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Decision on Liability and Principles of Quantum

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
BIT Bilateral Investment Treaty
BNA Ben Navis Avalon
Board Canada-Newfoundland Offshore Petroleum Board
CAPP Canadian Association of Petroleum Producers
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
CRA Canada Revenue Agency
CUSFTA Canada-United States Free Trade Agreement
Cl. Mem. Claimants' Memorial of August 3, 2009
Cl. Reply Claimants' Reply Memorial of April 8, 2010
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
Cl. Response 1st Art. 1128 Claimants' Response to 1st Article 1128 Submissions of Mexico and the United States of America of September 1, 2010
Cl. Response 2nd Art. 1128 Claimants' Response to 2nd Article 1128 Submissions of Mexico and the United States of America, of February 7, 2011
DPC Development Phase Credit
E&T Education and Training
FET Fair & Equitable Treatment
FTC Free Trade Commission
GATT General Agreement on Tariffs and Trade
GDP Gross Domestic Product
HCOM Host Country Operational Measures
HBP Hibernia Benefits Plan
HMDC Hibernia Management and Development Company Ltd.
MAI Multilateral Agreement on Investment
Mex. 1st Art. 1128 First Article 1128 Submission of Mexico, of July 8, 2010
Mex. 2nd Art. 1128 Second Article 1128 Submission of Mexico, January 21, 2011
MNC Multinational Corporation
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
OECD Organization for Economic Cooperation and Development
POA Production Operations Authorization
PRAC Petroleum Research Atlantic Canada
R&D Research and Development
RA Respondent's Authorities
RE Respondent's Exhibits
Respondent Government of Canada
R. Counter Respondent's Counter Memorial of December 1, 2009
R. Rejoinder Respondent's Rejoinder Memorial of June 9, 2010
R. P. Brief Respondent's Post-Hearing Brief of December 3, 2010
R. Reply P. Brief Respondent's Reply Post-Hearing Brief of January 31, 2011
SR&ED Scientific Research and Experimental Development
TNBP Terra Nova Benefits Plan
TRIMS Agreement on Trade Related Investment Measures
UNCTAD United Nations Conference on Trade & Development
U.S. 1st Art. 1128 First Article 1128 Submission of the United States of America, of July 8, 2010
U.S. 2nd Art. 1128 Second Article 1128 Submission of the United States of America, of January 21, 2011
VCLT Vienna Convention on the Law of Treaties
WTO World Trade Organization

I. INTRODUCTION AND THE PARTIES

A. INTRODUCTION

1.
This case concerns a dispute submitted to the International Centre for Settlement of Investment Disputes ("ICSID" or "Centre") under the Centre's Additional Facility Rules, on the basis of Chapter Eleven of the North American Free Trade Agreement ("NAFTA"). The dispute relates to two petroleum development projects: the Hibernia and Terra Nova projects off the coast of the Province of Newfoundland and Labrador in Canada (hereinafter "the Projects"). The Claimants allege that Guidelines for Research and Development Expenditures adopted in 2004 by the Canadian Newfoundland and Labrador Offshore Petroleum Board (the "2004 Guidelines") are more restrictive and onerous than the provisions of existing agreements concerning the Projects requiring the Claimants to undertake certain minimum research and development expenditures, as adopted under the Accord Act (enacted by Canada in 1994) and implementing laws. The 2004 Guidelines allegedly require the Claimants and other investors in offshore petroleum projects to pay millions of dollars per year for research and development in the Province of Newfoundland and Labrador. As a result of the promulgation and enforcement of the 2004 Guidelines, the Claimants assert that Canada has breached the performance requirement prohibition in NAFTA Article 1106 and the minimum standard of treatment guarantee in NAFTA Article 1105.

B. THE PARTIES

2.
The Claimants are Mobil Investments Canada Inc. and Murphy Oil Corporation ("the Claimants"), two corporations incorporated under the laws of the State of Delaware, United States of America. They are represented in this proceeding by Mr. David W. Rivkin, Ms. Jill van Berg, Ms. Samantha J. Rowe, Ms. Sophie Lamb of the law firm of Debevoise & Plimpton LLP, Mr. Barton Legum of the law firm of Salans, Mr. Rene J. Mouledoux, Mr. Tomasz J. Sikora and Mr. Eugene J. Silva of Exxon Mobil Corporation, as well as Mr. Walter Compton of Murphy Oil Corporation.
3.
Mobil Investments Canada Inc. ("Mobil Canada") is an indirect subsidiary of Exxon Mobil Corporation, a corporation organized under the laws of New Jersey, United States of America. It controls a 33,125% share in the Hibernia Oil Development Project ("Hibernia") through its ownership and control of companies incorporated in Canada, including a corresponding interest in the company that operates the project, Hibernia Management and Development Company Ltd. ("HMDC"). Mobil Canada indirectly controls a 22% share in the Terra Nova Oil Development Project ("Terra Nova"), which is an unincorporated joint venture with other energy companies.
4.
Murphy Oil Corporation ("Murphy Oil") indirectly owns a 12% share in Terra Nova,1 and a 6.5% share in Hibernia through its ownership of companies incorporated in Canada.
5.
The Respondent is Canada, represented by Mr. Nick Gallus, Mr. Mark Luz, Mr. Adam Douglas and Mr. Pierre-Olivier Savoie, all from Trade Law Bureau of the Department of Foreign Affairs and International Trade Canada.
6.
Both the United States of America and Canada are contracting States to the NAFTA. The USA has been a contracting State to the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the "ICSID Convention" or "Convention") since 1966. Canada has yet to ratify the Convention.

II. PROCEDURAL HISTORY

7.
On November 2, 2007, the Secretary-General of ICSID received a Request for Arbitration ("the Request") for institution of proceedings under Article 2 of the Arbitration (Additional Facility) Rules, submitted by the Claimants against the Government of Canada. Simultaneously, the Claimants submitted a request for approval of access to the Additional Facility under its Article 2(a). On December 19, 2007, the request for approval of access to the Additional Facility was approved pursuant to Article 4(2) of the Additional Facility Rules, and the Request was registered by the Secretary-General pursuant to Article 4 of the Arbitration (Additional Facility) Rules.
8.
On November 5, 2008, in the absence of an agreement between the parties on the number of arbitrators and the method of their appointment, the Claimants invoked Article 1123 of the NAFTA and appointed Professor Merit E. Janow, a U.S. national, as an arbitrator.
9.
On November 6, 2008, the Respondent requested that the Secretary-General issue an order taking note of the discontinuance of the proceeding pursuant to Article 51 of the Arbitration (Additional Facility) Rules. Article 51 provides that the parties shall be deemed to have discontinued the proceeding if they "fail to take any steps in the proceeding during six consecutive months or such period as they may agree with the approval of [...] the Secretary-General," and that the "Secretary-General shall, after notice to the parties, in an order take note of the discontinuance." According to the Respondent, there was no step in the proceeding in the six months prior to the Claimants' letter of November 5, 2008. It argued that certain communications exchanged between the parties during the period could not be viewed as "steps in the proceeding" under Article 51. According to the Respondent, Article 51 provides for an automatic discontinuance in these circumstances.
10.
On November 10, 2008, the Claimants filed observations opposing the Respondent's request. They argued that discontinuance could only occur after due notice from ICSID and that, in any event, the parties' actions and communications in view of reaching an amicable resolution of the dispute following the registration of the Request must be considered as "steps." The Claimants further stated that a discontinuance would only serve to delay the proceedings because it would result in the Claimants' immediate resubmission of the same request for arbitration.
11.
The parties submitted a further round of observations on the Respondent's request for discontinuance on November 14 (Respondent) and 19 (Claimants). On December 10, 2008, the Acting Secretary-General rejected the request for discontinuance based on the principle in dubio pro actione, since it was not clear that the actions of the parties in the relevant period would all fail to qualify as "steps" for the purposes of Article 51, or that termination of the proceeding would automatically result from the parties' inaction, irrespective of any notice by the Centre. The Acting Secretary-General thus invited the parties to continue with the process of constituting the Tribunal pursuant to Article 1123 of the NAFTA.
12.
On December 18, 2008, the Respondent appointed Professor Philippe Sands, a British and French national. On March 2, 2009, the parties jointly appointed Professor Hans van Houtte, a Belgian national, as the President of the Tribunal. The Tribunal was deemed to be constituted and the proceeding to have begun on March 9, 2009, in accordance with Article 13 of the Arbitration (Additional Facility) Rules. Mr. Marat Umerov, Counsel, ICSID, was designated as the Tribunal's Secretary and was later replaced by Ms. Martina Polasek, Senior Counsel, ICSID.
13.
Pursuant to Article 21 of the Arbitration (Additional Facility) Rules, the Tribunal held its first session with the parties in New York on May 6, 2009. Among other matters, the parties agreed that the applicable arbitration rules would be the ICSID Arbitration (Additional Facility) Rules of April 2006, except to the extent that they were modified by Section B of NAFTA Chapter 11. The parties also agreed that the procedural language would be English, that hearings would be held in Washington D.C. and that the International Bar Association Rules on the Taking of Evidence (IBA Rules) would be taken into account to the extent that this may be useful. The parties further agreed on a tentative timetable for the proceeding and that the Tribunal could consider non-disputing party submissions in accordance with the recommendations of the NAFTA Trade Commission.
14.
Following a proposal made by the parties, the Tribunal issued a Confidentiality Order at the first session for the protection of confidential information. The Order set out provisions concerning the designation of confidential information which could only be used in the present arbitration proceedings and be disclosed solely to persons identified in the Order. It further provided for public hearings, but that, at the request of a party, the Tribunal would hold in camera sessions during a hearing to protect confidential information. If a party wished to disclose certain materials from the proceedings to the public, it could do so provided that it gave the other party thirty days notice so as to give it an opportunity to identify and redact confidential information from such materials.
15.
The parties were unable to reach an agreement on the place of arbitration at the first session (Articles 19 and 20 of the Arbitration (Additional Facility) Rules, Article 1130 of the NAFTA). The Claimants proposed Washington, D.C., USA, while the Respondent proposed St. John's (Newfoundland and Labrador) or Ottawa (Ontario), Canada. If a place in Canada were to be selected, the Claimants proposed Toronto (Ontario). The parties made oral submissions on this issue at the first session and filed further written submissions following certain questions from the Tribunal.
16.
In the meantime, on August 3, 2009, pursuant to the procedural timetable agreed by the parties, the Claimants filed their Memorial. The Memorial was accompanied by six witness statements by Andrew Ringvee, Cal Buchanan, Ed Graham, Paul Phelan, Rod Hutchings and Ted O'Keefe and three expert reports by Howard Rosen, Sarah A. Emerson and W. David Montgomery, as well as exhibits and legal authorities.
17.
On October 6, 2009, the Respondent filed a request for production of documents. The parties filed several rounds of comments on the Respondent's request (the Claimants' submissions of October 28 and November 21, and the Respondent's submissions of October 29 and November 25, 2009).
18.
On October 7, 2009, the Tribunal issued Procedural Order No. 1, designating Toronto as the place of arbitration. In reaching its decision, the Tribunal took into account a range of factors, including the neutrality of the courts, Article 22 of the UNCITRAL Notes, the proximity of evidence and the ability to obtain evidence, and various arbitration statutes. As the Claimants had requested that the Ontario Superior Court of Justice have exclusive jurisdiction if Toronto were selected, the Tribunal invited the parties to comment on the request. The parties subsequently agreed that the Ontario Superior Court of Justice would be the exclusive court of the place of arbitration in which any and all applications concerning the arbitration would be filed. On November 5, 2009, the Tribunal issued Procedural Order No. 2 confirming the parties' agreement.
19.
On November 30, 2009, the Tribunal issued a decision on the Respondent's request for production of documents, granting certain requests and denying others.
20.
The Respondent filed its Counter-Memorial on December 1, 2009, including five witness statements by Ray Gosine, Charles Randell, Frank Smyth, Fred Way and John Fitzgerald, three expert reports by Peter A. Davis, Wade Locke and Richard E. Walck, as well as exhibits and legal authorities.
21.
On March 15, 2010, the Claimants submitted a request for production of documents in the form of a Redfern Schedule which included the Respondent's comments. The Tribunal ruled on the Claimants' request in a decision of March 27, 2010.
22.
The Claimants filed a Reply on April 8, 2010, including two supplementary witness statements by Paul Phelan and Andrew Ringvee, two supplementary expert reports by Sarah Emerson and Howard Rosen, as well as exhibits and authorities. By letter of April 30, 2010, the Respondent requested the Tribunal to order the Claimants to supplement their Reply with a quantification of damages. After hearing the Claimants' comments, the Tribunal decided that the Claimants were free to state the amount of their claim in due course, provided however that they used the method of evaluation of damages used in their submissions. Any new methodology would be viewed as new evidence and would only be admissible with the prior authorization of the Tribunal.
23.
On May 24, 2010, the Tribunal issued a decision on production of documents concerning the second request made by the Respondent.
24.
The Respondent filed a Rejoinder on June 9, 2010, including supplementary witness statements by Frank Smyth, Fred Way, John Fitzgerald and Ray Gosine, supplementary expert reports by Davies, Noreng and Walck, as well as exhibits and authorities.
25.
In accordance with the timetable agreed upon at the first session of the Tribunal, the Governments of the USA and Mexico filed their respective written submissions under NAFTA Article 1128 on July 8, 2010, to which the Claimants and the Respondent submitted their respective replies simultaneously on September 1, 2010.
26.
On August 6, 2010, the Claimants submitted their Updated Damages Calculations, to which the Respondent responded on September 8, 2010.
27.
The Tribunal held the oral hearing on the merits in Washington D.C. from October 19 to October 22, 2010. 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. Sophie Lamb, Debevoise & Plimpton LLP Ms. Jill van Berg, Debevoise & Plimpton LLP Ms. Samantha Rowe, Debevoise & Plimpton LLP Mr. Bart Legum, Salans

Ms. Toni Hennike, Exxon Mobil Corporation Ms. Anna Taylor Knull, Exxon Mobil Corporation Mr. Walter Compton, Murphy Oil Corporation Mr. Nathan Baines, Exxon Mobil Canada Ltd.

Mr. Rene Mouledoux, Exxon Mobil Corporation Mr. Paul Phelan, Witness

Mr. Andrew Ringvee, Witness Ms. Sarah Emerson, Expert Mr. Howard Rosen, Expert

On behalf of the Respondent :

Mr. Hugh Cheetham, Director and General Counsel, Department of Foreign

Affairs and Trade, Trade Law Bureau

Mr. Nick Gallus, Counsel, Trade Law Bureau

Mr. Mark Luz, Counsel, Trade Law Bureau

Mr. Adam Douglas, Counsel, Trade Law Bureau

Mr. Pierre-Olivier Savoie, Trade Law Bureau

Mr. Gordon Voogd, Natural Resources Canada

Mr. Matthew Tone, Foreign Affairs and International Trade Canada

Ms. Margaret Gillies, Government of Newfoundland & Labrador

Mr. Paul Scott, Government of Newfoundland & Labrador

Mr. Peter A. Davies, Expert

Mr. Richard (Rory) E. Walck, Expert

Mr. Frank Smyth, Witness

Mr. Fred Way, Witness

Mr. John Fitzgerald, Witness

28.
Representatives of the United States and Mexico were also present at the hearing. The hearing was open to the public, except for certain portions that the parties had designated as confidential, pursuant to the Tribunal's Order of May 6, 2009. The hearing was recorded and a verbatim transcript was made. At the end of the hearing, the Tribunal put certain questions to the parties, which were addressed during the closing arguments and subsequently in the parties' Post-Hearing Briefs.
29.
After the hearing, by letter of October 26, 2010, the United Mexican States and the United States of America were invited to provide clarifications concerning their respective submissions made pursuant to NAFTA Article 1128.
30.
By joint letter of November 5, 2010, the parties made certain proposals concerning a posthearing calendar, which the Tribunal approved by letter of November 9, 2010, and in which it also ruled on certain disagreements between the parties. Accordingly, the parties filed their first Post-Hearing Briefs simultaneously on December 3, 2010, addressing the other party's closing arguments made at the hearing, and the Tribunal's questions handed to the parties during the hearing. Following an objection from the Respondent concerning the length of the Claimants' Post-Hearing Brief and the number of new accompanying legal authorities, the Tribunal granted an extension until January 31, 2011 for the parties to file their Reply Post-Hearing Briefs, directing the parties to select a maximum of six authorities relied upon in regard to a question posed by the Tribunal. The Claimants submitted their list of selected authorities on December 23, 2010, and an amended Post-Hearing Brief which discussed only those authorities on January 7, 2011. Pursuant to the Tribunal's directions, the parties submitted their Reply Post-Hearing Briefs on January 31, 2011.
31.
On invitation by the Tribunal, the United States and Mexico filed clarifications to their first NAFTA Article 1128 submissions on January 21, 2011. The parties submitted their responses to these submissions on February 7, 2011. Following objections by the Respondent that the Claimants had addressed questions, in their February 7 response, that went beyond the Tribunal's directions, on February 18, 2011, the Tribunal ruled that Part III of the Claimants' response would not be considered as part of the record.
32.
By a letter dated June 23, 2011, the Tribunal posed questions to the parties as to the meaning of the words "the measure" in NAFTA Annex I, paragraph 2(f)(ii). The Claimants responded on July 29, 2011, followed by the Respondent on August 2, 2011. Both parties replied to the other's responses on August 26, 2011. The non-disputing NAFTA Parties were also invited to state their position but declined to do so.
33.
Each party filed a statement of costs on November 9, 2011.

III. FACTUAL BACKGROUND

34.
This section provides a background to the parties' dispute, the underlying facts of which are for the most part undisputed. It describes the regulatory framework governing research and development ("R&D") and education and training ("E&T") expenditures of petroleum operators in the Province of Newfoundland and Labrador ("NL" or "Province") (A); the Hibernia and Terra Nova projects (B); and how the regulatory framework was applied to the projects (C), including the events leading up to this arbitration.

A. THE REGULATORY FRAMEWORK

1. The Accord Acts

35.
The conduct of petroleum projects in the NL offshore area is governed by parallel Federal and Provincial legislation: the Canada-Newfoundland Atlantic Accord Implementation Act, 1987, c. 32 (the "Federal Accord Act") and the Canada-Newfoundland and Labrador Atlantic Accord Implementation Newfoundland and Labrador Act, R.S.N.L. 1990, c. C-23. (the "Provincial Accord Act"). The Federal Accord Act and the Provincial Accord Act are collectively known as the "Accord Acts." The Accord Acts implement the Canada-Newfoundland Atlantic Accord, an agreement between the Federal Government of Canada and the Province of NL concerning the joint regulation of the offshore petroleum sector (the "Atlantic Accord").4 The main purpose is to provide a legal regime for resource management, and revenue sharing to promote economic growth and development in NL, in particular, and Canada as a whole.

(a) The Board

36.
The Accord Acts established the Canada-Newfoundland Offshore Petroleum Board5 (the "Board"), which regulates oil development projects in NL. Operators of offshore oil projects wishing to exploit a field in the area must submit proposals which are subject to approval by the Board. The proposals consist of a Development Plan concerning the general approach of developing an oil field and a Benefits Plan explaining the process by which benefits would accrue to NL and Canada. The Board also approves the extraction of oil for specific periods of time through the granting of a Production Operations Authorization ("POA"). A POA may be conditioned on requirements set by the Board and can be suspended or revoked if an operator fails to comply with any condition on which it was granted.6

(b) Benefits Plans

37.
Section 45 of the Accord Acts entitled "Canada-Newfoundland Benefits Plan" provides as follows:

(1) In this section, "Canada-Newfoundland benefits plan" means a plan for the employment of Canadians and, in particular, members of the labour force of the Province and, subject to paragraph (3)(d), for providing manufacturers, consultants, contractors and service companies in the Province and other parts of Canada with a full and fair opportunity to participate on a competitive basis in the supply of goods and services used in any proposed work or activity referred to in the benefits plan.

