initially provide for the [REDACTED] that it is hoped will [REDACTED] Ultimately direct binding for the [REDACTED] will be provided.157
123.
For the Respondent, this expenditure is consistent with pre-Guidelines commitments.158 Indeed, the Respondent says, the Projects have funded [REDACTED] since 1986.159
124.
The Claimants hold that the fact that Projects have funded [REDACTED] in the past is irrelevant. The current incremental [REDACTED] (of [REDACTED]) furthermore far exceeds pre-Guidelines funding by Hibernia and is for a different purpose, according to the Claimants.160 Thus, even if the Claimants accepted that pre-Guidelines compatibility rendered certain expenses non-compensable (which they do not), this expenditure would be distinguishable.
125.
The Majority finds that the Claimants have proven that this is an incremental expenditure.
126.
Regarding the Respondent’s argument that this spending is in accordance with the preGuidelines regime, the Majority has already outlined its view that the mere fact that an expenditure is consistent with the pre-Guidelines regime does not resolve whether it is introduced as a result of the Guidelines or not.161
127.
The Majority finds the timing of this funding to be probative of a causal link to the Guidelines; the previous funding for [REDACTED] began in 1986 and continued until 1991. This amounts to a 20 year break in funding for or related to [REDACTED] The reinstitution of this type of funding is convincingly explained by the inception of the Guidelines.

(xvi)

128.
The Respondent accepts that the Claimants have spent [REDACTED] related to E&T and R&D that are incremental.162 The Majority therefore does not need to engage in discussion as to whether these expenses are incremental.

(c) Total Spending Determined to be Incremental by the Majority

129.
The Majority finds that the Claimants have proven that [REDACTED] worth of their expenditure was incremental and is compensable (subject to the adjustment discussed below163), as indicated above and set forth in the table below:

Expenditure ⁄ ProjectOrdinary CourseIncremental Expenditures164Share Mobil CanadaShare Murphy Oil
[REDACTED] [REDACTED] [REDACTED]
[REDACTED] [REDACTED] [REDACTED]
[REDACTED] [REDACTED]
[REDACTED] [REDACTED] [REDACTED]
[REDACTED] [REDACTED] [REDACTED]
[REDACTED]
[REDACTED]
[REDACTED]

C. SR&ED (TAX) CREDITS

130.
The SR&ED tax program is self-assessing. The Claimants assess and identify the portion of R&D expenditures that are eligible for credit under the program and reduce their tax liability in their annual returns accordingly.165 The applicable deduction rate is 32% (i.e. the Claimants deduct from their tax payable 32% of the value of R&D expenditures self-assessed to be eligible). The self-assessed amounts can be audited by the Canadian Revenue Authority ("CRA") for up to four years after the CRA issues a Notice of Assessment, which is issued "with all due dispatch" after the Claimants file their tax returns (reflecting the credits claimed).166
131.
Prior to the Damages Hearing, the Claimants offered to deduct from the compensation they claim the SR&ED "credits" that they have self assessed and included in their tax returns to date.167 If however, at a later date, the CRA denies any of the credits that Claimants have deducted from their damages, Claimants will have to pay the CRA the amount of that credit. Under the terms of the offer, the Canadian government will then have to reimburse the Claimants the amount of that credit, which they had to pay to the CRA.
132.
At the Damages Hearing, the Claimants also indicated that they could (alternatively) withdraw their claims for tax credits so that if the Majority compensated them for incremental expenditures there would be no danger of overcompensation.168 The Claimants have since indicated that this is not a possible course of action for [REDACTED] (a necessary step in fulfilling this offer).169
133.
The Respondent ultimately rejected the offer made by the Claimants to settle the question of SR&ED credits.170

