CHAPTER I. PREFACE
|The following abbreviations are adopted in this award:|
|CANADA||The Government of CANADA|
|CAN$, and $||Canadian dollars|
|Disputing Parties||SDMI and CANADA|
|FPA||First Partial Award|
|MEXICO||The United States of Mexico|
|MYERS Canada||Myers Canada Limited|
|NAFTA||The North American Free Trade Agreement|
|Parties||CANADA, MEXICO and the USA|
|SDMI||S. D. Myers, Inc|
|Transcript||Verbatim record of the hearing held in Toronto from 21 to 26 September 2001|
|UNCITRAL||United Nations Commission on International Trade Law|
|UNCITRAL Rules||UNCITRAL Arbitration Rules, 1976|
|USEPA||United States Environmental Protection Agency|
|U.S. or USA||The United States of America|
CHAPTER II. HISTORY OF THE PROCEEDINGS
• Unless the parties agree upon the second stage procedure the Tribunal will hold a further case management meeting with the parties in Toronto on 21 February 2001.
• In order that the arbitrators’ individual schedules may be accommodated in a way that will minimise the expense to the parties, the parties shall notify the Tribunal by 9 February 2001 as to whether or not they have reached an agreement on the second stage procedure.
• The Tribunal proposes that MYERS should deliver to CANADA whatever it can be ready to deliver by mid-January in relation to the quantification of its claims (presumably excluding experts’ reports), together with its proposals as to the second stage procedure.
• The Tribunal proposes that CANADA should provide its views on the procedure to be followed in the second stage within 10 days of receipt of ‘MYERS’ mid-January materials’. (Clearly it is not necessary for CANADA to have MYERS’ full Memorial before it indicates its views on the second stage procedure, but equally clearly it should have at least a summary of the case it faces).
• The parties should then consult with each other on the ‘second stage procedure ’ and report to the Tribunal by 9 February 2001, preferably jointly but otherwise separately, as to whether or not they have reached agreement.
• If they have reached an agreement the Tribunal will issue a Procedural Order No. 17 ‘By Consent ’. If they have not reached agreement, the Tribunal will meet the parties in Toronto on 21 February 2001.
... to ask the Tribunal to delay the assessment of damages until the courts complete judicial review of the Tribunal’s partial award on liability
CANADA also expressed its concern at the use of documents in court proceedings that had been delivered as evidence in the first stage of the proceedings, but had been marked confidential.
• CANADA’S application to suspend the arbitration pending the outcome of the judicial review process; (for this purpose the Tribunal directed CANADA to deliver a reasoned written application by 15 February 2001 and SDMI to reply by 19 February 2001).
• the procedural schedule for the second stage of the arbitration.
• whether or not the Tribunal should appoint its own forensic accountancy expert pursuant to Article 27 of the UNCITRAL Rules.
• whether or not the Tribunal’s previous confidentiality orders should be varied in order that additional material may be put before the national court in Canada for the purposes of the judicial review process. (The Tribunal asked the parties to address the practical aspects of this question in brief written statements ahead of the 21 February 2001 meeting).
Mr Bob Rasor
Mr Dana Myers
Mr Peter Wallace
Prof Roger Ware
Mr Jeffrey Harder
Mr Howard Rosen
Dr Joan Berkowitz
Mr Douglas White
Mr Robert Stillman (by videoconference)
Mr Derek Rostant
(listed in order of appearance)
CHAPTER III. CHRONOLOGY OF EVENTS
CHAPTER IV. THE SCOPE OF RECOVERY
By not identifying any particular methodology for the assessment of compensation in cases not involving expropriation, the Tribunal considers that the drafters of the NAFTA intended to leave it open to tribunals to determine a measure of compensation appropriate to the specific circumstances of the case......16
The Tribunal agrees with CANADA that it would be premature at this stage to attempt to set out detailed, exclusive, principles for calculating the compensation payable. The disputing parties should have the opportunity to make further factual and legal submissions on the question of the precise methodology to be used.17
The Tribunal has already suggested that whatever precise approach is taken it should reflect the general principle of international law that compensation should undo the material harm inflicted by a breach of an international obligation.18
The Tribunal also noted that punitive damages may not be awarded under the NAFTA.19
CANADA has submitted, and the Tribunal accepts, that the following principles also apply:
• The burden is on SDMI to prove the quantum of the losses in respect of which it puts forward its claims.