(2) Before the Board may approve any development plan pursuant to subsection 139(4) or authorize any work or activity under paragraph 138(1)(b), a Canada-Newfoundland benefits plan shall be submitted to and approved by the Board, unless the Board directs that that requirement need not be complied with.

(3) A Canada-Newfoundland benefits plan shall contain provisions intended to ensure that before carrying out any work or activity in the offshore area, the corporation or other body submitting the plan shall establish in the Province an office where appropriate levels of decision-making are to take place;
consistent with the Canadian Charter of Rights and Freedoms, individuals resident in the Province shall be given first consideration for training and employment in the work program for which the plan was submitted and any collective agreement entered into by the corporation or other body submitting the plan and an organization of employees respecting terms and conditions of employment in the offshore area shall contain provisions consistent with this paragraph; expenditures shall be made for research and development to be
carried out in the Province and for education and training to be provided in the Province; and
first consideration shall be given to services provided from within the Province and to goods manufactured in the Province, where those services and goods are competitive in terms of fair market price, quality and delivery.

(5) The Board may require that any Canada-Newfoundland benefits plan include provisions to ensure that disadvantaged individuals or groups have access to training and employment opportunities and to enable such individuals or groups or corporations owned or cooperatives operated by them to participate in the supply of goods and services used in any proposed work or activity referred to in the benefits plan.

(6) In reviewing any Canada-Newfoundland benefits plan, the Board shall consult with both Ministers on the extent to which the plan meets the requirements set out in subsections (1), (3) and (4).

(7) Subject to any directives issued under subsection 42(1), the Board may approve any Canada-Newfoundland benefits plan."

38.
Section 151.1 of the Federal Accord Act, dealing with Regulation of Operations, provides as follows:

(1) The Board may issue and publish, in such manner as the Board deems appropriate, guidelines and interpretation notes with respect to the application and administration of Sections 45, 138 and 139 or any regulations made under Section 149.

(2) Guidelines and interpretation notes issued pursuant to subsection (1) shall be deemed not to be statutory instruments for the purposes of the Statutory Instruments Act."

39.
As per Section 45.3, a Benefits Plan must contain a proposal for R&D and E&T expenditures to be carried out in NL by the project proponent. Under the Atlantic Accord the expenditures must be approved by the Board.7 The Accord Acts themselves do not specify any fixed amount or percentage of revenue to be spent on R&D and E&T under the Benefits Plan.

(c) Guidelines

40.
The Accord Acts authorize the Board to adopt guidelines with respect to the application and administration of the Benefits Plan requirements.8

(i) 1986 Guidelines

41.
The Board adopted the first set of Benefits Plan guidelines, the Guidelines for Benefits Plan Approval and Reporting Requirements for Exploration Activities in the Newfoundland Offshore Area, in 1986 (the "1986 Guidelines").9 The 1986 Guidelines stated that Benefits Plans must include "proposed expenditures and activities on research and development [and education and training] to be carried out within the Province."10 Annual reports were also required to that effect. The 1986 Guidelines also stated that further "[g]uidelines for expenditure amounts, etc. [would] be developed by the Board."11

(ii) 1987 Guidelines

42.
In 1987, the Board issued the Exploration Benefits Plan Guidelines: Newfoundland Offshore Area (the "1987 Guidelines").12 The 1987 Guidelines applied only to the exploration phase of the projects and did not apply to the development and production phases. They provided at s. 3.5:

"Section 45(3)(c) of the legislation requires that a Benefits Plan contain provisions intended to ensure expenditures are made for research and development and education and training in the Province. The company is expected to outline its plans in this regard by describing its program and identifying the expenditure amounts."

43.
The 1987 Guidelines also provided that

"[w]hen preparing a Benefits Plan, a company should state its intentions concerning... utilization of Newfoundland and other Canadian firms and institutions to undertake research and development" and "assistance to. private and public training institutions in identifying and developing suitable pre-employment training programs."13

The 1987 Guidelines further stated that they "may be revised from time to time following consultation with the industry."14 These guidelines were updated in 2006.

(iii) 1988 Guidelines

44.
In 1988, the Board issued the Development Application Guidelines: Newfoundland Offshore Area (the "1988 Guidelines").15 Despite the title, these guidelines did not specifically address the development and production phases of a project. They did, however, provide guidance with respect to the preparation of a Benefits Plan. The 1988 Guidelines provided that project proponents were expected to describe "specific education and training programs, including associated expenditures," and their plans concerning the "utilization of Newfoundland and other Canadian firms and institutions to undertake offshore-related research and development; and proposed research and development projects, and associated expenditures to be carried out in the Province pursuant to Sections 45(3)(c) of the Acts."16 The 1988 Guidelines further stated that "[i]t is the Board's intention to...require submission, by the proponent, of project expenditure and employment reports on a regular basis. Details of the Board's monitoring and reporting requirements will be established in consultation with the proponent after submission of the Benefits Plan."17

(iv) 2004 Guidelines

45.
In November 2004, the Board issued the guidelines which gave rise to the dispute that is the subject of this arbitration, the Guidelines for Research and Development Expenditures (the "2004 Guidelines,").18 The 2004 Guidelines state in relevant part:

"2.0 Required Expenditure Commitments

R&D expenditures in the development phase of projects tend to focus primarily on education & training activities, whereas it is expected that in the production phase there will tend to be more focus on research & development activities. Both will be legitimate and eligible expenditures in either phase of a project. Further an operator, or group of operators, may propose an R&D program in lieu of the requirement of the guidelines. The acceptability of such a proposal will be assessed by the Board.

2.1 Exploration Phase

From 2003 on, during the exploration phase, R&D expenditures up to a maximum of 5 percent of the expenditure bid will be allowed.

2.2 Development Phase and Production Phase

In the absence of experience on which to base a benchmark for such expenditures, the C-NOPB examined the levels of such expenditures by petroleum companies in Canada. These data (Statistics Canada, Catalogue No. 88-202-X1B) reveal that R&D expenditure by oil and gas extracting companies in Canada averaged about 0.6 percent of revenue between 1995 and 2000.

Establishing a benchmark (B) based on industry practice in Canada seems to be a reasonable approach and the Board will apply the most recent five-year data reported by Statistics Canada. The Total R&D expenditure (TRr&d) during the development and production phase will be determined by the Statistics Canada benchmark for oil and gas extraction companies, total recoverable oil (RO) as defined by the approved Development Plan and the long term oil price (LTOP) as follows:

TRr&d = B x (RO x LTOP)

A similar calculation will apply to the production of Natural Gas Liquids and Natural Gas.

2.2.1 Development Phase

Experience to date has been that R&D expenditures during the development phase of a project have amounted to approximately 0.5 percent of total project capital cost (C). The C-NOPB accepts this as a reasonable R&D expenditure level for the development phase of a project. The development phase R&D expenditure (DPr&d) will be calculated as follows:

DPr&d = 0,005 x C

2.2.2 Production Phase

The production phase R&D expenditure requirement will be calculated for each project for the period covered by each Productions Operations Authorization (POA) issued by the Board.

The production phase R&D expenditure requirement (PPr&d) will be calculated as the difference between the Total Requirement (TRr&d) and the development phase requirement (DPr&d), as follows:

PPr&d = TRr&d - DPr&d

The production phase expenditure requirement will be distributed over each POA period during the production life of the project in proportion to production. In other words the requirement for each POA period will be the same proportion of the production phase R&D expenditure requirement as production in that POA period is of total anticipated project production.

At the end of each POA period, there will be a re-calculation based on actual production levels and prices.

[…]

4.2 Expenditure Management

A successful R&D program should not fluctuate widely. Therefore, for any POA period in which there are not sufficient projects to absorb the required level of expenditure, the balance may be placed in a R&D fund. The fund will be managed by the Board in conjunction with the operator consistent with these guidelines. In a POA period where an operator overspends its R&D requirement, the excess may be applied against its requirement in the subsequent POA period."

46.
The 2004 Guidelines were the first set of guidelines to directly address R&D expenditure at the production phase of a petroleum project and were the first set of guidelines to require fixed amounts of expenditures to be made. The rationale behind the 2004 Guidelines, as presented by CNLOPB, was to ensure effective administration of Section 45 of the Accord Acts so that the exploitation of offshore petroleum created a lasting economic legacy for the people of the Province of NL.19 This, according to the 2004 Guidelines, was best achieved by building on the intellectual capital and human resources of the Province.
47.
As indicated above, the required amount of R&D expenditures for a specific period is determined on the basis of a benchmark derived from Statistics Canada reports on R&D spending by oil and gas companies in Canada. Statistics Canada relies on the oil and gas companies' responses to its survey rather than data obtained directly from the Canada Revenue Agency ("CRA"). The Board calculates the benchmark using the most recent five-year average of R&D expenditures.

B. THE HIBERNIA AND TERRA NOVA PROJECTS

1. Hibernia

(a) The Oilfield

48.
Hibernia is the first and largest offshore oil project in NL. The oilfield was discovered in 1979. It is located in the North Atlantic Ocean, 315 kilometers east-southeast of St. John's, Newfoundland. The project was constructed from 1990 to 1997. The gross capital investment in the construction of the facility was approximately $5.8 billion.
49.
Oil production at the facility began in November 1997. As of June 30, 2009, approximately 642 million barrels had been produced. At peak production, in 2005, about 200,000 barrels were produced per day. Since 2005, production has been in decline and averages about 140,000 barrels per day. Production is expected to continue through 2036. Hibernia's revenues between 2004 and 2008 were $19.3 billion, while projected revenues between 2009 and 2036 [REDACTED].
50.
Certain portions of the oilfield have not yet been developed and are not subject to this arbitration.
51.
The Hibernia project is owned by a consortium of working interest holders, including the Claimants. Mobil Canada controls the largest participation interest in Hibernia at 33,125%, while Murphy Oil controls 6.5%. In 1988, HMDC was established to manage and operate the project on behalf of the interest owners.

(b) The Benefits Plan

52.
In September 1985, the Hibernia project participants submitted a Development Plan and a Benefits Plan for the Board's approval.20 The Benefits Plan included a section on R&D:

"Mobil promotes local and Canadian research and development by entrepreneurs and institutions who are of our technical problems and who have the interest and resources to develop commercial applications.

Potential areas for research and development activity include the following:

• Iceberg management - developing better methods to track icebergs and attach towing apparatus in adverse weather

• Iceberg detection - further development of advanced remote sensing systems

• Remote valve actuation - further development of sonar methods of actuating subsea valves

• Quality assurance - developing inspection techniques for items such as subsea flowline bundles to provide greater assurance of operation without failure

• Remote component replacement - extending existing submarine manipulator technology to enable remote replacement of manifold and wellhead components

• Sonic transmission of bottom hole pressure information to the sea surface."21

53.
In December 1985, the Hibernia Environmental Assessment Panel submitted a report recommending that the Hibernia operators undertake R&D in specific areas including: "Research and development to improve the ability to detect and manage ice under adverse weather conditions" and research to develop "effective countermeasures" to offshore oil spills.22 The Panel also recommended that the implementation of the operators' plan to provide local benefits, including R&D and E&T expenditures, should be closely monitored.
54.
Upon the Board's request, a Supplementary Benefits Plan was submitted to the Board. The Supplementary Benefits Plan contained a commitment to:

"[c]ontinue to support local research institutions and promote further research and development in Canada to solve problems unique to the Canadian offshore environment."23 It further provided that the project operators would "[c]arry out a program of timely reporting to the [Board] to enable the Board to monitor the level of efforts and benefits achieved and to assist in promoting maximum benefits […]."24

55.
The Board approved the Hibernia Benefits Plan ("HBP") in June 1986, incorporating the Supplementary Plan. In its decision approving that plan, the Board stated:

"It was the decision of the Board that the most effective approach would be to encourage the commitment of the Proponent to a series of basic principles. The implementation of these basic principles would, in the Board's opinion, be more effective than attempting to negotiate specific requirements for the multitude of elements of which the project will consist."25

It also stated that "effective monitoring and reporting will be necessary to ensure that the Benefits Plan objectives are accomplished during the execution of the project"26 and provided that:

"The development and implementation of a Benefits Plan is, because of the nature of the subject matter, an evolutionary process. The Board has found the Proponent willing to amend its positions to comply with regulatory requirements and to respond positively to issues of concern. It is the Board's expectation that the Proponent's demonstrated responsiveness in the area of benefits will continue through the duration of the project."27

56.
The Hibernia development plan (which is not in dispute) was updated and re-approved by the Board six times between its approval and 2003, but the approved Benefits Plan was not amended. It did not contain specific targets or amounts to be spent on local R&D or E&T, nor did the Board impose additional conditions with respect to R&D or E&T when it issued POAs for Hibernia in 1997 and 2000.

(c) R&D Expenditures and Reporting to the Board

57.
HBP reporting began in 1990, when construction commenced. During the development phase, HMDC submitted monthly reports on various benefits commitments. However, the reports did not contain information on R&D expenditures. Starting in 1998, after the Hibernia project had moved into the production phase, HMDC began submitting annual benefits reports summarizing benefits expenditures in the prior year, including R&D. Regarding R&D, annual reports have provided a breakdown by research area of cumulative expenditures since 1990, and have typically quantified total expenditures in the Province in the prior year. The annual reports have also furnished an R&D expenditures estimate, likely to be incurred in the current year, and have indicated the total expenditures percentage incurred from 1997 onward.28
58.
HMDC has relied exclusively on data collected in connection with Canada's Scientific Research and Experimental Development ("SR&ED") tax incentive program for its R&D reporting. Pursuant to the SR&ED program, businesses subject to taxation in Canada may earn tax credits for R&D undertaken in the country that will lead to new, improved, or technologically advanced products or processes. To qualify for SR&ED credit, "work must advance the understanding of scientific relations or technologies, address scientific or technological uncertainty, and incorporate a systematic investigation by qualified personnel."29
59.
In 1986, 1988 and 1989, the Board issued letters acknowledging receipt of annual benefits reports and confirming that they "fully [met] the requirements outlined in the Board's Exploration Benefits Plan Guidelines."30 [REDACTED]
60.
From 1990, when the development phase commenced for Hibernia, through 2008, HMDC reported R&D expenditures over $226 million [REDACTED] Hibernia R&D and E&T expenditures decreased significantly from 1997 to 2001. In 1997, the reported R&D expenditure was [REDACTED] in 1998 [REDACTED] in 1999 and [REDACTED] in 2000 [REDACTED]31 During the first five years of the 2004 Guidelines, Hibernia's R&D expenditure was [REDACTED] in 2004, [REDACTED] in 2005, [REDACTED] in 2006, [REDACTED] in 2007, and in 2008.32 Examples of R&D and E&T spending included: sponsorship of an Industrial Research Chair in Ocean Engineering at Memorial University of Newfoundland ("MUN"), sponsorship of the furnishing of a classroom for the MUN Centre of Management Development, and a donation to the general trust fund of the Center for Cold Ocean Research (C-CORE).
61.
Over the next five to ten years, the Claimants estimate the R&D needs of the Hibernia projects to be consistent with the usual needs of offshore projects with aging facilities and declining production. R&D may include new or improved technologies to increase oil recovery from the reservoir and enhanced systems to monitor and assess the integrity of project infrastructure. In addition, Hibernia has a large secondary reservoir known as the Ben Nevis Avalon ("BNA") that is largely undeveloped due to its technical complexity and associated economic risk. New technologies will likely be required to economically develop the BNA.33

2. Terra Nova

(a) The Oilfield

62.
The Terra Nova field was discovered in 1984. It is located in the North Atlantic Ocean, 350 kilometers east-southeast of St. John's, Newfoundland, and 33 kilometers from Hibernia. The project was constructed from 1999 until 2001. The gross capital investment in the construction of the facility was approximately $2,985 billion.
63.
Oil production from the field began in January 2002. As of June 30, 2009, approximately 275 million barrels of oil had been produced. Peak production occurred in 2007, when the facility produced approximately 100,000 barrels per day. Production is now in decline and averages less than 100,000 barrels per day. Production is expected to continue through 2018. Terra Nova's revenues between 2004 and 2008 were $10.7 billion, while projected revenues between 2009 and 2018 are [REDACTED]
64.
The Terra Nova project is organized as an unincorporated joint venture. The largest shareholder, Petro-Canada, which owned a 33.99% interest, managed and operated the project for a consortium of working interest owners, including the Claimants. In 2009, Petro-Canada merged with Suncor, who is now the operator. Mobil Canada controls a 22% interest in Terra Nova, while Murphy Oil controls 12%.34

(b) The Benefits Plan

65.
In February 1995, prior to submitting a Benefits Plan to the Board, Petro-Canada met with the Board. At the meeting, Petro-Canada asked how the Board intended to apply the provisions of the Accord Acts relating to R&D. In response, the Board encouraged Petro-Canada to "enunciate its policies and procedures which would provide for expenditures on R&D and E&T in Newfoundland" and "to describe, in the Benefits Plan, the nature and current level of support to R&D in the Province (eg. C-CORE) and, to the extent possible, its future plans in this regard."35 Further, "Petro-Canada indicated that should there be any benefits undertakings agreed to with the Governments beyond the statutory requirements, they would be contained, if possible, in their Benefits Plan."36 The minutes also recorded that

"the Petro-Canada officials seemed to be well informed of the requirements of the Atlantic Accord Acts and the [1987] Guidelines. To a large extent, they see the benefits requirements to be ‘process' oriented rather than related to prescribed targets and outcomes. Nevertheless, the need for an assessment of the outcomes in terms of the potential level and nature of benefits to Canada and, in particular, to Newfoundland seemed to be understood."37

66.
The Terra Nova Benefits Plan ("TNBP") was submitted to the Board in 1996. It provided that "[t]o ensure benefits are flowing effectively to Newfoundland and other regions of Canada, the Proponents will work with the [Board] to effect efficient monitoring of the Proponents' performance relative to their commitments to this benefits plan."38 The Plan included a commitment to spend money on local R&D, but did not specify amounts. The Plan also stated that the "Operator will report to the [Board] yearly. [a] summary of R&D expenditures reported by program and total expenditure. "39
67.
The TNBP was reviewed by an Environmental Assessment Panel, which recommended:

"that the Board require operators of offshore oil projects to fund basic research. This initiative should include support of the Department of Fisheries and Oceans to conduct basic research on the mechanisms and processes by which chemicals in produced water may have impacts on the biological community. Also, support for research on cumulative and sublethal effects should be included."40

68.
Following the assessment by the Environmental Panel, the Board assessed the Benefits Plan submitted by the Terra Nova participants and approved it by a decision issued in December 1997.41 In its Decision, the Board reiterated the statement made in the decision approving the HBP that "[a]ny benefits plan is, in large measure, a commitment to principles." It then cited the two fundamental principles embodied in the Accord Acts—full and fair opportunity to Canadians and first consideration to Newfoundlanders—and found that the Benefits Plan as presented addressed those principles.42 The Board also stated that:

"[t]he Board believes the Proponent will undertake significant training and research in the Province and that it understands the education and training capabilities available with the Province. The Board will require regular forecasting and reporting of education and training and research and development initiatives and expenditures. The Board believes the Proponents commitments in the Benefits Plan will be fulfilled. However, the Board also has an obligation as the regulator to ensure that the Proponents commitments are met. Accordingly, it will develop, in consultation with the Proponent, reporting mechanisms for the timely review of contracts and appropriate reporting formats for tracking employment and expenditures. The Board will conduct periodic audits to confirm the accuracy of the reports."43

69.
The Board went on to endorse the Environmental Panel's recommendation that the operators fund basic research and stated that the TNBP "does not fully satisfy the statutory requirement that the Benefits Plan contain provisions intended to ensure that expenditures are made on [R&D] and [E&T] in the Province."44 The Board further placed the following requirements on the operators of the Terra Nova project:

"The Board appreciates the difficulty in providing, in advance, detailed [R&D] and [E&T] plans for the entire duration of the Development and, therefore, to provide a framework for monitoring the Proponent's activities in this regard, establishing a condition to its approval of the Benefits Plan that:

The Proponent report to the Board by March 31 of each year, commencing in 1998, its plans for the conduct of [R&D] and [E&T] in the Province, including its expenditure estimates, for a three-year period and on its actual expenditures for the preceding."45

In addition, the Board stated:

"The Proponent's commitments vis-à-vis its future support of such [R&D] activities are at best qualified, particularly inasmuch as there is no measure of the level of effort the Proponent intends to make in this regard (e.g. there are no expenditure estimates provided in the Benefits Plan). While the relevant provisions of the Accord Acts do not prescribe levels of expenditure, the Acts require that the Benefits Plan contain provisions intended to ensure that expenditures are made on [R&D] in the Province."46

70.
The Terra Nova Development Plan was amended twice, however, the Benefits Plan was not.47

(c) R&D Expenditures and Reporting to the Board

71.
Terra Nova benefits reporting began in 1999. At the beginning of each calendar year, Petro-Canada has submitted a report summarizing benefits expenditures in the prior year. With regard to R&D, the reports have quantified total expenditures in the prior year and provided an estimate of R&D expenditures likely to be incurred in the next three-year period. Terra Nova has similarly based its reporting on the SR&ED tax credits program.
72.
With respect to their reporting obligation, in the March 1999 R&D Report, for example, the Terra Nova Proponents reported that they "will continue to support technically worthy research and development activities and programs in the province where the results of such activities and programs have application to the Terra Nova Development and/or to the development of an offshore oil industry in the province." Similarly in the 1999 E&T Report, the Terra Nova Proponents stated that

"[i]n addition to implementing training initiatives aimed at meeting the specific training requirements of the development, the Proponents also continue to work actively...in various areas related to the furthering of opportunities for the establishment of offshore related skills in the province."48

73.
In February 1999, the Board wrote to Petro-Canada to "express a measure of concern" with respect to an R&D project involving large holes drilled in the sea-bed called glory holes. The Board stated:

"This [glory holes research] is a legitimate research and development target for operators in the Newfoundland offshore area, as evidenced by failure of 1998 efforts to excavate the glory holes. Section 45(3)(c) of the Atlantic Accord legislation specifically requires that expenditures for research and development be carried out in the province."49

74.
The Terra Nova participants spent approximately $24 million on R&D for the project as of August 2009. However, the R&D expenditures were decreasing between 1997 and 2001. According to Terra Nova's 2000 Benefits Report, the R&D expenditures were at [REDACTED] in 1997, [REDACTED] in 1998, in [REDACTED] 1999, and [REDACTED] in 2000.50 Between 1998 and 2000, the Terra Nova participants spent approximately $12 million on E&T.51 The Terra Nova participants made investments in technology directly applicable to the design of its own project, as well as funding for the establishment of a junior research chair in Ocean Environmental Risk Engineering at MUN, and funding for the MUN Chair for Women in Science in Engineering. The 2001 report projected [REDACTED] as the average annual expenditures for R&D and E&T until the end of 2004.
75.
Over the next five to ten years, the R&D needs of the Terra Nova project are, according to the Claimants, expected to be consistent with the usual needs of offshore projects with aging facilities and declining production. R&D may include new or improved technologies to increase oil recovery from the reservoir and enhanced systems to monitor and assess the integrity of project infrastructure. Petro-Canada, as operator, is planning to undertake research in the Province related to ship side valve isolation tooling. Petro-Canada may have additional R&D projects in mind, of which Claimants state they are not aware.

C. THE 2004 GUIDELINES: THE CIRCUMSTANCES OF THEIR ADOPTION AND THEIR APPLICATION TO HIBERNIA AND TERRA NOVA

76.
In 2001, the Board began drafting a new set of R&D expenditure guidelines. This came as a result of both the decreasing expenditures on R&D and E&T by the operators, and a report by a Public Review Commissioner issued in the context of its review of a third project in NL called White Rose. The Commissioner recommended that the Board

"release publically a definitive statement as to how the Board intends to interpret the Atlantic Accord and the Accord Acts, and how the Board will implement or administer it [sic] benefits responsibilities, including requirements for, and evaluation of, the Benefits Plans."52

In its Decision regarding White Rose, the Board imposed a minimum amount for R&D and E&T spending for the first time.53

77.
In 2002, in view of developing guidelines on R&D and E&T expenditures consistent with the Accord Acts, the Board commissioned a report on industry R&D expenditures and examined reports by Statistics Canada on average R&D expenditures by oil companies in Canada. The Board produced draft guidelines in August 2002 and revised them in July 2003, at which time the draft was presented to the Claimants.
78.
In May 2004, the Board met with HMDC to discuss the proposed guidelines. At this meeting, HMDC proposed that the guidelines should only require operators to conduct R&D and E&T that is necessary for the project.54 The Board rejected this proposal.55 The Board indicated that it was open to considering alternate approaches to the benchmark but that it was not prepared to revert to a regime lacking quantifiable targets.56 These parameters were unacceptable to the project operators, and therefore the project operators did not recommend an alternate approach.57
79.
The Board then agreed to postpone the implementation of the 2004 Guidelines, while the operators sought an alternative solution on the understanding that if no alternative were found, the Guidelines would apply as from the previous April.
80.
In July 2004, the Board met again with the operators and encouraged them to provide an alternative proposal to the Guidelines in writing. No proposal was provided before the Board released the 2004 Guidelines on November 5, 2004. The 2004 Guidelines specified that they were in effect as from April 2004.
81.
Shortly after the 2004 Guidelines were issued, the POA for Terra Nova was up for renewal. Petro-Canada, as project operator, had submitted an application for a new POA on July 14, 2004, before issuance of the 2004 Guidelines, but the Board extended the deadline for renewal of the POA until January 29, 2005. On January 27, 2005, the Board granted the application subject to a set of appended conditions. Condition 15 read:

"The Operator shall comply with the Guidelines for Research and Development Expenditures as issued by the Board November 5, 2004 and with effect from April 1, 2004."58

Petro-Canada did not countersign the conditions. A project operator has no choice but to accept conditions imposed unilaterally by the Board in a POA and cannot continue production without a valid POA.

82.
On February 18, 2005, the Board issued letters to the project operators regarding their R&D commitments under the 2004 Guidelines, from the effective date of April 1, 2004 through the end of 2004 (January 26, 2005 in the case of Terra Nova). The Board assessed HMDC's commitments for those nine months at $9.16 million, and Petro-Canada's commitments at $5.31 million.
83.
In a separate letter on March 3, 2005, the Board indicated that it would not seek to enforce compliance with the 2004 Guidelines while a court proceeding by the operators, challenging the legality of the 2004 Guidelines under Canadian law, was pending. The Board stated that the calculated amounts were mandatory and would be enforced if the Guidelines were upheld under Canadian law.
84.
On October 25, 2005, HMDC submitted an application for a new POA. At the Board's insistence, the application included the same condition appended to the Terra Nova authorization: "The Operator shall comply with the Guidelines for Research and Development Expenditures as issued by the Board November 5, 2004 and with effect from April 1, 2004."59 Along with the application, HMDC submitted a protest letter in which it indicated that it was "signing and submitting the Application prescribed by the Board, subject to (...) objections." Among the objections noted was HMDC's view that the Board lacked authority to impose the Guidelines. HMDC also annotated the application form supplied by the Board to indicate that the application was subject not only to the Board's condition, but also to the objections stated in the protest letter. On October 28, 2005, the Board responded, indicating that it would not accept the application as qualified and HMDC resubmitted its POA application without qualification on October 31, 2005. HMDC asked that a copy of its letter of October 25, 2005 and a copy of the Board's letter of October 28, 2005 be filed and attached to the POA for informational purposes to record the respective positions of HMDC and the Board. The Board issued a new POA for Hibernia on November 1, 2005, effective until October 29, 2008, and attached the letters as requested. That POA was twice extended as of October 30, 2009.
85.
On February 4, 2005, HMDC and Petro-Canada challenged the 2004 Guidelines in the Trial Division and the Court of Appeal of the Supreme Court of Newfoundland and Labrador.
86.
On January 22, 2007, the Trial Division held that the Board possessed the legal authority under the Accord Acts to issue the 2004 Guidelines, and that the Board could condition the issuance of the POA upon compliance with the 2004 Guidelines. On September 4, 2008, the Court of Appeal upheld the ruling of the lower Court. In particular, the Court of Appeal held, in a majority decision of two to one, that

"application of the Guidelines to the Hibernia and Terra Nova Projects does not involve an amendment to the benefits plans. Rather, the Guidelines set parameters consistent with the Board's responsibility to monitor expenditures for research and development required under the benefits plans."60

This conclusion was predicated on the finding of the Court that

"the Board (...) reserved for itself authority to determine on a continuing basis by its monitoring process whether the companies were making adequate expenditures on research and development."61

On February 19, 2009, leave to appeal the decision of the Court of Appeal was rejected by the Supreme Court of Canada. The Claimants have therefore exhausted all possibilities to appeal these decisions in Canada.

87.
As the proceedings before the Canadian Courts were pending, on November 1, 2007, the Claimants filed their Request for Arbitration with ICSID.
88.
On February 26, 2009 and March 3, 2009, the Board issued letters to HMDC and Petro-Canada, respectively, advising them of their expenditure requirements under the 2004 Guidelines from the effective date of April 1, 2004 through December 31, 2008. The Board assessed HMDC's obligation at $66.52 million, and Petro-Canada's obligation at $34.04 million. The Board directed each operator to submit a report by April 30, 2009 detailing its R&D and E&T expenditures for the period in question. Both operators requested and received an extension of the reporting deadline to September 30, 2009.
89.
As stated above, over the course of their reporting to the Board, prior to the 2004 Guidelines, Hibernia and Terra Nova based their reported R&D expenditures on SR&ED claims pending with the CRA. On September 30, 2009, HMDC submitted a report to the Board detailing R&D and E&T expenditures of approximately [REDACTED] over the relevant period (April 1, 2004-December 31, 2008). On December 10, 2009, the Board formally communicated that it had rejected as ineligible R&D and E&T expenditure of almost [REDACTED]
90.
Having confirmed that the remaining development phase credit of $10.1 million could be applied towards HMDC's outstanding obligations, on January 8, 2010, the Board confirmed HMDC's net shortfall at $43,556,526.275. On March 9, 2010, [REDACTED] the Board confirmed that the R&D expenditure shortfall for the Hibernia project had been further reduced to $32,718,226.
91.
On October 1, 2009, Suncor (who had merged with Petro-Canada) submitted a report detailing R&D and E&T expenditures of [REDACTED] over the April 1, 2004-December 31, 2008 period. On December 15, 2009, the Board formally communicated that it had rejected as ineligible R&D and E&T expenditures of [REDACTED]. Having confirmed that all remaining development phase credit could be applied upfront against Terra Nova's obligations, the Board confirmed Suncor's net shortfall as $11,860,092, and later reduced it again to $8,972,126.
92.
With regard to the approval of prospective R&D and E&T expenditures (as of April 8, 2010) of the two operators, only the Terra Nova participants submitted proposed expenditures of several projects for pre-approval by the Board. The Board has so far denied approval of an engineering and design project, estimated to cost a maximum of $80,000 that would allow installment of certain equipment onshore rather than in the field. The Board denied the application because it viewed the activity to be an application of existing technology and therefore ineligible under the 2004 Guidelines. The Board did however approve a $250,000 contribution to MUN to support research training over a period of five years.
93.
In December 2009, the Board informed HMDC and Suncor that they were required to provide a Work Plan detailing their proposals to rectify their shortfall in R&D and E&T spending over the 2004-2008 period by March 31, 2010. The operators were also required to provide the Board with unrestricted access to a promissory note secured by a letter of credit. The Work Plans were provided. The Board extended the deadline for provision of the financial instrument until April 30, 2010. The Board then established a deadline of March 31, 2015, at which time it will draw down from the provided financial instruments any unspent R&D shortfall from the 2004-2008 period and transfer it to a recognized research or education agency. The provision of a financial instrument has been included as an express condition to HMDC's POA. The current Terra Nova POA expired on September 30, 2011.

IV. Summary of the Parties' Claims and the Relief Sought

94.
The NAFTA entered into force on January 1, 1994, after the HBP was approved, but before the TNBP and the 2004 Guidelines were adopted. The parties' dispute concerns the legality of the 2004 Guidelines in view of Articles 1105, 1106 and 1108 of the NAFTA and its Annex I. The Tribunal's jurisdiction under Article 1116 and 1117 of the NAFTA and the Centre's Additional Facility has not been challenged, except with regard to the quantum of the Claimants' claims (see below).
95.
Article 1105 of the NAFTA entitled "Minimum Standard of Treatment" provides as follows:

"1. Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security.

2. Without prejudice to paragraph 1 and notwithstanding Article 1108(7)(b), each Party shall accord to investors of another Party, and to investments of investors of another Party, non-discriminatory treatment with respect to measures it adopts or maintains relating to losses suffered by investments in its territory owing to armed conflict or civil strife.

3. Paragraph 2 does not apply to existing measures relating to subsidies or grants that would be inconsistent with Article 1102 but for Article 1108(7)(b)."

96.
Article 1106 of the NAFTA entitled "Performance Requirements" provides that:

"1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory:

(a) to export a given level or percentage of goods or services;

(b) to achieve a given level or percentage of domestic content;

(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory;

(d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment;

(e) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings;

(f) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal or competition authority to remedy an alleged violation of competition laws or to act in a manner not inconsistent with other provisions of this Agreement; or

(g) to act as the exclusive supplier of the goods it produces or services it provides to a specific region or world market.

2. A measure that requires an investment to use a technology to meet generally applicable health, safety or environmental requirements shall not be construed to be inconsistent with paragraph 1(f). For greater certainty, Articles 1102 and 1103 apply to the measure.

3. No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements:

(a) to achieve a given level or percentage of domestic content;

(b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory;

(c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or

(d) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

4. Nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory.

5. Paragraphs 1 and 3 do not apply to any requirement other than the requirements set out in those paragraphs.

6. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1(b) or (c) or 3(a) or (b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures:

(a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement;

(b) necessary to protect human, animal or plant life or health; or

(c) necessary for the conservation of living or non-living exhaustible natural resources."

97.
Article 1108 of the NAFTA entitled "Reservations and Exceptions" provides as follows:

"1. Articles 1102, 1103, 1106 and 1107 do not apply to:

(a) any existing non-conforming measure that is maintained by

(i) a Party at the federal level, as set out in its Schedule to Annex I or III,

(ii) a state or province, for two years after the date of entry into force of this Agreement, and thereafter as set out by a Party in its Schedule to Annex I in accordance with paragraph 2, or

(iii) a local government;

(b) the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or

(c) an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 1102, 1103, 1106 and 1107.

2. Each Party may set out in its Schedule to Annex I, within two years of the date of entry into force of this Agreement, any existing nonconforming measure maintained by a state or province, not including a local government.

3. Articles 1102, 1103, 1106 and 1107 do not apply to any measure that a Party adopts or maintains with respect to sectors, subsectors or activities, as set out in its Schedule to Annex II.

4. No Party may, under any measure adopted after the date of entry into force of this Agreement and covered by its Schedule to Annex II, require an investor of another Party, by reason of its nationality, to sell or otherwise dispose of an investment existing at the time the measure becomes effective.

5. Articles 1102 and 1103 do not apply to any measure that is an exception to, or derogation from, the obligations under Article 1703 (Intellectual Property National Treatment) as specifically provided for in that Article.

6. Article 1103 does not apply to treatment accorded by a Party pursuant to agreements, or with respect to sectors, set out in its Schedule to Annex IV.

7. Articles 1102, 1103 and 1107 do not apply to:

(a) procurement by a Party or a state enterprise; or

(b) subsidies or grants provided by a Party or a state enterprise, including government supported loans, guarantees and insurance.

8. The provisions of:

(a) Article 1106(1)(a), (b) and (c), and (3)(a) and (b) do not apply to qualification requirements for goods or services with respect to export promotion and foreign aid programs;

(b) Article 1106(1)(b), (c), (f) and (g), and (3)(a) and (b) do not apply to procurement by a Party or a state enterprise; and

(c) Article 1106(3)(a) and (b) do not apply to requirements imposed by an importing Party relating to the content of goods necessary to qualify for preferential tariffs or preferential quotas."

98.
Annex I of the NAFTA ("Reservations for Existing Measures and Liberalization Commitments") provides, in relevant part, that:

"1. The Schedule of a Party sets out, pursuant to Articles 1108(1) (Investment), 1206(1) (Cross-Border Trade in Services) and 1409(4) (Financial Services), the reservations taken by that Party with respect to existing measures that do not conform with obligations imposed by:

[...]

(d) Article 1106 (Performance Requirements)

[...]

and, in certain cases, sets out commitments for immediate or future liberalization.

2. Each reservation sets out the following elements:

(a) Sector refers to the general sector in which the reservation is taken;

(b) Sub-Sector refers to the specific sector in which the reservation is taken;

(c) Industry Classification refers, where applicable, to the activity covered by the reservation according to domestic industry classification codes;

(d) Type of Reservation specifies the obligation referred to in paragraph 1 for which a reservation is taken;

(e) Level of Government indicates the level of government maintaining the measure for which a reservation is taken;

(f) Measures identifies the laws, regulations or other measures, as qualified, where indicated, by the Description element, for which the reservation is taken. A measure cited in the Measures element

(i) means the measure as amended, continued or renewed as of the date of entry into force of this Agreement, and

(ii) includes any subordinate measure adopted or maintained under the authority of and consistent with the measure;

(g) Description sets out commitments, if any, for liberalization on the date of entry into force of this Agreement, and the remaining non-conforming aspects of the existing measures for which the reservation is taken; and

(h) Phase-Out sets out commitments, if any, for liberalization after the date of entry into force of this Agreement.

3. In the interpretation of a reservation, all elements of the reservation shall be considered. A reservation shall be interpreted in the light of the relevant provisions of the Chapters against which the reservation is taken. To the extent that:

(a) the Phase-Out element provides for the phasing out of nonconforming aspects of measures, the Phase-Out element shall prevail over all other elements;

(b) the Measures element is qualified by a liberalization commitment from the Description element, the Measures element as so qualified shall prevail over all other elements; and

(c) the Measures element is not so qualified, the Measures element shall prevail over all other elements, unless any discrepancy between the Measures element and the other elements considered in their totality is so substantial and material that it would be unreasonable to conclude that the Measures element should prevail, in which case the other elements shall prevail to the extent of that discrepancy.

[…]"

99.
Pursuant to Annex I of the NAFTA, on March 29, 1996 the Respondent made a number of reservations to the NAFTA, including one in relation to the Atlantic Accord. That reservation provides as follows:

" Sector: Energy

Sub-Sector: Oil and Gas

Industry Classification: SIC 071 - Crude Petroleum and Natural Gas Industries

Type of Reservation: Performance Requirements (Article 1106) Local Presence (Article 1205)

Level of Government: Federal

Measures: Canada Oil and Gas Production and Conservation Act, R.S.C. 1985, c. O-7, as amended by Canada Oil and Gas Operations Act, S.C. 1992, c. 35 Canada - Nova Scotia Offshore Petroleum Resources Accord Implementation Act, S.C. 1988, c. 28 Canada - Newfoundland Atlantic Accord Implementation Act, S.C. 1987, c. 3 Measures implementing Yukon Oil and Gas Accord Measures implementing Northwest Territories Oil and Gas Accord

Description: Cross-Border Services and Investment

1. Under the Canada Oil and Gas Operations Act, the approval of the Minister of Energy, Mines and Resources of a "benefits plan" is required to receive authorization to proceed with any oil and gas development project.

2. A "benefits plan" is a plan for the employment of Canadians and for providing Canadian manufacturers, consultants, contractors and service companies with a full and fair opportunity to participate on a competitive basis in the supply of goods and services used in any proposed work or activity referred to in the benefits plan. The Act permits the Minister to impose an additional requirement on the applicant, as part of the benefits plan, to ensure that disadvantaged individuals or groups have access to training and employment opportunities or can participate in the supply of goods and services used in any proposed work referred to in the benefits plan.