(a) Parties' Positions

134.
The Respondent argues that the Claimants are receiving the benefit that these credits result in now and that if they are not deducted from the Claimants' damages the Claimants will enjoy a windfall.171 Thus, for any incremental spending the Majority finds to be compensable, a 32% deduction should be applied.172
135.
For the Claimants, the SR&ED credits (nor the deductions from their tax payable) are not "final," or enjoyed in any "relevant sense"173 because they have not yet been made subject to an audit by the Canadian government authorities and can therefore still be denied.
136.
The Claimants argue that it is far from certain that the CRA will in fact confirm the entirety of the credits that the Claimants have claimed. The Respondent disputes this. To these ends, the Parties differ on the historic and overall acceptance rate of self-assessed SR&ED credits by CRA, using Hibernia as an example. The Claimants put the acceptance rate at [REDACTED] through 2009,"174 whereas the Respondent points to the high rate of acceptance from 2007 to 2009 (either [REDACTED] or [REDACTED])175 and argues that the Claimants have in fact conceded that the overall acceptance rate for Hibernia is [REDACTED].176
137.
Further, the Respondent says that the Claimants' "offers" demonstrate that they themselves agree there should be a deduction to their damages to reflect the SR&ED credits they enjoy. The Claimants dispute this, explaining that whilst they have never sought to "double dip," this does not mean that they agree that the Majority should make deductions from their compensation now. Rather, this simply demonstrates that the Claimants are willing to work with the Respondent to achieve other solutions to this issue that ensure that they are not left out of pocket.

(b) Majority's Finding

138.
The Majority finds that it is appropriate to deduct from the compensation granted to the Claimants under this Award an amount that reflects the benefits that they, by their own account, have received as a result of the SR&ED program. This will result in a 32% deduction to the amount the Majority has determined to be incremental spending where the expenditure appears to be eligible under the SR&ED program. So far as the Majority is aware, the Claimants have not indicated exactly which of their incremental expenditures they consider eligible and/or have used as a basis for claiming credits under the SR&ED program.177 The Majority therefore is necessarily guided by the indications of the Respondent's expert in in this regard.178 Accordingly, applying the 32% discount to the relevant incremental expenditures leaves a compensable amount of CDN$ [REDACTED] due to Mobil Canada and CDN$ [REDACTED] due to Murphy Oil.179
139.
The Majority arrives at this finding by virtue of several aspects of the evidence and arguments that were put before it. Foremost, there is a significant likelihood that the Claimants will have the benefit they have already received confirmed. There is a clear record of a high acceptance rate for self-assessed credits under this program, at times reaching [REDACTED] even on the Claimants’ own evidence.180 No evidence has been presented to indicate that the CRA would change its practice with respect to SR&ED credit regime.
140.
The Majority also finds it significant that the (potential) audit process for the SR&ED program is relatively short, and does not entail any punitive claw-back provisions.181

D. Royalty Deductions

141.
Similar to the SR&ED program, the royalty deduction program allows the Claimants to self-assess deductions from the royalties on revenue that they pay to the Province,182 based on their R&D expenditure.183 Royalties are paid to the Province on a monthly basis and deductions to royalties for R&D are made monthly as well.184 The deduction rates are [REDACTED] of the relevant expenditure for Hibernia and [REDACTED] of the relevant expenditure for Tena Nova.185 The royalty deduction program is governed by Provincial regulations and royalty agreements pertaining to each of the Projects.186 The deductions that the Claimants make are subject to review and audit. The audit process for each of the Projects differs, but can take from five to seven years to resolve.187 If the Province ultimately determines, via the audit process, that certain deductions were invalid, these must be repaid to the Province with interest. The applicable interest rate for Terra Nova is prime + 2% and for Hibernia [REDACTED] (in both cases dating back to the month in which the relevant R&D expenditure was made).