3. The Canada - Nova Scotia Offshore Petroleum Resources Accord Implementation Act and the Canada - Newfoundland Atlantic Accord Implementation Act have the same requirement for a benefits plan but also require that the benefits plan ensure that:

(a) prior to carrying out any work or activity in the offshore area, the corporation or other body submitting the plan establish in the applicable province an office where appropriate levels of decision-making are to take place;

(b) expenditures be made for research and development to be carried out in the province, and for education and training to be provided in the province; and

(c) first consideration be given to goods produced or services provided from within the province, where those goods or services are competitive in terms of fair market price, quality and delivery.

4. The Boards administering the benefits plan under these Acts may also require that the plan include provisions to ensure that disadvantaged individuals or groups, or corporations owned or cooperatives operated by them, participate in the supply of goods and services used in any proposed work or activity referred to in the plan.

5. In addition, Canada may impose any requirement or enforce any commitment or undertaking for the transfer of technology, a production process or other proprietary knowledge to a person of Canada in connection with the approval of development projects under the applicable Acts.

6. Provisions similar to those set out above will be included in laws or regulations to implement the Yukon Oil and Gas Accord and Northwest Territories Oil and Gas Accord which for purposes of this reservation shall be deemed, once concluded, to be existing measures.

Phase-Out : None"

A. CLAIMANTS' POSITION

100.
The Claimants argue that the imposition of the 2004 Guidelines requiring investors to spend a fixed percentage of project revenues on R&D in NL, and the enforcement of this requirement by the Board, constitute a prohibited performance requirement and violate NAFTA Article 1106(1). They assert that the 2004 Guidelines compel the Hibernia and Terra Nova project operators to spend several million more dollars per year on R&D activities under their revised Benefits Plans than they would otherwise be required to spend by reference to Benefits Plans that reflect the approach set forth in the 1986, 1987 and 1988 Guidelines. As a result, the Claimants argue that the Board substitutes its own development objectives for the business judgment of investors, and distorts investment flows in favor of the Province. According to the Claimants, the 2004 Guidelines are not exempted by Article 1108(1)(a) of the NAFTA (as an existing non-conforming measure) and are not covered by Canada's Annex I Reservations, which describe the aspects of the Federal Accord Act that do not conform with Article 1106. Moreover, in the Claimants' view, the 2004 Guidelines cannot amount to an amendment of an existing non-conforming measure pursuant to Article 1108(1)(c) of the NAFTA, or to the adoption of a "subordinate measure adopted. under the authority of and consistent with the measure" that has been reserved, pursuant to Annex 1, paragraph 2(f)(ii) of the NAFTA.
101.
Second, the Claimants claim that the 2004 Guidelines violate Article 1105(1) of the NAFTA in that the Respondent has failed to "accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security." According to the Claimants, Canada has breached the obligation by failing to provide a stable regulatory framework for the conduct of petroleum development projects in the NL offshore area, and by frustrating Claimants' legitimate expectations with regard to that regulatory framework.
102.
As a result, the Claimants request the following relief, as set out in their Reply Memorial:

"301. In order to protect Claimants' rights and reduce the possibility of future disputes, Claimants request the Tribunal:

a) Find that the promulgation and enforcement of the R&D Expenditure Guidelines constitute a performance requirement within the meaning of Article 1106(1) of the NAFTA, and that Canada has breached its obligations under the Article as a result;

b) Find that the [2004] Guidelines are not covered by Article 1108(1) of the NAFTA or Canada's Annex I reservation to the treaty for the Federal Accord Act;

c) Find that Canada has breached its obligations under Article 1105(1) of the NAFTA by failing to provide Claimants and their investments the guarantee of fair and equitable treatment in accordance with international law;

d) Order Canada to pay to Claimant Mobil Investments Canada Inc., or alternatively, to its indirectly controlled enterprises, money damages in an amount to be established at the hearing, plus interest as applicable when the Tribunal issues its final award, to compensate Claimant Mobil Investments Canada for the cost of its compliance with the Guidelines including through the remaining life of the Hibernia and Terra Nova projects, in which it is an investor;

e) Order Canada to pay to Claimant Murphy Oil Corporation, or alternatively, to its directly or indirectly controlled enterprises, money damages in an amount to be established at the hearing, plus interest as applicable when the Tribunal issues its final award, to compensate Claimant Murphy Oil Corporation for the cost of its compliance with the Guidelines including through the remaining life of the Hibernia and Terra Nova projects, in which it is an investor;

f) Order Canada to pay to Claimants the full measure of legal fees and costs, to be determined at the conclusion of the proceedings, that they will have incurred as a result of this arbitration;

g) Find that Claimants are entitled to recover all costs incurred in seeking to enforce the Tribunal's Award, including any costs incurred in seeking compensation in respect of the Board's future application of the Guidelines to the Projects; and

h) Order such further relief as it deems appropriate."62

103.
On August 6, 2010, the Claimants submitted an updated calculation of damages as follows:

Damages : Projects

Oil Field Damages Hibernia CDN$ 113.74MM Terra Nova CDN$ 43.95MM

Damages: Mobil Investments Canada Inc.

Oil Field Ownership Share of Economic Damages Hibernia 33,125% CDN$ 37.68MM Terra Nova 22% CDN$ 9.67MM Total CDN$ 47.35MM

Damages: Murphy Oil Corporation

Oil Field Ownership Share of Economic Damages Hibernia 6.5% CDN$ 7.39MM Terra Nova 12% CDN$ 5.27MM Total CDN$ 12.67MM

B. RESPONDENT'S POSITION

104.
The Respondent rejects that it has breached any provision of the NAFTA.
105.
First, the Respondent argues that Article 1106(1)(c) of the NAFTA does not prohibit requirements regarding R&D or E&T. Its position is that the relevant provision does not encompass R&D and E&T performance requirements because such performance requirements must be distinguished from the requirement to purchase local goods or services. Even if R&D and E&T requirements could fall within the scope of Article 1106, the 2004 Guidelines do not necessarily compel the purchase, use or accordance of a preference to local goods or services. Further or alternatively, the Respondent argues that the 2004 Guidelines fall within the scope of Canada's Annex I Reservation to Article 1106, and in particular that the 2004 Guidelines are measures subordinate to the Accord Acts, that have been adopted "under the authority of and consistent with" the Accord Acts and are therefore compatible with the NAFTA (as provided by paragraph 2(f)(ii) of Annex 1 of the NAFTA).
106.
Second, the Respondent argues that the standard for finding a violation of Article 1105 has not been met in the circumstances of this case. According to the Respondent, the protection of legitimate expectations and a stable regulatory environment does not fall under the Article 1105 standard. The Respondent's position is also that the Tribunal has no authority to review the decisions of domestic courts which have ruled on a claim for a breach of Article 1105 of the NAFTA. In this case, Canadian courts have confirmed that the Board acted consistently with the regulatory framework.
107.
Third, as to the Claimants' case on the quantum of damages, the Respondent states that the Claimants are not entitled to any compensation as it is premature to calculate damages at this stage, and in any event, the claim is exaggerated.
108.
As a result, the Respondent requests the following relief, as set out in its Counter-Memorial:

"387. Canada requests that the Tribunal reject the claims and order that the Claimants pay the costs and legal fees of Canada incurred as a result of this arbitration."63

V. ARTICLE 1105

A. INTRODUCTION

109.
Article 1105 is entitled Minimum Standard of Treatment and provides that:

"Each Party shall accord to investments of investors of another Party treatment in accordance with international law, including fair and equitable treatment and full protection and security."

110.
In 2001 the NAFTA Parties adopted an Interpretative Note on Minimum Standard of Treatment in Accordance with International Law that provides, in relevant part, as follows:

"1. Article 1105(1) prescribes the customary international law minimum standard of treatment of aliens as the minimum standard of treatment to be afforded to investments of investors of another Party.

2. The concepts of "fair and equitable treatment" and "full protection and security" do not require treatment in addition to or beyond that which is required by the customary international law minimum standard of treatment of aliens.

3. A determination that there has been a breach of another provision of the NAFTA, or of a separate international agreement, does not establish that there has been a breach of Article 1105(1)."

B. THE PARTIES' ARGUMENTS

1. Claimants' Arguments

111.
The Claimants assert that, by its acts or acts attributable to it, the Respondent has violated Article 1105 of the NAFTA by "failing to provide a stable regulatory framework for the conduct of petroleum development projects in the Newfoundland offshore area and by frustrating Claimants' legitimate expectations with regard to that regulatory framework."64 The Claimants argue that

"[a] series of arbitral awards punctuated by a binding Interpretative Note issued jointly by the NAFTA parties establishes three salient points: first, the source of the minimum standard of treatment guaranteed by the treaty is customary international law on the treatment of aliens; second, the content of the standard is not static, but rather evolves over time with the development of customary international law; and third, the minimum standard of treatment afforded to foreign investors by current customary international law includes a protection of the legitimate expectations upon which the investor relied in entering into the investment."65

112.
The Claimants further assert that

"[s]everal tribunals have found violations of an investor's legitimate expectations by virtue of state action making fundamental changes to the terms of an administrative permit upon which the investment had been premised, or revoking such permit on the basis of minor performance issues without giving the investor an opportunity to remedy them."66

113.
In support of this proposition the Claimants rely principally on two arbitral awards: Técnicas Medioambientales Tecmed, S.A. v. United Mexican States ("TecMed")67, and Metalclad Corporation v. Mexico ("Metalclad")68. The Claimants also argue that

"[l]ikewise, fundamental changes to a contractual relationship such as failure by the State to deliver on a contractual promise, express threats to terminate a contract or unilateral suspension of a contract have been held to violate the investor's legitimate expectations.

Other tribunals have held that the protection afforded by the fair and equitable treatment provision requires more broadly that a State maintain a stable legal and business environment for investments."69

114.
The Claimants assert that

"the imposition of the [2004] Guidelines and the Board's actions to enforce compliance with their terms [changed] the economic basis on which Claimants invested and depart from the regulatory framework that had governed the conduct of the Hibernia and Terra Nova projects since their inception,"70 and that therefore the 2004 Guidelines "undermined the legitimate expectations of the interest owners as to the scope of their R&D obligations when they decided to proceed with their investments."71

115.
They argue that

"[t]he reality is that the Guidelines fundamentally transformed the R&D expenditure obligations or operators with approved benefits plans in the province, and thus violated the Claimants' legitimate expectations."72

116.
According to the Claimants, they relied

"on a series of assurances from the Board and the federal and provincial governments that the commitments articulated in their [existing] Benefits Plans with respect to R&D were satisfactory to meet the requirements of the Accord Acts and would define the scope of their obligations"73 and they had a legitimate expectation that "the Benefits Plans' provisions would define [their] R&D expenditure obligations for the life of the investment."74

117.
They further claim that

"[t]he Board's actions in approving the Benefits Plans, and the federal and provincial governments' actions in approving the Board's decisions, engendered a legitimate expectation on the part of the project proponents that the provisions made in the Benefits Plan with respect to R&D satisfied the requirement of the Accord Acts and would not be supplemented by the Board."75

118.
The Claimants assert that

"[a]t no point was there any suggestion that the project owners would undertake a prescribed level of R&D, much less an arbitrary level of R&D calibrated to match the average expenditures of an undifferentiated sample set of oil and gas companies operating both onshore and off,"76 and that "[b]y the time the Hibernia interest owners made the decision to proceed with the project, they did so on the basis of further assurances by the federal and provincial governments that they would not be subject to further R&D-related requirements."77

119.
They add:

"When the Hibernia project participants made the decision to proceed with the investment in 1990, they did so on the basis of a series of express promises by the federal and provincial governments, and indeed by the Board, as to the scope of their benefits commitments. By the time the Terra Nova project arose, the Claimants had over a decade of experience watching the Board administer the Accord Acts with the support of the federal and provincial governments at Hibernia. It was reasonable for the Claimants to rely on that experience as a guide."78

120.
The alleged breach of Article 1105 is summarized by the Claimants as follows:

"This extensive history of State conduct by the federal and provincial governments and the Board created legitimate expectations on the part of the Hibernia and Terra Nova project participants with respect to the extent of the R&D-related regulatory requirements that would govern conduct of the projects. The 2004 R&D Expenditure Guidelines represent a fundamental shift in that regulatory framework and in the contractual understanding expressed in the Benefits Plans and the Hibernia Framework Agreement. The Guidelines therefore undermine the legitimate expectations engendered by the State and relied upon by the project participants when they decided to proceed with the investments. This State conduct amounts to a violation of the minimum standard of treatment guaranteed to investors by customary international law and, in turn, by NAFTA Article 1105(1)."79

2. Respondent's Arguments

121.
In response, the Respondent argues that the Article 1105 claim should be dismissed because:

"(a) Article 1105 prescribes that the NAFTA Parties must accord the customary international law minimum standard of treatment of aliens and the Claimants have failed to prove that this standard includes protection of a foreigner's legitimate expectations of the obligation to maintain a stable legal and business environment for investments. These are not obligations that form part of customary international law and accordingly are not part of Canada's obligations under article 1105; and

(b) even if the Claimants had proven that the protection of legitimate expectations and a stable regulatory environment were part of customary international law, which they have not, the Guidelines do not frustrate the Claimants' legitimate expectations. Nor has Canada failed to provide a stable regulatory framework for the Claimants' investment."80

122.
The Respondent further argues that

"[t]he Claimants allege that the Guidelines breach Article 1105 of the NAFTA because they are inconsistent with the Claimants' legitimate expectations. There is no dispute between the parties that only a failure to provide the minimum standard of treatment of aliens under customary international law will breach Article 1105.There is also no dispute that the Claimants have the burden to prove that the protection of a foreign investor's legitimate expectations is part of that standard."81

123.
The Respondent refutes the Claimants' argument that it has breached Article 1105 on the ground that they have failed to prove that the minimum standard of treatment under customary international law encompasses legitimate expectations. It argues that

"[t]he Claimants [have submitted] no evidence of state practice or opinio juris to support their assertion that the minimum standard of treatment afforded to foreign investors by customary international law includes a protection of legitimate expectations or the obligations to provide a stable regulatory environment for foreign investments."82

124.
The Respondent further asserts that

"while NAFTA tribunals have considered as a relevant element the repudiation of the legitimate expectations of foreign investors, assuming they reasonably existed at the time of the investment and are based on specific representations (...) they have not found that the failure to fulfill legitimate expectations constituted in and of itself a breach of a rule of customary international law part of the minimum standard of treatment under Article 1105."83

125.
The Respondent argues, in the alternative, that even if Article 1105 requires the protection of legitimate expectations, the Claimants do not meet four "prerequisites necessary for the expectations of a foreign investor to be entitled to protection."84 First, the Claimants' legitimate expectations must be based on objective expectations; second, the investor must have relied on a specific assurance by the state to induce the investment; third, the legitimate expectations must be those which existed at the time the investment was made and; fourth, to assess the legitimacy of the expectations, all circumstances must be taken into account.85 As such, the Respondent argues that

"the only expectations of the Claimants with respect to its investment in Canada which meets these conditions are that:

- the legal framework governing their investment would reflect the importance of R&D and E&T to the sustainable development of NL;

- the Claimants would be required to make expenditures on R&D and E&T in NL;

- these expenditures would be monitored and approved by the Board; and

- the Board had the authority to issue guidelines on the R&D and E&T expenditure requirement."86

126.
On the standard applicable under Article 1105, the Respondent relies in particular on the decisions in Glamis Gold, Ltd. v. United States of America87 and Cargill, Incorporated v. United Mexican States88 to the effect that the customary international law standard "has not evolved from the ‘shocking and egregious' standard described in Neer "89 but that "what is ‘egregious and shocking' has developed since 1926."90

3. The Parties' Responses to the Tribunal's Question

127.
The Tribunal posed the following question to the parties during the hearing:

"What evidence of "state practice" and opinio juris is available, if any, to support the conclusion that "fair and equitable treatment" encompasses a substantive obligation to protect the legitimate expectation of the parties?"91

128.
The Claimants referred to various authorities in their pleadings. In addition, the Claimants invoked two bilateral investment treaties that "explicitly tie fair and equitable treatment to the provision of a stable and predictable framework,"92 namely the Argentina/US BIT, and the Ecuador/US BIT. The Claimants also referred to two NAFTA Chapter 11 tribunals. They argued that the tribunal in Metalclad Corporation v United Mexican States

"had before it further evidence of state practice... [f]or example, the European Community "Investment Protection Principles" in October 1992, which state in part that the "‘fair and equitable' treatment standard should be understood as an ‘overriding concept' that encompasses in particular the following investment protection principles: (i) "transparency and stability of investment conditions."93

129.
The Claimants also relied on Merrill & Ring Forestry L.P. v. Canada,94 asserting that the tribunal "undertook its own analysis of state practice in relation to the minimum standard of treatment"95 and identified the "protection of legitimate expectations and maintaining a stable and predictable framework for investment are both relevant elements under that standard."96
130.
The Claimants further asserted that the majority of NAFTA tribunals addressing claims under Article 1105, post-dating the FTC Note on Minimum Standard of Treatment in Accordance with International Law, have found that "at the very least, the fact that a claimant's legitimate expectations have been repudiated is a relevant consideration when deciding whether a NAFTA Party has violated Article 1105."97 In support of this statement, the Claimants cite seven arbitral awards: International Thunderbird Gaming Corporation v. United Mexican States,98Waste Management, Inc. v. United Mexican States,99Gami Investments, Inc. v. United Mexican States,100ADF Group Inc. v. United States of America,101Merrill & Ring, Glamis Gold and Cargill v. Mexico.
131.
The Respondent noted that the Claimants

"submitted no evidence of practice of the three NAFTA Parties regarding the protection of legitimate expectations, let alone evidence of practice by any of the other 189 members of the United Nations, as would be necessary to prove that a rule of custom crystallized through widespread and consistent practice undertaken out of a sense of legal obligation."102

132.
The Respondent further asserted that the three new documents, on which the Claimants rely in their Post-Hearing Brief, the Argentina/US BIT, the Ecuador/US BIT and the European Community "Investment Protection Principles," provide no support for their assertion that the protection of legitimate expectations is part of the minimum standard of treatment of aliens under customary international law.103 The Respondent argued that "reference to a summary of an unproduced European Community document is not evidence of customary international law"104 and that the preambles of the two BITs on which the Claimants rely do not address legitimate expectations and are not evidence of state practice or opinio juris. The Respondent also asserted that

"the Claimants rely again on Merrill & Ring and suggest that the tribunal ‘undertook its own analysis of state practice in relation to the minimum standard of treatment.' This is incorrect. None of the material reviewed by the Merrill & Ring tribunal related to state practice concerning legitimate expectations and the tribunal did not make a decision on the role of such expectations in the customary international law standard of treatment."105

133.
Continuing that

"[n]one of the other NAFTA cases to which the Claimants refer in their Post-Hearing Brief support the conclusion that the protection of legitimate expectations is part of the customary international law standard of treatment. Nor does Cargill, the most recent NAFTA Chapter 11 decision. As Canada noted during the hearing, Cargill aptly summarized the customary international law minimum standard of treatment of aliens and the appropriate Article 1105 analysis as follows:

‘To determine whether an action fails to meet the requirement of fair and equitable treatment, a tribunal must carefully examine whether the complained of measures were grossly unfair, unjust or idiosyncratic; arbitrary beyond a merely inconsistent or questionable application of administrative or legal policy or procedure so as to constitute an unexpected and shocking repudiation of a policy's very purpose and goals, or to otherwise grossly subvert a domestic law or policy for an ulterior motive; or involve an utter lack of due process so as to offend judicial propriety.'"106

134.
The Respondent concludes that "[h]ence, mere failure to fulfill legitimate expectations does not fall below the customary international law standard of treatment required by Article 1105 of the NAFTA."107

C. THE TRIBUNAL'S APPROACH

136.
The parties disagree, however, as to what the standard of customary international law is and, in particular, whether it includes a protection of the ‘legitimate expectations' upon which the Claimants assert they relied in entering into the investment in 1986. Even assuming that the standard does include a protection of ‘legitimate expectations,' the parties disagree as to whether the facts demonstrate a violation of that standard.
137.
Two principal issues therefore fall to be determined by the Tribunal: first, to identify the applicable standard under Article 1105; and second, to apply that standard to the facts of this case.

D. THE APPLICABLE STANDARD

Metalclad

Waste Management (No. 2)

International Thunderbird

Glamis Gold

Cargill v. Mexico

E. THE TRIBUNAL'S ASSESSMENT OF THE STANDARD UNDER ARTICLE 1105

F. APPLICATION OF THE STANDARD TO THE FACTS

155.
The Claimants assert that when they made the decision to proceed with their investment in the Hibernia project in 1990, they did so "on the basis of a series of express promises by the federal and provincial governments, and indeed by the Board, as to the scope of their benefits commitments."136 According to the Claimants, they had watched the Board administer the Accord Acts with the support of the Federal and Provincial governments over a period of a decade, and concluded that it was therefore "reasonable for the Claimants to rely on that experience as a guide."137 The implication that was drawn, allegedly, was that there would be no change in the scope of their benefit commitments.138 According to the Claimants, this extensive history of State conduct, by the Federal and Provincial governments and the Board, created legitimate expectations that the regulatory arrangements in relation to the Benefits Plan would not change in a way that would materially and negatively affect the Claimants.139 Put another way, the Claimants assert that by changing the rules, the Respondent failed to provide a ‘stable regulatory framework' for the conduct of petroleum development projects in the Newfoundland offshore area, and thereby frustrated the Claimants' legitimate expectations.140
156.
At the heart of these claims is an assertion that the Federal and Provincial governments, and the Board, made a series of express promises - in the form of representations - which they then broke. For the reasons set out below, having carefully studied the record and all the evidence the Tribunal is unable to conclude that any such ‘promises' were made, either expressly or by any pattern of behavior over a ten year period, such as to give rise to a representation that there would not be changes to the regulatory regime. In order to be able to rely upon an expectation that is said to exist, evidence would need to be tendered to show clear and explicit representations together with an indication as to reliance being placed upon such representations. The record in this case shows no such evidence, including of any subjectively held expectation that might be claimed to have existed.
157.
For its part, the Respondent asserts that there is an affirmative and continuing obligation on the Claimants to make expenditures on R&D.141 The Respondent further argues that the Federal Accord and Provincial Accord Acts did not give the Claimants a discretion regarding payments. It is Respondent's case that it did not make any representations contrary to the above, or that they would not exercise their discretion to issue new guidelines as to the application and administration of Section 45 of the Federal Accord Act.142 The Respondent also relies on the fact that the Canadian courts confirmed that the Board had the legal authority to impose the 2004 Guidelines as a matter of Canadian law, and that the courts' reasoning on this point was not further challenged by the Claimants in these proceedings.143 The Respondent made the further point that the Claimants had introduced no documents or witness statements in support of the claim that representations were made upon which the Claimants relied.144
159.
It is readily apparent that the Atlantic Accord does no more than establish the basis for the Federal and Provincial governments to impose benefits plans imposing R&D requirements. There is nothing in the text of the Atlantic Accord that expressly prevents the Federal or Provincial governments from establishing a prescribed level of R&D, as opposed to the system of self-assessment of R&D levels imposed by the original Benefits Plans. Nor does the Tribunal see any basis for concluding that a change to the Benefits Plans, by imposing a prescribed level of R&D, is necessarily contrary to a reading of the Atlantic Accord. In short, those Accords cannot be seen as containing any promise or representation to not change an existing benefits plan or to impose a new plan that is consistent with the requirements of the Atlantic Accords.
160.
The Tribunal also finds no such requirements in the Federal Accord Act, or the Provincial Accord Act. Section 45 of the Federal Accord Act is broad in its terms and does not specify the kind of benefits plan that might be adopted' it cannot be read to prohibit per se a benefits plan that establishes a ‘prescribed level of R&D.' Moreover, the fact that the Federal Accord Act includes Section 151.1, which allows the Board to "issue and publish (…) guidelines and interpretation notes with respect to the application Section 45," will have alerted the Claimants to the possibility that an amendment to an existing benefits plan could not be excluded and might be made. There is nothing in Section 151.1, on its face or otherwise, that prevents such an amendment establishing a Benefits Plan that establishes a prescribed level of R&D as such. The same conclusions apply in relation to the Provincial Accord Act, Section 45 of which cannot be read to expressly or impliedly prohibit a benefits plan that establishes a prescribed level of R&D, and Section 147 of which provides an analogous provision to Section 151.1 of the Federal Accord Act. In short, neither the Federal Accord Act nor the Provincial Accord Act may be interpreted as making any promise or representation not to change an existing benefits plan or to impose a new plan that is consistent with the requirements of the Federal Accord Act and/or the Provincial Accord Act.
161.
Did the Board by other means make a promise or representation that the Benefits Plan would not be amended or, if it was, that it would not establish a Benefits Plan that established a prescribed level of R&D? The Tribunal has carefully studied the record and has been unable to find any evidence that such a "promise" or representation was made. The 1986 Hibernia Benefits Plan does not contain any such promise or representation. Adopted on the basis of the Federal Accord Act and the Provincial Accord Act, the conclusions set out in the preceding paragraph apply with equal force to the Benefits Plan itself; the 1986 Benefits Plan does not on its face offer a promise or representation that it will not be changed or that a new benefits plan might not be adopted that is consistent with the requirements of the Federal Accord Act and/or the Provincial Accord Act. What can be said, however, is that at the time of the Board's decisions approving the Hibernia Benefits Plans, there was no discernible dissatisfaction with the actions that were proposed to be taken by the Claimants, and no suggestion as to whether the regulatory framework governing that investment might change. The Terra Nova Decision indicated increased monitoring requirements and additional conditions, but that too did not appear to indicate, at the time, that the Board was fundamentally dissatisfied with the then actions of the Claimants, with respect to these investment projects. Thus, no specific assurances were provided, and there was no clear indication at the time that the actions to be taken by the Claimants were in some way fundamentally unsatisfactory to the Respondent.
162.
The Claimants also assert that the Respondent made promises or representations by other means, namely the framework agreement concluded in 1990, regarding Hibernia148 and the Foreign Investment Review Act ("FIRA").149 The Respondent argues that neither is relevant to these proceedings. The Tribunal agrees that neither of these instruments could amount to a representation, made by or on behalf of the Respondent, that the 1986 Benefits Plan would not be changed or that a new Benefits Plan that is consistent with the requirements of the Federal Accord Act and/or the Provincial Accord Act, might not be adopted. As regards the framework agreement, the Tribunal notes the force of the Respondent's point that it had no connection with any obligations the Claimants had under Section 45 of the Atlantic Accord, and that the Board was not even a party to the framework agreement.150 As regards the FIRA, the Tribunal cannot see how the Claimants can eke out a representation out of a Federal Accord Act that was not in force at the time they made their investment, having regard to the fact that the FIRA was replaced in 1985 by the Investment Canada Act.151 Whatever context the FIRA may have provided, it cannot amount to a representation that gives rise to any expectation on behalf of the Claimants.152
163.
Moreover, there is nothing in the record to show that any person acting for or on behalf of the Board made any explicit future oriented promise or representation prior to the adoption of the Benefits Plan in 2004, or at any time thereafter that the approach adopted in the Plan would be maintained as a constant in the future. Counsel for the Respondent reiterated this point on the final day of the hearing, stating that the Claimants

"have not identified any specific assurances that are relevant to this dispute. They have identified no promises from the Board that the Operators can just undertake research and development necessary for the projects. They have identified no promises that the Operators could unilaterally determine how much they could spend. They have identified no promise that the Guidelines would not be issued; no promise that the Board would not rely on its authority under Section 151.1(1)1 to issue such Guidelines; and, finally, no promise that the Board would not enforce the Claimants' obligation under Section 45(3)(c) to expand on research and development and education and training in the Province."153

Since the Claimants have not asserted that any such specific assurance was made, that point is not in dispute between the parties. The Claimants argued, as noted above, that they had obtained assurances from the Board that their existing Benefits Plans were satisfactory and met regulatory requirements, and further argued that this served as the basis for their expectation that conditions would not be altered.

164.
This is the heart of what is left to support the Claimants' argument that a promise or representation was made. In short, the Claimants' argument is that the 1986 and 1997 Benefits Plans amounted to agreements in the nature of a contract, and that it was implicit in those agreements that there would be no changes to the Benefits Plans of the kind that were later adopted. The point was put in the following way:

"The Board's actions in approving the Benefits Plans, and the federal and provincial governments' actions in approving the Board's decisions, engendered a legitimate expectation on the part of the project proponents that the provisions made in the Benefits Plan with respect to R&D satisfied the requirement of the Accord Acts and would not be supplemented by the Board."154

165.
In making this argument, the Claimants have to show that the Benefits Plans amounted to a contractual arrangement, and that the contractual arrangement contained an implicit undertaking that there would be no material changes. They would also have to show that by entering into such a contractual undertaking the Board had, by taking decisions to approve the Benefits Plans, in some way fettered its ability to act under obligations arising from the Atlantic Accord, the Federal Accord Act and the Provincial Accord Act. Each of these claims is difficult to sustain on the facts of this case.
166.
The Tribunal is not able to accept these arguments. Both Benefits Plans were adopted by Decision of the Board. Whatever discussions, negotiations or exchanges that may have occurred before these decisions, the decisions are not in the form of a contractual agreement and, in the view of the Tribunal, cannot otherwise be said to amount to a contractual undertaking. The Board's decisions amounted to an exercise of administrative or public authority. The essential point, however, is that the Claimants have not been able to point to any promise or representation made by any person on behalf of the Board or the Respondent that the Benefits Plans, or the decisions that adopted them, would not be supplemented by any changes, including changes that were consistent with and lawful under the Atlantic Accord, the Federal Accord Act and the Provincial Accord Act. It follows that the Claimants are unable to show that in some way they were induced into making the investment by certain promises.
167.
The question of consistency with the Atlantic Accord, the Federal Accord Act and the Provincial Accord Act was fully addressed by the Canadian courts, and resolved as a matter of Canadian law by the judgment of September 4, 2008 of the Newfoundland and Labrador Court of Appeal. In that case the majority rejected an appeal from a decision that found that the Board had acted lawfully under Canadian law. Leave to appeal to the Canadian Supreme Court having been rejected; the Court of Appeal's ruling on Canadian law is dispositive. Although this Tribunal has a different task from that of the Court of Appeal, namely to determine whether there has been a violation of the law of NAFTA, it is not for us to express a view as to whether the Court of Appeal got its decision on Canadian law wrong. That decision is dispositive of the issues that arise as a matter of Canadian law. The conclusions reached by the Court of Appeal are relevant to and underpin our ruling that no violation of Article 1105 has occurred.
168.
The Court of Appeal concluded that as a matter of Canadian law the Board had acted reasonably and lawfully in exercising its authority to apply the 2004 Guidelines to the Hibernia and Terra Nova projects.155 In reaching that conclusion, the Court of Appeal considered the regulatory framework within which the Claimants made their investment, the Benefits Plans approved, and the 2004 Guidelines adopted. In reaching its judgment the Court of Appeal interpreted the Federal Accord Act and the Benefits Plans, and it carefully considered Section 151.1. Judge Walsh, writing for the majority concluded:

"There is no indication section 151.1 or the Guidelines were intended to operate retrospectively. However, under section 138(2), an operating licence expires on March 31 of each year, and is renewable only for one year periods. A production authorization is required for each work or activity, and an authorization can be suspended or revoked for failure to comply with a requirement in the authorization (subsections 138(4) and (5)). Section 45(3) requires that the benefits plan "contain provisions intended to ensure" that expenditures will be made for research and development in the Province. When Hibernia Management and Petro-Canada entered into their agreements and their benefits plans were approved, they were aware of these provisions, and could, at the initial stage, have sought more specific language and particulars regarding expenditures on research and development."156 (emphasis added)

Justice Walsh also addressed the function of the Board's monitoring role:

"A reasonable inference flowing from the monitoring function is that the Board may determine that the expenditures of a company do not meet the requirements of the benefits plan. Further to this point, the effect of the Guidelines is to advise companies regarding what to expect when the Board undertakes its monitoring function."157

Justice Berry concurring with Justice Walsh, added that the Board:

"approved the Hibernia and Terra Nova projects on condition that the Board have the authority to continuously monitor research and development expenditures and intervene by issuing guidelines requiring higher expenditures should the appellants' level of expenditures fall below that which the Board considered appropriate. These were the rules of the game when development approvals issued. The same rules apply today."158 (emphasis added).

169.
The Court of Appeal's findings, as here emphasized, are not without relevance to our assessment of whether the Claimants had a legitimate expectation that a certain standard of conduct would be met in relation to measures adopted under the Federal Accord Act and the Provincial Accord Act. In the present instance the Claimants need to show a specific assurance attributable to the Respondent. They need to be able to show that there were clear and explicit representations made by or attributable to the Respondent, in relation to future changes to the regulatory framework or requirements under Benefits Plans. Yet, as the Court of Appeal makes clear, the Claimants did not seek more specific language in respect of any future changes. There is no evidence before us that they sought assurances that Section 151.1 would not be relied upon to adopt new guidelines, or that any new guidelines would not be applied to their projects. Nor is there any evidence to show that they sought assurances that the Board's requirement to monitor the projects (to ensure that the Claimants' expenditures met the requirements of the benefits plans, as the Court of Appeal explained) would not lead to a situation in which the Board, having found that such expenditures were insufficient, would then impose additional requirements which were lawful under Canadian law. If the Claimants identified ambiguities in relation to the regulatory framework established by the Atlantic Accord and the Federal Accord and Provincial Accord Acts, provisions with which they were clearly familiar, then it was for them to seek clarifications and obtain specific assurances. If indeed the need to avoid future changes to the Benefits Plans was a matter of central concern, one assumes that the point would have been raised in the exchanges between the Claimants and the Board. There is no evidence before us that the point was so raised. Indeed, there is no evidence before us that any specific assurances were sought by the Claimants in relation to future changes that might be adopted under Sections 45.3(c) and 151.1, and there is no evidence that any such assurances were given.

G. CONCLUSIONS ON ARTICLE 1105

171.
That being the basis for the Claimants' arguments as to the alleged violation of Article 1105, the Tribunal concludes that the Respondent's behavior did not amount to conduct that was arbitrary, grossly unfair, unjust or idiosyncratic, or discriminatory, or involved a lack of due process leading to an outcome which offends judicial propriety.

VI. ARTICLE 1106

A. INTRODUCTION

172.
The Claimants allege that the required spending on R&D and E&T pursuant to the 2004 Guidelines constitute an impermissible performance requirement within the meaning of Article 1106(1)(c) of the NAFTA. As noted above, Article 1106 of the NAFTA ("Performance Requirements") provides that:

"1. No Party may impose or enforce any of the following requirements, or enforce any commitment or undertaking, in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment of an investor of a Party or of a non-Party in its territory:

(a) to export a given level or percentage of goods or services;

(b) to achieve a given level or percentage of domestic content;

(c) to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory;

(d) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment;

(e) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings;

(f) to transfer technology, a production process or other proprietary knowledge to a person in its territory, except when the requirement is imposed or the commitment or undertaking is enforced by a court, administrative tribunal or competition authority to remedy an alleged violation of competition laws or to act in a manner not inconsistent with other provisions of this Agreement; or

(g) to act as the exclusive supplier of the goods it produces or services it provides to a specific region or world market.

2. A measure that requires an investment to use a technology to meet generally applicable health, safety or environmental requirements shall not be construed to be inconsistent with paragraph 1(f). For greater certainty, Articles 1102 and 1103 apply to the measure.

3. No Party may condition the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with any of the following requirements:

(a) to achieve a given level or percentage of domestic content;

(b) to purchase, use or accord a preference to goods produced in its territory, or to purchase goods from producers in its territory;

(c) to relate in any way the volume or value of imports to the volume or value of exports or to the amount of foreign exchange inflows associated with such investment; or

(d) to restrict sales of goods or services in its territory that such investment produces or provides by relating such sales in any way to the volume or value of its exports or foreign exchange earnings.

4. Nothing in paragraph 3 shall be construed to prevent a Party from conditioning the receipt or continued receipt of an advantage, in connection with an investment in its territory of an investor of a Party or of a non-Party, on compliance with a requirement to locate production, provide a service, train or employ workers, construct or expand particular facilities, or carry out research and development, in its territory.

5. Paragraphs 1 and 3 do not apply to any requirement other than the requirements set out in those paragraphs.

6. Provided that such measures are not applied in an arbitrary or unjustifiable manner, or do not constitute a disguised restriction on international trade or investment, nothing in paragraph 1(b) or (c) or 3(a) or (b) shall be construed to prevent any Party from adopting or maintaining measures, including environmental measures:

(a) necessary to secure compliance with laws and regulations that are not inconsistent with the provisions of this Agreement;

(b) necessary to protect human, animal or plant life or health; or

(c) necessary for the conservation of living or non-living exhaustible natural resources."

173.
The Tribunal begins by setting out the parties' argument as to whether the 2004 Guidelines constitute a prohibited performance requirement under Article 1106 of the NAFTA. The legal issues that arise concern two questions; first, what constitutes the proper scope and interpretation of Article 1106, and in particular, do the R&D and E&T requirements under the 2004 Guidelines (and the application thereof) constitute ‘services' within the meaning of Article 1106; and second, whether the 2004 Guidelines compel spending on R&D and E&T such that they constitute a ‘requirement' to "purchase, use, accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory."159 After addressing the parties' arguments, the Tribunal sets out its conclusions.