(a) Parties' Positions

142.
For the Claimants, it is "simply too speculative" to determine at this time whether or not they will ultimately enjoy these royalty deduction benefits, such that there should be a deduction to the compensation granted to them by this Majority.188 The Claimants also object that this uncertainty is of the Respondent's making, for the Respondent could simply guarantee that the deductions will be confirmed. If the Respondent did so, the Claimants would be happy to have a deduction applied to the compensation awarded by this Tribunal. They point to the fact that the Province is yet to audit any royalty payments from 2006 onwards, saying it is therefore unclear how R&D spending under the Guidelines will be treated in the royalty deduction program.189
143.
The Claimants argue that it is significant that the royalty regulations which apply to both Projects190 provide that if a cost which is eligible (here R&D expenditure) is offset in some way (i.e. by an award of damages in these proceedings), that cost becomes ineligible as the basis for a royalty deduction.191 Thus, any deductions that the Claimants have made on the basis of R&D may ultimately be deemed ineligible for royalty deductions if they are also compensated as incremental expenditure by this Tribunal. At the Damages Hearing, the Respondent argued that it is not clear that the provisions of the royalty regulations and Hibernia Royalty Agreement would lead to such a claw back.192
144.
As with the SR&ED credits, the Claimants have emphasized that they do not seek to "double dip" and that if they ultimately receive confirmation of the deductions they have made to their royalty payments, they will return any amount of overcompensation to Canada.193 Indeed, the Claimants have expressed that they are willing to have this Award direct them to do so.194
145.
The Respondent argues that the Claimants are enjoying the benefits of the royalty deduction program now (a fact which it asserts the Claimants have themselves accepted).195 To avoid overcompensation to the Claimants, these savings should therefore be deducted from any compensation awarded. The Respondent relies upon the fact that the Claimants have offered to deduct these savings from their damages under certain conditions to argue that indeed, the Claimants agree that there should be a deduction.196 The Respondent asserts that it is impermissible for the Tribunal to rely upon or include in this Award any kind of enforceable order or direction that the Claimants repay any amount of overcompensation at a later date. This would be outside the boundaries of the Tribunal's powers pursuant to Article 1135 of NAFTA.197 The only option for the Tribunal is to deduct the royalty-based benefits at the present time.
146.
Regarding the Claimants' assertion that Respondent could rectify the uncertainty (which is of the Respondent's making) surrounding royalty deductions, the Respondent says that it has "no authority to ‘guarantee' a result" in this way (i.e. that it ensure the royalty deductions are ultimately confirmed).198

(b) Majority's Finding

147.
For several different reasons, the Majority finds that there should be no deduction to the Claimants' compensation to reflect deductions made under the royalty regime applicable to the Projects.199
148.
First, it appears far from certain that the deductions the Claimants have applied to royalties will ultimately be confirmed. [REDACTED]200 Unlike for the SR&ED tax credits regime, the Majority was not presented with reliable historical data showing acceptance rates for royalty deductions.
149.
The Majority observes that the audit process, which applies to the royalty deductions, is very lengthy201 and the interest rate that is applied to any amount the Claimants must repay for Hibernia is very high, bordering on the punitive. Thus, were the Majority to reduce the Claimants' compensation as requested, the Claimants may well be left in a situation (many years hence202) where they are not only out of pocket but, for Hibernia, faced with a substantial penalty to pay in addition.
150.
Secondly, it is a possibility that the royalty deductions will be clawed back. The Province may, relying on provisions in the regulations and royalty agreement for Hibernia,203 seek repayment of the deductions related to R&D expenditures for which the Majority granted compensation. This in turn creates a possibility that if the Majority reduced the Claimants' compensation to reflect royalty deductions, the Claimants may later be left undercompensated. Whilst the Majority recognizes that this is not an absolute certainty, the relevant provisions of the regulations and royalty agreement indicate it is a possibility that warrants refusing the Respondent's request for deduction.

E. SHORTFALL

151.
The Claimants claim CDN$ [REDACTED] in shortfall-related losses, being the pro-rated amounts for which Murphy Oil and Mobil Canada are responsible (CDN$ [REDACTED] and CDN$ [REDACTED] for Hibernia and Terra Nova respectively).204 The Board has requested that a promissory note secured by a letter of credit be provided as security for the Hibernia shortfall amount205 and letters of credit have been put in place to secure the Terra Nova shortfall amount.206

(a) Parties' Positions

152.
The Claimants posit that the notifications of shortfalls that they have received constitute a "call for payment" within the terms of the Decision.207 Additionally, the fact that the notification has been followed by a requirement that the Projects provide letters of credit to underwrite the shortfalls, and the accompanying risk that if the letters of credit are not provided, the Projects' POAs may not be renewed, is further evidence of a call for payment.208
153.
The Respondent says that it is likely that a great deal of the Claimants' shortfall will be met with spending on R&D that is "ordinary course" spending.209 Such ordinary course spending is not compensable and the Claimants are therefore not entitled to the full shortfall amount. The Respondent argues that a reduction should also be made to reflect the fact that the Claimants will likely meet some of the shortfall with spending that is consistent with their obligations under the Accord Acts and Benefits Decisions.210
154.
The Terra Nova shortfall, the Respondent says, is in fact already slated to be eliminated via a large R&D project211 [REDACTED] which the Claimants have recently had pre approved by the Board.212 Similarly, the Respondent points to the fact that the Claimants' witness Mr. Phelan has made statements that indicate that their Hibernia shortfall will be "spent down."213 The Respondent argues that this too, may be ordinary course spending.
155.
The Claimants allege that the Respondent accepts that they are entitled to the shortfall as compensation "as a matter of law."214 For the Claimants, the Respondent's arguments regarding "ordinary course" spending and compatibility with the Accord Acts and Benefits Decisions are an unwarranted attempt to chip away at the Claimants' losses.215 It is far from clear, argue the Claimants, that they will spend money on R&D to meet their shortfall. They may instead simply allow the Board to draw down the letters of credit that are held by the Board.216 In the event that the Claimants do spend on R&D to meet the shortfall, and if that spending is "ordinary course," the Claimants will not claim these amounts in future proceedings and this will allow for any necessary reconciliation.217 The Respondent rejoins that the Claimants' evidence demonstrates that it is in fact likely that they will spend down the shortfall on R&D, and that it is inappropriate for this Tribunal to rely on the possibility of future proceedings to ameliorate the danger of overcompensation that is therefore present.218