B. INTERPRETING ARTICLE 1106: WHETHER R&D AND E&T CONSTITUTE ‘SERVICES'

174.
The parties agree that the interpretation of Article 1106 is governed by the 1969 Vienna Convention on the Law of Treaties ("VCLT"), and that the starting point is Article 31(1), which requires interpretation of a treaty to be undertaken "in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in light of its object and purpose."160

1. Claimants' Arguments

175.
The Claimants argue that "[o]n its face, Article 1106(1) prohibits NAFTA Parties from imposing or enforcing a requirement to purchase R&D services or goods in the territory, or to accord a preference to R&D services or goods provided in the territory."161
176.
In the Claimants' view, the NAFTA prohibits performance requirements because "they subjugate the business judgment of foreign investors to the development goals of the host State and, in so doing, create investment and trade distortions."162 Undertaking R&D as required by the 2004 Guidelines represents the substitution of the Board's own judgment and development objectives for the business judgment of the project operators, and to this end reflects a distortion of investment flows.163
177.
The Claimants' core argument is that R&D and E&T are ‘services' within the meaning of Article 1106(1)(c). They refer to Webster's Third New International Dictionary which defines ‘services' as "useful labor that does not produce a tangible commodity - usu. used in pl. (railroads, telephone companies, and physicians perform services although they produce no goods)."164 They rely on the ordinary meaning of ‘services' to argue that it includes R&D and E&T services, which makes spending requirements under the 2004 Guidelines a prohibited performance requirement.165
178.
The Claimants further argue that the expenditure on R&D invariably involves the purchase of services from technical experts in the Province; "[t]hey also may entail (though to a much lesser extent) the purchase of goods as needed to support those services."166 According to the Claimants, since 1106(1)(c) lists ‘services' without any limitation or exclusion, the Respondent bears the burden of proving a special meaning of that term, that excludes R&D and E&T services.167
179.
As R&D is expressly mentioned in Article 1106(4) which permits conditioning the receipt of an advantage on a requirement to carry out research and development in its territory, the Claimants argue that Article 1106(1) prohibits performance requirements involving services including R&D.168
180.
Although other NAFTA tribunals have considered Article 1106, the Claimants see these cases as offering little guidance because the Article 1106 dimension was ancillary to the claim, or the requirements at issue did not, on their face, fall squarely within Article 1106, which they argue is the case in the present dispute.169
181.
The Claimants look to other provisions of the NAFTA for contextual support for their interpretation that services in the NAFTA include R&D and E&T services. For example, the scope and coverage provisions of NAFTA's chapter on government procurement referred to ‘goods' and ‘services'.170 Moreover, with respect to services, the NAFTA Parties agreed on a common classification system for reporting purposes, and that system included ‘research and development services' and ‘educational and training services.'171 The Claimants argue that this demonstrates that the Respondent understood that R&D and E&T included services.172
182.
As regards the negotiating history of the NAFTA, as a supplementary means of interpretation pursuant to Article 32 of the VCLT, the Claimants argue that Canada had proposed an exception for R&D and E&T to the main prohibition now contained in Article 1106(1), in addition to the text which is the predecessor to the current Article 1106(4).173 Canada's proposed text was not accepted by the other NAFTA Parties. Nevertheless, according to the Claimants, this proposed draft text of Article 1106 reflects Canada's recognition that R&D and E&T were covered by the term ‘services.'
183.
The Claimants also reference the classification instruments in the Uruguay Round, which was negotiated contemporaneously with the NAFTA, to confirm their interpretation that the ordinary meaning of the term ‘services' encompasses R&D and E&T services.174 Moreover, the Claimants note that UNCTAD has issued reports that classify requirements to conduct R&D as performance requirements.175
184.
The Claimants further consider the terms and structure of the 2004 Guidelines as being relevant to the context within which the interpretation occurs. The 2004 Guidelines have attached to them an Expenditure Application Form that is designed to provide some ‘concrete idea' of the R&D services that the Guidelines cover. The form provides check-boxes for ‘engineering, design, computer programming", ‘mathematical analysis and testing of psychological research," among other classifications.176 According to the Claimants, each of these clearly falls within the ordinary meaning of ‘services.'177
185.
The Claimants argue that the Respondent is requiring a special interpretation of services that excludes R&D and E&T, and as such it bears the burden of proof in establishing that this special meaning, in Article 1106(1), excludes R&D and E&T services, on the grounds that they are "different types of performance requirements."178 The Claimants argue that "none of the sources on which [the Respondent] relies qualifies among the primary sources of treaty interpretation stated in the VCLT."179
186.
The Claimants agree with the Respondent that the only requirements prohibited under Article 1106(1) are those listed in that provision. However, they do not agree that a specified list of prohibited conduct means that those listed features should be interpreted restrictively. In the Claimants' view, the limitations of Article 1106(5) do not apply to services, since it is expressly mentioned in Article 1106(1)(c).180 Article 1106(5) provides: "Paragraphs 1 and 3 do not apply to any requirements other than the requirements set out in those paragraphs."
187.
Referencing a number of WTO cases which they view to be supportive of a non-restrictive approach to treaty interpretation, the Claimants argue that terms in a closed list should be interpreted in accordance with the "Vienna Convention and to achieve the goals of the treaty, and not in an restrictive manner."181
188.
The Claimants further argue that such an interpretation of Article 1106(1)(c) accords with the NAFTA's objective of "eliminating barriers to trade in, and facilitating the cross-border movement of goods and services between the territories of the Parties."182

2. Respondent's Arguments

189.
The Respondent argues that that the 2004 Guidelines do not breach Article 1106 of the NAFTA because Article 1106(1)(c) does not prohibit either R&D or E&T expenditure requirements. It also argues that R&D and E&T expenditure requirements are outside the scope of ‘services' under Article 1106(1)(c). Thus, there is a fundamental disagreement between the parties as to whether R&D and E&T requirements constitute conduct that is included within, and hence prohibited by, Article 1106(1).
190.
The Respondent asserts that Article 1106(1) identifies seven specific prohibited ‘performance requirements,' and that only those expressly set out in Article 1106(1) are caught by Article 1106. They rely on the ordinary meaning of the terms in Article 1106(5) to assert that the list of performance requirements in Article 1106(1) is exhaustive, that it should be interpreted restrictively, and that accordingly, a performance requirement will not contravene the NAFTA unless explicitly prohibited by Article 1106(1).183 Accordingly, the Respondent asserts that when considering whether R&D and E&T expenditure requirements are covered by Article 1106(1)(c), the treaty interpreter is required by Article 1106(5) to adopt a restrictive approach and determine that such requirements "fall squarely and specifically into the prohibited performance requirements of purchase, use or preference for local goods or services."184 A measure will not contravene Article 1106(1) unless it is explicitly prohibited by it.185
191.
The Respondent argues that Article 1106(1)(c) does not mention either R&D or E&T. They reason that:

"[s]ince Article 1106(1) must be interpreted restrictively(...), as a threshold matter, it cannot be presumed, as the Claimants do, that a requirement for an investor to conduct or support R&D or E&T falls within the scope of Article 1106(1)(c)."186

To conclude otherwise, the Respondent argues, would be inconsistent with previous NAFTA decisions and would render Article 1106(5) redundant and inconsistent with the proper interpretation of the NAFTA; that each provision of the treaty be given effect.187 The Respondent draws support for its view from several NAFTA cases.188

192.
Moreover, in the Respondent's view, R&D and E&T represent distinct types of performance requirements. It notes, for example, that an UNCTAD survey of performance requirements treats "sourcing/local content performance requirements which are covered by NAFTA 1106(1) differently from research and development requirements and training requirements."189 The Respondent argues that UNCTAD recognizes that R&D requirements are not encompassed by the TRIMS Agreement and are precluded in only a few bilateral or regional treaties.190 Similarly, training is considered a distinct form of performance requirement. R&D and E&T requirements "serve different policy goals than requirements to purchase, use or accord a preference to local goods or services."191
193.
Another related line of argumentation in the Respondent's case is that where States have wanted to prohibit R&D and E&T, they have done so explicitly. It refers to several examples. The 1994 Model US BIT, which was developed at the same time of the NAFTA, contains an explicit prohibition on requiring a particular type or percentage of R&D, and numerous other treaties have explicitly referenced R&D when they wished to contain a prohibition to R&D requirements. The Multilateral Agreement on Investment ("MAI") also made a distinction between R&D and the requirement to purchase or use local goods and services.192 The Canada-US Free Trade Agreement, which predated the NAFTA, drew a distinction between a prohibition on purchasing local goods or services as a condition of entry and operation of an investment, and R&D, which was not precluded.193 Thus, the Respondent asserts that local content and R&D and E&T performance requirements are not the same and should not be treated as such when applying Article 1106.194
194.
The Respondent also argues that requirements such as those set out in the 2004 Guidelines, which only incidentally result in the purchase, use or accord of preference to local services, are not prohibited under the NAFTA. According to Canada, to hold otherwise would be a slippery slope nullifying almost all requirements on foreign investors that indirectly implicate the use of local services.195 The Respondent asserts that the Claimants have failed to understand the structure of Article 1106, or appreciate why certain clarifications were made to Article 1106(4) during the drafting process.196 They refer to the risk of conflicting obligations with respect to R&D subsidies between the NAFTA and WTO subsidy agreement, and the resulting agreement in the NAFTA that permitted conditioning the receipt of an advantage on the performance of R&D in the territory.197
195.
The Respondent further contests the Claimants' understanding of the draft negotiating text. It argues that the only "reasonable inferences that can be drawn from the NAFTA negotiating text and the ICA Reservations are [that] while there may have been some uncertainty in July 1992 as to whether R&D requirements were covered by what would become Article 1106(1), that uncertainty was resolved by August 1992 by virtue of what would become Article 1106(5)."198

C. CANADA'S ARTICLE 1108 RESERVATION

1. Claimants' Arguments

196.
In support of their claim that R&D and E&T expenditures constitute a performance requirement under Article 1106, the Claimants reference Canada's Annex I Reservation for the Federal Accord Act. According to the Claimants' view, Canada's reservation of the R&D and E&T provisions of the Federal Accord Act in its Schedule to Annex I forms part of the context in interpreting Article 1106(1).199 The Annex, they argue, was to list "existing measures that do not conform with obligations imposed by (…) Article 1106 (Performance Requirements)."200 By listing the Federal Accord Act and specifically describing its R&D expenditure requirements separately from the basic requirement to have a benefits plan, the Claimants assert that "Canada acknowledged that a requirement to provide for R&D expenditures is itself inconsistent with Article 1106."201 In other words, according to the Claimants, the reservation was necessary because, otherwise Article 1106(1) prohibited local content requirements for R&D services.

2. Respondent's Arguments

197.
The Respondent rejects the Claimants' argument, and does not accept that by including the Federal Accord Act in Annex I of the NAFTA, it was in any way acknowledging that R&D expenditures are inconsistent with Article 1106(1).202 Rather, the Respondent maintains that the reservation "should be considered in light of all the elements set out in the reservation, including the description of the reservation and the reserved articles."203 The Respondent asserts that Canada adopted a "belt and suspenders"204 approach because

"[w]hen the reservation was drafted, there were no decisions to guide how Article 1106 might be interpreted by future arbitral tribunals, [and] [i]n light of that uncertainty and the complexity of the NAFTA's performance requirements provision, it makes sense that the reservation description was drafted to be fulsome and over-inclusive, even at the risk of including aspects of the Benefit Plans that did not necessarily violate Article 1106(1). "205

D. COMPULSION UNDER THE 2004 GUIDELINES

198.
The parties agree that in order to be caught by Article 1106(1) of the NAFTA, a performance requirement must contain a requisite degree of compulsion.

1. Claimants' Arguments

199.
The Claimants argue that compliance with the 2004 Guidelines is mandatory, and will compel Hibernia and Terra Nova to spend $189 million more on R&D throughout the remaining life of the Hibernia and Terra Nova projects, than they would have otherwise undertaken.206 According to the Claimants, expenditures in excess of what would otherwise be undertaken under the original Benefits Plans confirms the existence of compulsion and demonstrates that the 2004 Guidelines constitute a performance requirement within the meaning of Article 1106(1).207
200.
The Claimants also argue that there is no doubt that the Guidelines constitute a ‘requirement' within the meaning of Article 1106(1). They note, for example, that even though the 2004 Guidelines are characterized as ‘guidelines' rather than requirements, "every available indicator, including their text, functionality and purpose, makes clear that the Guidelines establish compulsory obligations."208 The term ‘requirements' appears in numerous places in the 2004 Guidelines, with respect to areas such as Section 2 which is captioned ‘Required Expenditure Commitments.'209 Section 2.2.2, concerning expenditure targets, uses the word ‘requirement' five times, including three times in the phrase "production phase R&D expenditure requirement."210
201.
The Claimants further highlight that the Section dealing with expenditure management further provides for unspent expenditure commitments into an "R&D fund in the event that there are not sufficient projects to absorb the required level of expenditure in a given POA period."211 Furthermore, when an operator "overspends its R&D requirement, the excess may be applied against its requirement in the subsequent POA period."212 The Claimants further argue that the Board requires the project operator to comply with the Guidelines as a condition to issuance of a POA.213
202.
The Claimants argue that Article 1106(1) applies to ‘services' in the broad sense, which is inclusive of both R&D and E&T, and accordingly E&T is not exempt from coverage. Moreover, Article 1106(1) applies to requirements "to purchase, use or accord a preference to goods produced or services provided in the territory, or to purchase goods or services from persons in its territory," irrespective of the form of the transaction. The examples that the Respondent references such as funding a professorial chair, or providing scholarships or classroom furnishings or various research and educational projects in the Province, are not outside Article 1106(1)(c)'s prohibition because they are E&T expenditures that do not involve the purchase of local goods or services.214 According to the Claimants, the requirement contained in the 2004 Guidelines includes actions that "accord[s] a preference" to educational services provided in the province, which is what these expenditures represent.215 The Claimants assert that to suggest that the "Claimants can now avoid any conflict with the NAFTA by making expenditures exclusively on E&T" [is] "both ineffective given the prohibition in Article 1106 (1) (c) of local content requirements for services (including E&T services), and disingenuous in view of the clear orientation of the Guidelines to expenditures on R&D."216
203.
The Claimants further argue that the Accord Acts themselves, at Section 45(3), tie E&T expenditures to "education and training to be provided in the Province," and the wording of the 2004 Guidelines make clear that such expenditures are designed to accord a preference to E&T services provided in the Province. The 2004 Guidelines state, at Section 3.4, that "the definition of education and training in the Province (...) shall include expenditures for (...) scholarships and work terms including provincial residents who may study or work outside the Province."217 In this way, even study abroad programs are designed to according a preference to services in the Province as the Claimants are paying funds to those students.218
204.
The Claimants also reject the arguments advanced by the Respondent, to the effect that there are examples of spending that fail to require the use, or accordance, of a preference of goods or services provided in the Province.219 In the case of an in-house R&D facility, for example, which the Respondent has characterized as "incidental spending,"220 the Claimants note that there is no way to create or conduct such a facility without using or according a preference to local goods and services in its construction and operation. It relies on the testimony of one of Canada's witnesses at the oral hearing to support this proposition.221 According to the Claimants, the basic purpose of the 2004 Guidelines was to "extract greater commitment to R&D from the oil and gas sector,"222 so that the Board developed a specific expenditure requirement based on a statistical index for nationwide R&D spending by the oil and gas sector.

2. Respondent's Arguments

205.
The Respondent argues that even if R&D and E&T could fall within the scope of Article 1106(1)(c), and even if some R&D and E&T expenditures may involve local goods or services, the 2004 Guidelines do not necessarily compel the purchase, use or accordance of a preference to local goods and services.223 They rely on the premise that if a measure allows an investor the option of expending on something that is not prohibited, then there is no compulsion, and, therefore, no breach of the NAFTA obligations.224 The Respondent asserts that if "an impugned measure does not specifically require the investment of the investor to purchase, use or prefer local services, and allows compliance by means which do not implicate 1106(1)(c), then the claim of a violation must be rejected."225
206.
The Respondent further asserts that the 2004 Guidelines are sufficiently broad and flexible that Claimants could make qualifying expenditures without necessarily purchasing or using local goods and services, and the Guidelines do not even "necessarily require the Claimants to undertake R&D because the Claimants may fulfill their obligations exclusively through expenditures on E&T."226
207.
Moreover, in the Respondent's view, while the 2004 Guidelines require expenditures, many of the eligible expenditures do not necessarily "impose or enforce a requirement or enforce a commitment or undertaking to purchase use or accord a preference for local goods or services."227 In support of this proposition, the Respondent refers to the endowment of a chair at a university, the contribution of various ice research equipment to a university, or sponsorship of the furnishings of a classroom, as examples that do not result in the purchase of goods or services.228 The example of endowing a chair at a university is not seen as resulting in the purchase of goods or services. Rather it bestows funds on the educational institution to be used for a specific educational purpose.229 According to the Respondent, fellowships do not compel the purchase, use or accordance of a preference to local goods or services; "[r]ather it involves the contribution of funds to an educational institution or individual to support E&T."230 The Respondent also references examples of specific R&D expenditures undertaken by Hibernia and Terra Nova in the Province that did not necessarily compel the purchase of goods or services.231
208.
The Respondent cites further examples (such as endowment of academic research chairs, student scholarships and work abroad programs for students) of expenditures under the 2004 Guidelines that do not violate Article 1106(1)(c), on the ground that there is no exchange of services for expenditure.232 The Respondent stresses that the 2004 Guidelines do not prescribe how the Claimants make such expenditures on R&D and E&T, as long as they are carried out in the Province.233 They reason that if the operators use domestic entities to carry out R&D in the Province for business reasons, this will not amount to an imposition of a requirement.234
209.
The Respondent, relying on the ordinary meaning of the terms "provided" and "purchase[d] (…) from persons" in Article 1106(1)(c), argues that Article 1106(1)(c) is only brought into play when the "service supplier and the service consumer are separate entities [and] when a requirement compels the provision of a service from a domestic service provider to the investment of the investor."235 The requirement under the 2004 Guidelines to ‘carry out' R&D and that E&T 'be provided' in the territory does not, according to the Respondent, fall under the prohibition of Article 1106(1)(c).236 According to the Respondent, establishing an in-house R&D facility in the Province would not result in a transaction that violates Article 1106(1)(c), and, yet, could qualify under the Guidelines.237

E. THE TRIBUNAL'S FINDINGS

1. Treaty Interpretation and the Scope of Article 1106

210.
As required by Article 1131(1) of the NAFTA, the Tribunal is bound to apply "this Agreement [the NAFTA] and the applicable rules of international law." Accordingly, the Tribunal will also apply as "applicable rules" the rules of interpretation of treaties as set forth in Articles 31 and 32 of the VCLT. We interpret the requirements of Article 1106 in accordance with their ordinary meaning, in their context, and in light of their object and purpose.
211.
Article 1106(1) prohibits the imposition of certain listed performance requirements in connection with the establishment, acquisition, expansion, management, conduct or operation of an investment. In the view of the Tribunal, there can be little doubt that the 2004 Guidelines purport to impose conditions on the Claimants with respect to their management, conduct or operation in the Province. The relevance of the preamble language of Article 1106 has not been challenged by the parties.
212.
The question before the Tribunal is whether those 2004 Guidelines impose requirements "to purchase, use or accord a preference to goods produced or services provided in its territory, or to purchase goods or services from persons in its territory" within the meaning of Article 1106(1)(c), and whether R&D and E&T constitute ‘services' within the meaning of Article 1106(1)(c).
213.
As outlined above, the Claimants and the Respondent agree that the prohibited requirements are specifically enumerated in Article 1106. The Claimants argue that R&D and E&T are ‘services' within the meaning of Article 1106(1)(c). By contrast, the Respondent asserts that the enumerated list set out in Article 1106(1)(c) does not mention R&D and E&T, that States have specified when R&D and E&T is to be covered, that there is a distinction between R&D, E&T and performance requirements, and that reading Article 1106(1) to cover R&D and E&T is improper and would ignore the requirements of Article 1106(5).
214.
The question as to whether a closed list, such as the enumerated impermissible performance requirements in Article 1106(1), should be read restrictively or not can only be partially addressed in the abstract. At one level of generality, there is no dispute that Article 1106(1) must be read in a manner that is consistent with the text as well as the object and purpose of the treaty.
215.
Turning to the text, the Tribunal accepts the point made by the Respondent that the text of Article 1106 does not refer specifically to R&D and E&T as such. However, the Tribunal is not convinced that the absence of such express reference necessarily means that the terms are to be interpreted to the effect that the term ‘services' does not include R&D and E&T.
216.
The Tribunal considers that the more persuasive view is that the ordinary meaning of the term ‘services' is broad enough to encompass R&D and E&T. On its face, the term ‘services' covers a broad range of economic activities, and R&D and E&T may be seen as mainstream forms of service sector activity. Thus, on its face, it would appear that there is nothing inherent in the term ‘services' in Article 1106(1) that necessarily excludes R&D and E&T.
217.
As noted by the parties, there is no single and comprehensive definition of services in the NAFTA. The Claimants and the Respondent have had to find support for their respective positions in provisions in the NAFTA that address services more generally,238 or in particular articles of the NAFTA that refer to R&D and E&T, in dictionary definitions, in the terms of other trade agreements, and in the 2004 Guidelines themselves.
218.
The Claimants reference the Webster's definition of ‘services' to underscore the ordinary meaning, which provides that services include "useful labor that does not produce a tangible commodity."239 In our view, the concepts of R&D as well as E&T would appear to fit into that broad definitional category of economic activity. The Tribunal further notes that research and development is defined in the Oxford English Dictionary as "work directed on a large scale toward the innovation, introduction and improvement of products and processes."240
219.
Interpreting ‘services' to include R&D and E&T is consistent with how services are to be treated within the treaty text of the NAFTA more broadly. Specifically, certain other references to services in the NAFTA, such as the classification system for services, provide some content as to the meaning of R&D services and E&T services, and support the conclusion that ‘services' as a concept is broad enough to include R&D and E&T.241 This is, in our view, necessary context for understanding a NAFTA provision.
220.
Looking more specifically at the classification system developed under the NAFTA's procurement chapter, ‘services' includes a category called R&D, which is defined as follows:

"Procurement of research and development services include the acquisition of specialized expertise for the purposes of increasing knowledge in science; applying increased scientific knowledge or exploiting the potential of scientific discoveries and improvements in technology to advance the state of art; and systematically using increases in scientific knowledge and advances in state of the art to design, develop, test or evaluate new products or services."