(b) Majority's Finding

156.
The Majority finds that the shortfall is only partially compensable.
157.
The Majority observes that the shortfall is comprised of the difference between the spending required under the Guidelines over a particular POA period and the total spending undertaken by the Projects over that particular POA period. The shortfalls for both Projects over the first POA period after implementation of the 2004 Guidelines (2004 to 2008) were "spent down" fully by the Claimants.219 However, the shortfalls in the subsequent POA period, 2009 to 2011 (April 2012 for Hibernia), have, to the best of our knowledge, not yet been eliminated.220
158.
The Decision has indicated that in principle, shortfall amounts may be compensable, if their quantum is ascertainable with sufficient certainty and if there has been a call for payment. However, at this time, the Majority finds itself confronted by two key challenges: first, whether the Claimants have in fact received a "call for payment." Second, the possibility that the current shortfalls will be mitigated by future ordinary course expenditures.
159.
Regarding the first issue, the Majority notes that the notification by the Board of the shortfall and the attendant actions associated therewith are not a conventional call for immediate payment. Rather, they amount to a call for the Claimants to fulfill their obligations, with a request for a guarantee. The practice has been that the Board's notification and attendant actions are merely the first steps in a process whereby the Claimants may ultimately take several different courses of action to fulfill their obligation: via spending on R&D (either incremental or ordinary course); or via payment into an R&D fund.221 The letters of credit that are in place are best considered an interim measure; they may be amended and adapted to whatever course of action the Claimants take in meeting the shortfall.222
160.
More crucially, regarding the second issue, the Majority is concerned that compensating the entirety of the shortfall, as the Claimants request, may result in prefinancing of ordinary course expenditures. The Majority is not comforted in this regard by the Claimants' assurance that any future ordinary course expenditures financed by this compensation will be off-set in any future claim or reconciliation proceedings.223
161.
The Majority also finds parts of the Respondent's approach to shortfall problematic. In particular, Respondent's argument that the Accord Acts and Benefit Decisions dictated a quantifiable minimal obligation of spending and that some of the Claimants' projected shortfall expenditures should be deemed to be in conformity with such obligation [REDACTED] for Hibernia, and [REDACTED] for Terra Nova)224 has been found unconvincing and inapplicable elsewhere herein.225
162.
The Majority feels obligated to develop an understanding of possible spending by the Claimants in the immediately foreseeable future that may mitigate the shortfall in the specific POA period being examined herein. The Majority notes that the situation with respect to shortfall differs between the Projects. As discussed below, there are reasonably certain, large future expenditures at Terra Nova that are likely to eliminate its existing shortfall completely. The same is not true for Hibernia, and the Projects' shortfalls are therefore dealt with separately below where relevant.
163.
Whereas the previous shortfall was fully met through the Claimants' spending, the present shortfall has not been extinguished and its final composition is thus currently undetermined (whether it will be met by incremental or ordinary course spending, or otherwise). As previously mentioned, the Claimants could have extinguished the shortfall by placing the full amount into a Board-administered R&D Fund, or insisting the Board draw down the letters of credit. The Claimants did not do so.
164.
For Terra Nova, as noted above, the Majority finds it reasonably certain that the shortfall will cease to exist via projected expenditures on the [REDACTED] which targets [REDACTED] It is also reasonably certain that, as they have done in the past by arrangement with the Board, the Claimants will use the expenditure on this project to eliminate the existing shortfall for Terra Nova. The fact that the Claimants have sought Board approval for this project is clear indication thereof. Given this reasonable certainty that the shortfall for Terra Nova will cease to exist in the foreseeable future, it is not appropriate, in the Majority's view, that this Tribunal compensate the Claimants at this time for the existing Terra Nova shortfall. The Majority notes that as they have done so in these proceedings, the Claimants may claim whatever portion of the [REDACTED] spending they believe is incremental, in later proceedings.
165.
By contrast, for Hibernia, the Majority accepts that the shortfall is partially compensable at present. Both the Claimants and Respondent agree on the initial compensability of the shortfall at Hibernia,226 but differ as to the possible future ordinary course spending that should be accounted for in the present compensation assessment. Whereas the Claimants demand full compensation upfront, but offer not to claim resulting pre-financed ordinary course spending in possible future proceedings, Respondent suggests applying a historic ratio (based on spending in the 2009-2011 period) to differentiate the Claimants' future ordinary from incremental spending.227
166.
The Majority was, in the Decision, reluctant to engage in speculative predictions of the future.228 The Majority does not have the same concerns in using the historical incremental spending ratio over this specific POA period (as against some far distant past or future period) to estimate what proportion of the current Hibernia shortfall may be reduced or extinguished with ordinary course spending. The Majority is acutely aware that it cannot predict ordinary course spending well into the future – and neither would it be appropriate for it to attempt to do so. However, it is comfortable with the projection (based on historical data and practice) it is carrying out for a very narrow future time period. The projection allows the Majority to make a reasonable approximation of what portion of the shortfall may be met with incremental spending and is therefore compensable. This current assessment necessarily leaves unprejudiced the compensability of shortfall damages over future POA periods, or indeed the compensability of spending not accounted for here, that the Claimants ultimately believe is incremental.
167.
The Majority therefore accepts, in principle, the application of the historic ratio between incremental and ordinary course spending, as suggested by the Respondent. However, whilst the Majority accepts this, it believes that the percentage of [REDACTED] posited by the Respondent requires adjustment. The [REDACTED] figure was derived from information regarding the ratio of ordinary course versus incremental spending provided by the Claimants. The Respondent's expert Mr. Walck arrived at the [REDACTED] figure by examining the 2009 to 2011 spending that was applied (by agreement with the Board) to the 2004 to 2008 shortfall. The Majority has adjusted the calculations to reflect our findings on historical incremental and ordinary course spending discussed above and to include the spending which it has determined was not incremental spending.229
168.
The Majority has also made some other minor adjustments in calculating the historical ratio of incremental spending. These adjustments include:

a. calculating the ratio across all spending that was undertaken in that POA period, not just across the spending from 2009 to 2011 that was applied to the 2004 to 2008 shortfall. The Tribunal believes this provides a more accurate and complete picture, and thus a more accurate historical ratio for present purposes;

b. calculating the ratio over the period 2009 to April 2012, rather than across 2009 and 2011, as this is the current Hibernia POA period; and

c. calculating the ratio based on Mobil and Murphy's proportion of the Hibernia project spend.