The same classification system includes a category called ‘educational and training services,' which has some 11 subcategories including such matters as; scientific and management training, vocational and technical, lectures for training, tuition registration and membership fees, faculty salaries for schools overseas, and other education and training services.242 The Tribunal notes that there are several categories of services that are subject to explicit exclusion from open procurement in Canada's schedule; including ‘research and development' and ‘education and training.'

221.
In our view, this NAFTA classification system is relevant in that it illustrates that:

(1) the category of services is defined broadly;

(2) research and development and education and training are recognized as categories of services, including by the NAFTA parties;

(3) the types of activities that are recognized in each such category as comprising R&D and E&T comport with the types of activities that are being undertaken pursuant to the 2004 Guidelines and the Hibernia and Terra Nova Benefits Plans to meet the R&D and E&T spending requirements in the Province; and

(4) such services cover a range of activities which are amenable to exploitation through the "purchase" "use" or "accord [of] a preference," in the manner that is referred to by Article 1106 of the NAFTA.

222.
The Respondent also argues that 1106(1)(c) is aimed at a particular closed set of performance requirements that would otherwise reduce the cross-border flow and importation of goods and services, while R&D requirements are aimed at increasing the knowledge base of the country. By this logic, the Respondent argues that R&D is not encompassed by the broad category of ‘services.'243 In the Tribunal's view, while the policy purposes may differ in some respects as between different types of performance requirements, the requirement to utilize domestic sources of R&D and E&T appears rather clearly to be a form of performance requirement imposed on an investor. Promoting economic development and improving the skills and education of Canadians in the Province would also seem to be in furtherance of economic policy objectives. Excluding R&D and E&T from a definition of ‘services' because the form of transmission is not always cross-border (or the policy purpose of the requirement is not just strictly economic) is an argument for a special meaning to be given for R&D and E&T, which we do not see reflected in the NAFTA text. Nor does this interpretation comport with the NAFTA classification system for services, or the ordinary meaning of the term ‘services.'
223.
The Claimants emphasize that R&D is specifically mentioned in Article 1106(4), which clarifies that the prohibition on conditioning the receipt of an advantage for goods, as contained in 1106(3)(b), does not prevent a party from conditioning the receipt of an advantage with respect to a "service, train or employ workers, construct or expand particular facilities, or carry out research and development in its territory," as contained in Article 1106(4). The Respondent argues that the provision was included to eliminate any doubt that parties were permitted to condition receipt of an advantage on the performance of R&D in its territory, and it should not be interpreted to mean that R&D comes under services.244
224.
In the view of the Tribunal, the specific mention of R&D in Article 1106(4) may be seen as a means of indicating the NAFTA drafters' view that they intended to exclude R&D for the purposes of investment incentives enumerated in Article 1106(4), but that they did not explicitly do so, for purposes of Article 1106(1).245
225.
In the Tribunal's view, this interpretation of Article 1106 is not an expansive reading of ‘services' but is rather one that is consistent with the treatment of R&D and E&T in the NAFTA and the object and purpose of the treaty, which is to eliminate barriers to trade and increase investment opportunities within the NAFTA Parties.246 Such a conclusion does not render Article 1106(5) inutile, which is an important provision in addressing the scope of the prohibitions elaborated in Article 1106(1) and (3), but is one that does not provide guidance on interpreting the exact coverage of the enumerated performance requirements.247

2. Reference to Other Treaties, Agreements and Sources

226.
The Claimants and the Respondent have both referenced other agreements, treaties, documents and the NAFTA preparatory materials, as relevant for interpreting Article 1106 of the NAFTA. The Respondent, for its part, has relied inter alia upon the US and Japanese BITs, UNCTAD reports, the draft MAI, and the Canada-US Free Trade Agreement. The Respondent also points to certain agreements as providing contextual support for the purposes of the VCLT.248 The Claimants, for their part, have referred to inter alia, the Uruguay Round Agreements, which were negotiated contemporaneously with the NAFTA, and certain draft NAFTA negotiating text, as well as other UNCTAD reports and BITs as support for its interpretation.
227.
The Tribunal is mindful that Article 32 of the VCLT allows recourse to supplementary means of interpretation

"in order to confirm the meaning resulting from the application of Article 31, or to determine the meaning when the interpretation according to Article 31: (a) leaves the meaning ambiguous or obscure; or (b) leads to a result which is manifestly absurd or unreasonable."

228.
While treatises and materials can provide relevant context for the NAFTA, draft reports, other BITs, the draft MAI, or the Uruguay Round are not preparatory works for the purposes of Article 32 of the VCLT. The specific NAFTA draft negotiating texts advanced by the Claimants could be viewed as such,249 but the weight to be ascribed to these texts is contested by the Respondent, which properly reminds the Tribunal not to assume what was in the minds of the negotiators.250
229.
The Tribunal does not feel it necessary to resort to supplemental means of interpretation, and does not rely on such supplemental materials. Moreover, quite apart from the question whether these sources constitute relevant context, support or are properly viewed as supplementary means of interpretation for purposes of Article 32 of the VCLT, in the Tribunal's view, recourse to these other sources as supplementary means of interpretation does not assist in confirming either the Claimants' or the Respondent's views as to the scope of services under Article 1106.
230.
These agreements and sources are not the NAFTA, they did not involve entirely the same parties to the negotiation, at times raise inter-temporal discontinuities, and the extent to which they did or did not influence the NAFTA parties in the preparation of the NAFTA text is not well established. Moreover, the purposes of these agreements are not identical to that of the NAFTA, for example, BITs are focused on investment related matters, while the NAFTA's performance requirements in Article 1106 are part of a larger treaty that is focused primarily on international trade. The reason for the exclusion of a provision in one treaty versus another is contested by the parties to this dispute.
231.
Additionally, recourse to those materials that meet the test of supplementary materials for purpose of the VCLT, is also in doubt because the circumstances of such reliance do not seem present in this case, namely, that it is necessary to

"determine the meaning when the interpretation according to Article 31 (...) ‘leaves the meaning ambiguous or obscure' or ‘leads to a result which is manifestly absurd or unreasonable.'"251

232.
For these various reasons, the Tribunal is of the view that the other treaties or sources, discussed with great erudition by the parties, are in some instances of only limited relevance, and in other instances, are of no relevance for the purposes of interpreting or confirming the NAFTA text. Moreover, as the Tribunal reminded the parties during the discovery stage of this dispute, Articles 31 and 32 of the VCLT attaches the greatest importance for interpretation to the ordinary meaning of the treaty, taken in its context.

3. Compulsion

233.
At a certain point in the pleadings, the Respondent does not contest that R&D and E&T can be a service. Instead, it shifts its emphasis to an argument that the 2004 Guidelines do not contain the requisite compulsion to run afoul of Article 1106.252 Article 1106 refers to a " requirement to purchase, use or accord a preference to goods produced or services provided in its territory or to purchase goods or services from persons in its territory." Indeed, it follows that a degree of legal obligation is necessary for the 2004 Guidelines and their implementation, to be caught by Article 1106.
234.
We see ample evidence of the requisite degree of compulsion for the purposes of Article 1106. The Accord Acts state unambiguously that "expenditures shall be made for research and development to be carried out in the Province and for education and training to be provided in the Province."253 The 2004 Guidelines are designed to be applied as a matter of legal obligation by means of Benefits Plans, whilst leaving some flexibility for operators to design the specific modalities that could make the most sense for their project. The purpose is to introduce an obligatory expenditure requirement. The new guidelines offer specific and mandatory guidance as to what those expenditure levels need to be, and they are intended to be implemented by Benefits Plans that impose legal obligations that are subject to monitoring and supervision by the Board.
235.
The 2004 Guidelines introduce a new and different approach, and it is obviously not the case that an operator may choose for itself whether to follow the requirements or not. The operator is required to file an R&D and E&T Expenditure Application form for each activity that it plans to undertake, which is reviewed by the Board for approval prior to the commencement of the activity.254 The 2004 Guidelines take the position those expenditures on a "successful R&D program should not fluctuate widely,"255 and there is a requirement that a fund should be established for "any POA period in which there are not sufficient projects to absorb the required level of expenditure, (...). The fund will be managed by the Board in conjunction with the operator consistent with these guidelines."256 Thus, as these various elements make plain, the requirements of the 2004 Guidelines are to be implemented by means of a legal mechanism in the form of a Benefits Plan that will achieve compliance with the expenditure requirement.
236.
The Respondent has argued that the requirement to carry out R&D or that E&T be provided in the Province does not automatically compel the Claimants to purchase, use or accord a preference to any particular domestic goods or services. It asserts that there are alternative ways for the operators to comply without providing a preference to local services or requiring the purchase, use or accordance of a preference for local goods or services. The Respondent emphasizes the absence of mandatory consumption of local goods or services or the provision of services provided to the investment of the investor.257
237.
The Tribunal does not find these arguments compelling. It is no doubt possible to identify a small number of examples indicating that operators may not necessarily be compelled to purchase domestic goods or services. Nevertheless, the reality is that the implementation of the 2004 Guidelines would, in practice, require local expenditures.258 Moreover, a number of the examples referenced by the Respondent cannot be implemented without according a preference to services provided in the Province. Endowing a university chair, furnishing a classroom, or providing scholarships are all requirements that accord, or are likely to accord, a degree of preference to local educational facilities or individuals. Even an in-house research facility would seem to require according a preference to local goods and services in order to undertake its construction and operation, as noted by the Claimants.259
238.
Similarly, while one might be able to conceive of certain expenditures that have incidental effects, these examples are difficult to imagine in practice, and they are not the central intent of the 2004 Guidelines. Nor do they accord with the realities of commercial and related activities. In our view, the possibility of hypothetical alternative spending examples does not distract from requirements that would otherwise be caught by Article 1106. In practice, the Tribunal fails to see how the operators could, in reality, be required to spend millions of dollars on R&D and E&T in the Province without in practice being required to purchase, use, or accord a preference to domestic goods or services.
239.
The Respondent has also made an argument that Article 1106(1)(c) only applies where the service provider and the service recipient are separate entities and one party is "providing" something to another party. Article 1106(1)(c), in the Respondent's view, requires reciprocal consideration for the service rendered, and the requirement compels the provision of a service from a domestic service provider to the investment of the investor.260 This reasoning allows the Respondent to argue that the Claimants can satisfy the 2004 Guidelines expenditures through certain types of transactions that do not have the compulsion that is required by Article 1106.261 As noted above, the fact that it is theoretically possible to imagine arrangements allowing R&D or E&T expenditures to be undertaken in the Province that do not require the direct purchase of the service from another party fails to address the central purpose of the 2004 Guidelines, which is to require expenditures in the Province. Moreover, the Tribunal sees no requirement of separate entities or reciprocal consideration in the text of Article 1106, or in its underlying rationale.
240.
Finally, although several previous cases address interpretative matters that this Tribunal has considered carefully, we note that this dispute has some significant differences from other cases that have involved NAFTA performance requirements. Perhaps most importantly, in the present case, the 2004 Guidelines are not only imposing incidental effects with respect to the purchase, use or accordance of a preference to local goods or services, which was the case with respect to most of the previous disputes that came before NAFTA arbitral panels under Article 1106. For example:

§ S.D. Myers262 addressed an export ban introduced by Canada that the Claimant argued was a violation of Article 1106 because it required carrying out a major part of its proposed business - the physical disposal of PCB waste - in Canada, requiring it to consume goods and services in Canada. The majority of the tribunal, however, noted that the ban "was not cast in the form of an express condition attached to a regulatory approval"263 and found that no requirements were imposed on the Claimant that fell squarely within those listed in Article 1106.

§ In Pope & Talbot Inc.264 the investor claimed that Canada's softwood lumber export control regime violated Article 1106, in circumstances where the regime had been introduced to comply with the US Canada Softwood Lumber Agreement. This regime permitted a certain level of softwood lumber to be exported from Canada without any fees up to a certain amount, with increasing fees attached thereafter. The tribunal stressed that the aim of performance requirements was to increase exports of goods or services but the wording of 1106(1)(a) would apply to a requirement to export at any level, and the measures at issue did not impose or enforce any requirements to export because exporters could pay export fees and undertake additional exports. While these fees deterred exports, there was no requirement to export at any particular level in return for the right to operate in Canada and thus the regime did not breach Article 1106(1)(a).265

§ In Merrill & Ring266 the Claimant argued that the implementation of Canada's Log Export Regime imposed performance requirements in breach of Article 1106, notably in connection with the obligation to cut and sort timber, to scale timber rafts metrically and to follow certain other rules for properties located in remote areas, all of which impacted the way it managed its investments. The tribunal rejected the argument, holding that a requirement related to the advertisement of goods as a step in the process of obtaining an export permit cannot be seen as a restriction on exports themselves. It further held that the cutting requirements are not a performance requirement designed to restrict or enhance exports, and that metric scaling is a measurement system used throughout Canada. Thus, while these requirements may have an incidentally adverse effect, they do not amount to the kind of prohibited performance requirement banned by Article 1106.

241.
There is one case where the requirements fell squarely within the ambit of Article 1106, ADF Group Inc. v. United States of America.267 This case involved the procurement of steel components to a highway interchange construction project in Northern Virginia, where the claimant, a Canadian company, challenged the Buy America clause that applied to the fabrication of steel. The tribunal ruled that the US measures appeared, by their own terms, to be local content requirements contrary to Article 1106(1)(b), as well as a requirement to accord a preference to goods or services produced or provided in the US (under Article 1106(1)(a)), which the Respondent did not dispute. Instead, the Respondent argued that it came within Article 1108 exclusions, which argument the tribunal accepted.
242.
Most previous NAFTA disputes involving performance requirements have found the restraints to be ancillary. As argued in S.D. Myers, and noted in Merrill & Ring, "the fact that there might have been incidental consequences of the regulatory regime does not mean that these are performance requirements."268 In the circumstances of this dispute, the 2004 Guidelines are designed to ensure that expenditures for R&D and E&T services occur in the Province, and thereby implying a legal requirement for the purposes of Article 1106. It is plain, in the view of the Tribunal, that such spending on R&D and E&T in the Province is a central feature of the 2004 Guidelines, and not an ancillary objective or consequence.

F. THE ARTICLE 1108 EXEMPTION

243.
The Tribunal addresses the structure and operation of Article 1108 in detail in the following section of this Decision. Nevertheless, the Tribunal considers it appropriate to briefly address the issue of Canada's decision to include the Accord Acts provisions on R&D and E&T in its Article 1108 exemptions, and the weight to be attached to that decision for the purposes of an evaluation under Article 1106.269
244.
In its listing of non-conforming measures, Canada identifies the Accord Acts' requirement that Benefits Plans include R&D expenditures as one such measure in Annex I to the NAFTA. It argues that no negative inference should be drawn from this listing.270
245.
The Tribunal's analysis of Article 1106 has been undertaken on its own terms. The inclusion of the Accord Acts and their provisions governing R&D and E&T, and the specific reference to Article 1106, tend to confirm that the R&D and E&T requirements of the Accord Acts might be seen as constituting a prohibited performance requirement under Article 1106 of the NAFTA. While the Tribunal does not rely on the Respondent's use of the exemption as the basis for its finding that that the 2004 Guidelines are caught by Article 1106, it nevertheless notes that Canada's decision is consistent with the finding.

G. CONCLUSIONS ON ARTICLE 1106

246.
In conclusion, the Tribunal finds that:

1) R&D and E&T requirements imposed by the 2004 Guidelines are ‘services' within the meaning of Article 1106;

2) the 2004 Guidelines and their implementation impose legal requirements on operators to undertake R&D and E&T expenditures in the Province; and

3) subject to the requirements of Article 1108, the R&D and E&T requirements of the 2004 Guidelines, and the implementation thereof, constitute a prohibited performance requirement under Article 1106 of the NAFTA.

VII. ARTICLE 1108

A. INTRODUCTION: THE TREATMENT AND SCOPE OF THE NAFTA RESERVATIONS

247.
Having concluded that the requirements imposed by the 2004 Guidelines, made pursuant to Section 45 of the Accord Acts, are performance requirements subject to and caught by NAFTA Article 1106(1), the next issue to be determined is whether these non-conforming measures are exceptions covered by NAFTA Article 1108(1), as the Respondent argues.
248.
In its Schedule to Annex I, Canada listed the Federal Accord Act as an existing measure that is reserved from Article 1106.271 The Respondent argues that the Provincial Accord Act, which was not expressly listed, was also covered by agreement between the Parties under the listing of the Federal Accord Act.272
249.
The scope of Article 1108, and the issue of whether the 2004 Guidelines are covered by the reservation, was fully argued by the parties. The Tribunal expresses its appreciation for the quality of the submissions that raise important issues as to the proper approach to be taken in the interpretation and application of the reservations under Article 1108. Consideration of Article 1108 and the NAFTA reservations is largely a matter of first impression. It was apparent that both parties, and the two other NAFTA Parties that each made two Article 1128 submissions, recognize the importance of the issues raised and the potential significance of this Award for the NAFTA system.
250.
All three NAFTA Parties have made reservations under Article 1108, as well as other provisions of the NAFTA that permit reservations. The Claimants and the Respondent also extensively addressed the correct approach to be undertaken in the interpretation and application of reservations.273 By the close of the proceedings there appeared to be a degree of convergence between the parties, in particular with respect to the proposition that Article 1108 reservations are to be interpreted and applied in accordance with the VCLT.
252.
For its part, the Respondent argues that the reservations to the NAFTA must be interpreted according to Article 31 of the VCLT, and that subsequent jurisprudence has applied the VCLT to construe the plain terms, for example with respect to the exception for procurement within NAFTA Article 1108. The Respondent argues that there are no grounds for interpreting reservations restrictively and notes that this approach has been expressly rejected in Aguas del Tunari SA v. Bolivia.277 The WTO Appellate Body in EC-Hormones is also referenced, where the Appellate Body refused to undertake a restrictive reading of Article 3.3 of the SPS Agreement because it is an exception to the rule under Article 3.1.278 The Respondent also rejects the Claimants' argument that the interpretative note to Annex 1 of the NAFTA requires that reservations be interpreted restrictively279 and further argues that the Claimants' reliance on Cross-Border Trucking is misplaced because that tribunal relied on decisions that pre-dated the VCLT and any principle of treaty interpretation "which those decisions supported have since been supplanted by the Vienna Convention."280
253.
Mexico and the United States, in their Article 1128 submissions, do not specifically address the question of whether reservations should be interpreted broadly or restrictively.
255.
In carrying out its task, the Tribunal is therefore guided by the principles of interpretation that are set forth in Articles 31 to 32 of the VCLT. These provisions are recognized by the NAFTA Parties to be applicable, both to the provisions of the NAFTA and to the reservations made by each Party. In interpreting the NAFTA provisions and the terms of the Respondent's Article 1108 reservation, the Tribunal will also adopt a balanced approach that respects the interests of the Claimants, and of the Respondent, without seeking to give priority to either. In doing so, the Tribunal is mindful of the implications of its decision for the system of reservations as a whole, as well as the specific implications for the interpretation and application of the Respondent's reserved measure.
256.
To address the application and effect of Article 1108, it is necessary to look carefully at the scheme established by NAFTA with regard to two distinct types of instruments, namely, "measures" and "subordinate measures", as reflected in the combined effects of NAFTA Article 1108 (entitled ‘Reservations and Exceptions'), Annex I of NAFTA, and the Respondent's Article 1108 reservation. The parties are in fundamental disagreement as to whether the 2004 Guidelines are covered by the Respondent's reservation, and whether that determination is made by reviewing the 2004 Guidelines as a subordinate instrument, solely with the measure that is the specific subject of the Article 1108 reservation, or whether it should also consider other subordinate measures that were introduced pursuant to the reserved measure. More concretely, this difference would mean that the 2004 Guidelines should either be reviewed against the relevant portions of the Federal Accord Act alone or, alternatively, should also be reviewed against the Hibernia and Terra Nova Benefits Plans and board decisions, together with the Federal Accord Act. The Tribunal is then required to consider the meaning and application of the standard and address whether the 2004 Guidelines are lawful as applied to Hibernia and Terra Nova. As set out below, addressing these matters requires the Tribunal to consider the following issues:

i. The scheme established by the NAFTA: Article 1108 and Annex I;

ii. The reserved measure that was in effect as of January 1, 1994, when the NAFTA came into force;

iii. The new subordinate measure adopted by the Respondent after that date, and consideration of when a subordinate measure, subject to a reservation, is taken by a NAFTA Party;

iv. The standard to determine whether a subordinate measure is subject to a reservation taken by a NAFTA Party with respect to obligations imposed by 1106; and

v. In applying that standard, consideration of whether the Respondent's new measure is lawful under NAFTA Article 1108.