169.
In light of the foregoing, the Majority finds that the applicable historical ratio is [REDACTED] incremental spending / [REDACTED] ordinary course spending.230 The Claimants are therefore granted [REDACTED] of the claimed shortfall amount for Hibernia of respectively CDN$ [REDACTED] for Mobil and CDN$ [REDACTED] for Murphy.231 Consequently, Mobil Canada is entitled to CDN$ [REDACTED] and Murphy Oil is entitled to CDN$ [REDACTED] as compensation for the relevant shortfall.232

IV. OTHER MATTERS

A. INTEREST

B. COSTS

171.
The Claimants' legal fees and expenses incurred in the arbitration amount to US$ 8,204,365.40 (up until the Decision the legal fees and expenses amounted to US$ 7,103,207.50 and the remaining US$ 1,101,157.80 pertained to the damages phase of the proceeding).240 They have advanced US$ 525,000 on account of the fees and expenses of the Members of the Tribunal and the ICSID administrative fees and expenses (the "Arbitration Costs"), and a lodging fee of US$ 25,000. The Claimants seek an award of the entirety of these costs.
172.
The Respondent's legal fees and expenses amount to CND$ 5,363,229.70 (CND$ 4,507,481.19 of which related to the proceeding on merits and on principles of quantum). It has advanced US$ 525,000 to ICSID.241
173.
The Respondent initially requested that the Claimants be ordered to pay the costs and legal fees of Canada.242 In its Statement of Costs of August 14, 2013, it requested the Tribunal to decide that the Parties should bear their own legal costs and share equally the Arbitration Costs. The Respondent argued that (i) ICSID and other tribunals have refused to award costs when the claimant failed to establish all alleged treaty breaches or recovered significantly less damages than claimed, meaning that there was no "unsuccessful party" in those cases; (ii) tribunals have consistently not awarded costs against parties that raised legitimate arguments, even if those arguments did not ultimately prevail, or where the dispute raised novel issues as in this case; (iii) the proceeding involved unnecessary costs due to unscheduled submissions filed by the Claimants and the Damages Hearing requested by the Claimants.243
174.
In their observations on the Respondent's Statement of Costs, the Claimants maintained their position that the Respondent should bear the Claimants' legal fees and expenses and the Arbitration Costs, arguing that the Tribunal should apply the "Costs Follow the Event" rule.244 The Respondent counter-argued that the "Costs Follow the Event Rule" is not a prevailing principle in investment treaty arbitration and that both the NAFTA and the ICSID Additional Facility give full discretion to the Tribunal to award costs.245
175.
Although the Parties disagree on the allocation of costs, they agree that the Tribunal has broad discretion to decide how and by whom the Arbitration Costs and the legal costs and expenses incurred by the Parties in connection with the proceeding shall be borne, pursuant to Article 58 of the Arbitration Rules and the NAFTA.
177.
Having considered all the circumstances of this arbitration, in the exercise of its discretion, the Tribunal has concluded that it is fair and appropriate that both sides bear the Arbitration Costs in equal share and that each side bears its own legal and other costs.246

V. AWARD

178.
On the basis of the foregoing, the Tribunal decides:

a. That Canada shall pay Mobil Canada and Murphy Oil respectively CDN$ 10,310,605 and CDN$ 2,273,635 as compensation for incremental expenditures. These amounts shall bear interest at the 12-month Canadian Dollar LIBOR rate + 4%, compounded monthly, from July 23, 2012 to the date of this Award.

b. That Canada shall pay Mobil Canada and Murphy Oil respectively CDN$ 3,582,408 and CDN$ 1,127,612 as compensation for shortfall.

c. That the Parties shall bear their own legal and other costs in relation to this proceeding, and shall bear the Arbitration Costs in equal share.

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