1. The Scheme Established by NAFTA: Article 1108 and Annex I

257.
When the NAFTA came into force in 1994, it barred the NAFTA Parties from utilizing performance requirements pursuant to Article 1106. It also introduced in Article 1108 and Annex I arrangements to allow the Parties to make reservations where existing measures did not conform to NAFTA obligations, such as Article 1106.
258.
Article 1108(1) provides inter alia that Article 1106 does not apply to:

"(a) any existing non-conforming measure that is maintained by

(i) a Party at the federal level, as set out in its Schedule to Annex I or III,

(ii) a state or province, for two years after the date of entry into force of this Agreement, and thereafter as set out by a Party in its Schedule to Annex I in accordance with paragraph 2, or

(iii) a local government;

(b) the continuation or prompt renewal of any non-conforming measure referred to in subparagraph (a); or

(c) an amendment to any non-conforming measure referred to in subparagraph (a) to the extent that the amendment does not decrease the conformity of the measure, as it existed immediately before the amendment, with Articles 1102, 1103, 1106 and 1107."

Article 1108(2) provides that each Party is to

"set out in its Schedule to Annex I, within two years of the date of entry into force of [the NAFTA], any existing non-conforming measure maintained by a state or province, not including a local government."

259.
Annex I of the NAFTA provides the NAFTA Parties with greater guidance as to the details they are to set out in their Schedules. Annex I is entitled ‘Reservations for Existing Measures and Liberalization Commitments', and it provides:

"1. The Schedule of a Party sets out, pursuant to Articles 1108(1) (Investment). the reservations taken by that Party with respect to existing measures that do not conform with obligations imposed by:

[…]

(d) Article 1106 (Performance Requirements),

[…]

and, in certain cases, sets out commitments for immediate or future liberalization."

260.
Paragraph 2 of Annex I specifies eight elements that "each reservation must set out." It requires the identification of (a) sectors, (b) subsectors, (c) industry classification, (d) type of reservation, (e) level of government, (f) laws, regulations or other measures for which the reservation is taken,281 (g) description, and (h) phased out, if any.
261.
Paragraph 3 of Annex I addresses the interpretation of a reservation:

"3. In the interpretation of a reservation, all elements of the reservation shall be considered. A reservation shall be interpreted in the light of the relevant provisions of the Chapters against which the reservation is taken. To the extent that:

(a) the Phase-Out element provides for the phasing out of nonconforming aspects of measures, the Phase-Out element shall prevail over all other elements;

(b) the Measures element is qualified by a liberalization commitment from the Description element, the Measures element as so qualified shall prevail over all other elements; and

(c) the Measures element is not so qualified, the Measures element shall prevail over all other elements, unless any discrepancy between the Measures element and the other elements considered in their totality is so substantial and material that it would be unreasonable to conclude that the Measures element should prevail, in which case the other elements shall prevail to the extent of that discrepancy."

262.
Several preliminary observations may be useful in respect of Article 1108 and Annex I. First, these instruments make clear that the NAFTA Parties explicitly envisaged the possibility that each Party should be able to adopt reservations in relation to Article 1106. That is not in dispute between the parties.
263.
Second, the Parties agreed on a number of requirements to be fulfilled in making a reservation, including the provision of certain detailed information as to the "elements" that are to be set out in relation to any reservation. This too is not in dispute between the parties.
264.
Third, at the heart of the scheme, and of relevance to this dispute, is the distinction between a "measure" and a "subordinate measure," the meaning and effect of which is examined in this section. Indeed, the Parties drafted Article 1108 and Annex I in such a way as to reflect a distinction between these two kinds of measures that may form part of a reservation. Any reservation extends to and encompasses both:

(i) the "non-conforming measure" that is set out in the Schedule to Annex I (as referred to in Article 1108(1): it is referred to as "the measure" in Annex I, paragraph 2(f)(i)); and

(ii) "any subordinate measure" (as referred to in Annex 1, paragraph 2(f)(ii)).

265.
The "non-conforming measure" and "any subordinate measure" are however, distinct instruments. The relationship between a "non-conforming measure" and a "subordinate measure," and the conditions under which a "subordinate measure" will be evaluated and determined to be compatible with an earlier "non-conforming measure," have emerged as the issues that lie at the heart of this case.

2. The Reserved Measure in effect as of January 1, 1994

266.
Article 1108(1)(a) excludes from the application of Article 1106 any "existing nonconforming measure." In the present case, the existing "non-conforming measure" is the measure maintained by Canada at the Federal level, as set out in its Schedule to Annex I, as at January 1, 1994. As noted above, in accordance with paragraph 2(f) of Annex I, the Respondent was required to include in the reservation a number of elements, including the "measure" (meaning the law, regulation or other measure) and the "description element" (meaning the non-conforming aspects of the existing measures for which the reservation is taken).
267.
The Respondent's reservation is set out in Canada's Annex I reservation. The law set out under the "Measures element" is the " Canada - Newfoundland Atlantic Accord Implementation Act, S.C. 1987, c. 3" (the Federal Accord Act). In its second Article 1128 submission the United States refers to this as the non-conforming measure entry282 and the Tribunal will also refer to it as such in this Award. The "Description element" that delineates and qualifies the "Measures element" references the same requirements for a benefits plan as those set forth in the Canada Oil and Gas Operations Act, S.C. 1992, c. 35 . A Benefits Plan is a

"plan for the employment of Canadians and for providing Canadian manufacturers, consultants, contractors and service companies with a fair and full opportunity to participate on a competitive basis in the supply of goods and services used in proposed work or activity referred to in the benefits plan."

268.
The Federal Accord Act requires that

"benefits plan[s] (...) ensure that (...) (c) expenditures shall be made for research and development to be carried out in the province, and for education and training to be provided in the Province."283

269.
There is no dispute between the parties that the Federal Accord Act, as qualified by the "Description element," constitutes the existing non-conforming measure to which the application of Article 1106 has been reserved. This "Measures element" is adopted at the Federal level, is a reservation taken with regard to Article 1106, and is not qualified by a "liberalization commitment from the Description element" (see NAFTA Annex 1, paragraph 3(b)).
270.
Two observations may be made in relation to the Respondent's "non-conforming measure." The first concerns what the "Description element" does and does not say. The "Description element" references the Federal Accord Act by addressing the requirement that Benefits Plans must ensure that expenditures be made for research and development to be carried out in Newfoundland, and for education and training to be provided in the Province. This "nonconforming measure" is thus limited to the requirement that any Benefits Plan, as provided for by the Federal Accord Act, ensures that the expenditure requirements that would otherwise be prohibited by Article 1106, shall be imposed. It does not specify any further detail on content. All that the Federal Accord Act, as qualified, does is address the issue of an expenditure requirement reflected in Benefits Plans. It does not elaborate as to (i) how exactly Benefits Plans are to ensure that the expenditure requirement is met, (ii) the nature and level of expenditure that would be required for an investor to meet the requirements of the reserved measure, and (iii) the means for review of the expenditures under a Benefits Plan. Under the referenced portion of the Federal Accord Act, the legal instrument that is specifically referenced to implement the requirement to spend on research and development, and education and training, are the Benefits Plans, which must be prepared and approved for each investment project.
271.
The second observation concerns a determination of the relevant portions of the Federal Accord Act. Neither the "Measures element" nor the "Description element" refer to any particular part or Section of the Federal Accord Act. Which provisions of the Federal Accord Act are to be treated as reflecting or giving effect to the existing "non-conforming measure?" The Respondent has argued that the entire Federal Accord Act is reserved,284 but the Claimant disagrees with this.285
272.
In the course of argument, two provisions of the Federal Accord Act were the subject of particular attention by the parties: Section 45,286 which addresses the Canada-Newfoundland Benefits Plan, and Section 151.1,287 which addresses the publication of guidelines and interpretation notes with respect to Section 45.
273.
It appears that by the close of the proceedings there was no disagreement between the parties that Section 45 of the Federal Accord Act was an "existing non-conforming measure" within the meaning of Article 1108(1)(a). The Tribunal adopts the same view; Section 45 is plainly covered by the law referred to in the "Measures element" (the Federal Accord Act) and the subject it addresses is almost identical to the terms of the "Description element" (it is directly concerned with a Benefits Plan to ensure that expenditures are made for research and development to be carried out in the Province, and for education and training to be provided in the Province). The Tribunal therefore concludes that Section 45 is an "existing nonconforming measure" within the meaning of Article 1108(1)(a).
274.
A further provision of the Federal Accord Act at issue in this case is Section 151.1. On its face, Section 151.1 is connected to the application and administration of Section 45, a provision of the Federal Accord Act to which it expressly refers. There is no dispute between the parties that it was pursuant to Section 151.1 that the 2004 Guidelines, that have given rise to this dispute, were adopted.288 The parties disagree, however, as to whether Section 151.1 is an existing non-conforming measure that was subject to the reservation made by the Respondent.
275.
During the hearings, the Claimants framed their argument as follows:

"Under Headnote 2(f) of Annex I, the measure includes the qualification as it is described, the description element, for which the reservation is taken. As we already noted, the Guidelines were adopted under the authority of Section 151.1, and Canada's description of the nonconforming aspects of the Accord Acts does not extend to Section 151, so as a matter of an international law, it simply does not fit within the terms of the Annex."289 (Emphasis added)

The Claimants further explained that

"[w]hen you're looking at the question of authority, as I said, Section 151.1 is nowhere mentioned in the schedule and nowhere described as a non-conforming aspect."290 (Emphasis added)

The Claimants' argument was centered on the point that the failure to make express reference to Section 151.1 indicates that it is not to be considered as being subject to the reservation.

276.
The Respondent disagreed, setting out its argument as follows:

"Let's go back to the Atlantic Accord Implementation Acts in Section 151.1, which is the next slide. In addition to requiring these expenditures on research and development and education and training, the Acts also gave the Board express authority to issue Guidelines with regard to this requirement. You can see there in the highlighted part that it says, "The Board may issue Guidelines with respect to the application and administration of Section 45." Consequently, the Board is given express authority to issue Guidelines with respect to this requirement to expand on research and development and education and training."291

The Respondent added:

"The key part of local law to understand the relationship between the Benefits Plans and the Guidelines is the Accord Implementation Acts. And in the Accord Implementation Acts, it states that the Operators must provide Benefits Plans, and those Benefits Plans must ensure benefits for the Province. It also states that those Benefits Plans must ensure expenditures on research and development and education and training in the Province. The same Act gives the Board authority to issue Guidelines with respect to this requirement. [...] in Section 151.1(1), the Board is given the authority to issue Guidelines with regard to Section 45. Consequently, both the Benefits Plans and the Guidelines derive their authority under domestic law from the Accord Implementation Acts."292

277.
The Respondent also addressed the reservation's failure to refer to Section 151.1:

"And whilst the Claimants are right that the description does not expressly mention Section 151.1, it does not expressly mention the authority to issue Guidelines with respect to their obligation to expend on research and development and education and training, it would simply make no sense to reserve the obligation to expend on research and development and education and training without reserving the means to implement that. Consequently, even if we accept the Claimants' argument that the description does limit the reservation, the Guidelines are still reserved here because the obligation to expend on research and development and education and training is expressly reserved within the reservations of the Accord Implementation Act."293 (Emphasis added)

278.
In the Tribunal's view, one difficulty with the Claimants' argument is that the Respondent's reservation, as qualified by the "Description element," does not specifically mention any provision of the Federal Accord Act. No mention is made of either Section 151.1 or Section 45, although Section 45's content is set out. The Claimants' approach would appear to lead to the result that a failure by a NAFTA Party to refer to a particular provision of domestic legislation, that has been reserved, could mean that such a provision is to be treated as having not been reserved at all. As the NAFTA Parties have reserved many legislative acts without referring to any particular provision, the Claimants' argument may not provide a reliable methodology for understanding the scope of a reservation.
279.
The Tribunal considers that the more plausible approach is to examine the reserved measure as qualified by the "Description element," and then in accordance with the VCLT determine whether a particular provision of the Federal Accord Act is covered or not. In the present case, the qualification addresses the requirement that the Benefits Plan ensure that expenditures be made for research and development to be carried out in the province, and for education and training to be provided in the province. Section 151.1 of the Federal Accord Act is not specifically mentioned in the "Description element" but looking at the Federal Accord Act as a whole, the 2004 Guidelines issued pursuant to Section 151.1 provide a means, not necessarily the only means, by which guidance is offered on how to ensure that expenditures on research and development are carried out in the Province. The Board is authorized to issue and publish guidelines and interpretation notes but it is not required to do so. Thus, the application and administration of the expenditure requirement of Section 45 may be contained in guidelines and interpretation notes issued by the Board, but such expenditures must be made through requirements contained in Benefits Plans, as specifically mentioned in Section 45.
280.
As noted, Sections 45 and 151.1 are closely connected. Section 151.1 expressly refers to Section 45 and Section 151.1 offers an instrument for addressing the content of the expenditure requirement, while the Benefits Plans are the means for implementing the requirement contained in the "Description element." If the Board issues an instrument called ‘guidelines', then in the Tribunal's view, the threshold evaluation will be as to whether those particular guidelines are actually designed to give effect to Sections 45, 138 or 139 of the Federal Accord Act, as stated in Section 151.1. If the content and subject matter of any such guideline is directed to the application and administration of Section 45, including the expenditure requirement contained in Benefits Plans, the Tribunal is of the view that such guidelines are covered by the reservation.
281.
To say that a new subordinate measure, taken in the form of guidelines, to further implement Section 45, is subject to the reservation does not however insulate it from review and challenge. Importantly, whether a particular set of guidelines are covered or not by the reservation, and consistent with the NAFTA, will require an evaluation to determine whether those particular guidelines meet the legal standards articulated in Annex I.
282.
Before doing so, the Tribunal notes that for the purposes of this case, it is not required to form a view as to whether any other provision of the Federal Accord Act forms part of the existing non-conforming measure reserved by the Respondent.
283.
Beyond the Federal Accord Act, no other measure relevant to this case has been included in the "Measures element" of the reservation set out by the Respondent in its Schedule to Annex I. In particular, the Board Decisions approving the Hibernia Benefits Plan and the Terra Nova Benefits Plans were not referred to expressly in the "Measures element." They are not the "non-conforming measures" set out in the Schedule to Annex I, but, as discussed below, are for purposes of the NAFTA subordinate measures. The Tribunal turns in the section that follows to their relationship to the "non-conforming measure" set out in Annex I as well as the 2004 Guidelines, which are another set off subordinate measures.

3. The New Subordinate Measure and Consideration of When a Subordinate Measure, Subject to a Reservation, is Taken by a NAFTA Party

284.
Articles 1106 and 1108 of the NAFTA do not refer to the term "subordinate measure," and it is not found in Chapter 11 of the NAFTA at all. However, it appears in paragraph 2(f) of Annex I. Provided it meets certain conditions, a subordinate measure forms a part of a reservation made by a NAFTA Party with respect to existing measures that do not conform with obligations imposed by Article 1106.
285.
Paragraph 2(f) of Annex I is divided into two sentences. The first sentence provides that "[m]easures identifies the laws, regulations or other measures, as qualified (...) by the Description element". It is clear that the term "Measures" is here limited to such measures as are expressly referred to in a Party's Schedule to Annex I, and only to the extent "qualified (…) by the Description element."294
286.
The second sentence of paragraph 2(f) distinguishes between "the measure" and "any subordinate measure." It provides that:

"A measure cited in the Measures element

(i) means the measure as amended, continued or renewed as of the date of entry into force of [the NAFTA], and

(ii) includes any subordinate measure adopted or maintained under the authority of and consistent with the measure."

With respect to the facts before the Tribunal, neither party has argued that the Hibernia and Terra Nova Benefits Plans and Board Decisions 86.01 and 97.02, are to be regarded as being "the measure" within the meaning of paragraph 2(f)(i). For the purposes of this case, "the measure" referred to is the Federal Accord Act (and more specifically, Sections 45 and 151.1). The Board Decisions 86.01 and 97.02 are covered by paragraph 2(f)(ii). Both parties have proceeded on the basis that each of these measures are a "subordinate measures adopted or maintained under the authority of and consistent with the [Federal Accord] Act." In our view that is the correct basis on which the matter falls to be addressed.

287.
However, this appears to be the limit to the parties' converged views. They disagree as to what paragraph 2(f)(ii) means, and in particular, the meaning and effect of the words "adopted or maintained," the basis for the interpretation of "consistency," and the meaning and effect of the term "the measures" at the end of the sentence. The Tribunal must therefore consider each of these elements and also clarify its interpretation of this second sentence of paragraph 2(f) as a whole, for purposes of determining what measures are to be examined with respect to this dispute.

The Meaning of ‘Adopted or Maintained'

288.
With respect to the meaning and effect of the words "adopted or maintained," one aspect of the disagreement relates to the temporal question of whether a "subordinate measure" referred to in paragraph 2(f)(ii) needs to be adopted before the entry into force of the NAFTA, or whether it may be adopted before or after the entry into force of the NAFTA (subject in both cases to the conditions of authority and consistency having been met). The Claimants advocate for the first view and the Respondent for the second. These differences emerged in the course of the written pleadings.
289.
Beyond making passing reference to the language of paragraph 2(f)(ii), the Claimants did not explicitly address this issue.295 The Respondent adopts the opposite view:

"The use of the term "maintain" and "adopt" in Article 1108 demonstrates that a measure which is maintained is one that exists at the time the Agreement entered into force and is maintained after that date. A measure which is adopted is one that came into existence after this date. Consequently, by including within the reservation for Article 1108(1)(a) "any subordinate measure adopted or maintained under the authority of and consistent with the [expressly reserved] measure, the NAFTA reserves both subordinate measures which existed at the date of entry into force of the Agreement as well as those which came into existence afterwards."296

The Claimants maintain their original position and advance a number of further arguments challenging the Respondent's position. The Claimants argue that the NAFTA Parties understood the difference between existing and future measures, and knew how to make clear when they wished to address one or the other, or both. The Claimants further argue that the interpretative note focuses on "existing measures" that do not conform with Article 1106 obligations, that the textual comparison of "maintained" does not support the Respondent's argument, and that the Respondent's reading cannot be reconciled with the object and purpose of NAFTA, as it would "render Article 1108(1) ineffective."297

290.
The Respondent provides further argument as to its alternative view. It references the context to the reservation in Article 1108(1)(a), which includes reservations 1108(1)(b) and (c). Reservation 1108(1)(b) reserves the subsequent "continuation or prompt renewal of any nonconforming measure" and (c) reserves a subsequent amendment. The Respondent argues that there "is no reason for the NAFTA to reserve continuations, renewals and amendments after the NAFTA entered into force but not to reserve subsequent subordinate measures."298 Respondent also argues that the use of "adopted or maintained," or variations thereof, appears elsewhere in the NAFTA over a hundred times, and refers to measures after the NAFTA entered into force. It is further argued that the temporal reference is confirmed by the NAFTA drafting directions.299 These differences were maintained during the oral arguments.