• Compensation is payable only in respect of harm that is proved to have a sufficient causal link with the specific NAFTA provision that has been breached. The economic losses claimed by SDMI must be proved to be those that have arisen from a breach of the NAFTA, and not from other causes;
• Damages for breach of any one NAFTA provision can take into account any damages already awarded under a breach of another NAFTA provision. There must be no ‘double recovery ’.20
The international law principle of compensation that is applicable in this NAFTA claim is that Canada must put the Investor into the position that it would have been but for Canada’s wrongful act. According to NAFTA Article 1116, the Investor is entitled to claim for all damage and loss arising from Canada’s breach.21
The investor’s analysis is based on an income loss approach, which looks at losses to the Myers companies, i.e. in the US and Canada, and how they are interconnected...22
To put the Investor and the Investment back in the place they would have been but for the breach, we have to figure out what they lost. What they lost, among other things, was an opportunity to capitalize on the tremendous goodwill that was going to translate into market share. And this goodwill, which soon would become market share, is a form of intangible property, and this is recognised within Article 1139’s definition, part (g) as an investment.23
The Investor’s approach can be summarized as follows:
a) take the known business activity of the Myers Companies in Canada......
b) discount this activity by a specific factor to take into account the percentage of contracts that would have reasonably been completed based on evidence regarding the Myers Companies activities in the U.S. and on the state of the market in Canada......
c) calculate this value over the relevant period of liability to obtain the expected gross lost revenue; and
d) discount this expected revenue loss by the gross margin of the respective product being remediated to produce a loss of Incremental Cash Flow
This loss must also be augmented by appropriate out of pocket losses and by an applicable rate of interest applied to the total of these figures to produce the total necessary to put the Investor and the Investment into the position they would have enjoyed but for the wrongful acts of Canada.24
CHAPTER V. REVIEW OF SOME PRINCIPLES CONCERNING THE ASSESSMENT OFCOMPENSATION
...the provision of a service: (a) from the territory of a Party [the United States] into the territory of another Party [Canada]...(c) by a national of a Party [SDMI] in the territory of another Party [Canada]...it...does not include the provision of a service in [CANADA] by [Myers Canada]....
The requirement by a Party that a service provider of another party post a bond or other form of financial security as a condition of providing a service into its territory does not of itself make this Chapter applicable to the provision of that crossborder service. This Chapter applies to the Party’s treatment of the posted bond or financial security.
This provision underscores the intention to limit the application of Chapter 11 to the protection of investments and their activities and not to extend it to the provision of cross-border services in the absence of an investment. Chapter 11 is not engaged merely because of a requirement to post security.
...to recoup or compensate...for damages...which result directly or indirectly...and...such compensation includes both damages suffered and profits lost....51
The Shufeldt tribunal continued to note that the profits. ..lost...must be the direct fruit of the contract and not too remote or speculative.52
Q....you basically treated the volumes that Myers was not able to process during the closure period as lost forever—
A. That’s correct.
Q. Subject to the contracts they in fact did in the spring?
A. That’s correct.57
If this is right, there would have been no inventory for SDMI to process in order to mitigate its losses.
CHAPTER VI. QUANTIFYING THE COMPENSATION TO BE AWARDED
...I got an Entrepreneur of the Year in Northwest Ohio for positive cash flow, positive profits and growth in the company from 16 million in the year I took over to over 42 million about two years after I took over, all because of this resource recovery62
...letting our competitors compete with an EPA-granted regulatory cost advantage.66
While [SDMI] was rendered inactive in Canada, its U.S. competitors applied to the USEPA for permission to import PCB’s from Canada (i.e. in the event that the border closing would one day be lifted).68
US companies that had no real thought that the Canadian market would even have been available...now had lots of time to plan to compete with us...and eventually they did69
He gave no particulars of who these competitors were or the extent to which they eventually competed with SDMI.
We started off in Canada quoting prices that were 10, 15, 20 percent higher than our U.S. prices because we knew the prices would come down so we started higher so that we could come down a bit and still make the margins we wanted to make70
The issue is whether S.D. Myers had a first-mover advantage over its US competitors, not over Chem-Security; with respect to the latter S.D. Myers was already in a highly advantageous position in terms [sic] of price at least72
In my experience, PBC waste holders by and large wanted to get rid of their inventories to escape the bureaucratic red tape surrounding mandatory MOE inspections of their storage sites. Some were concerned, like Canada Brick, that the Alberta borders might actually close again and they might miss their window of opportunity. They were motivated and willing to take advantage when the opportunity presented itself74
Mr Wallace’s view was supported by the fact that over half of the inventory targeted by SDMI was destroyed during the closure despite relatively high prices.
The Myers Companies were, in my view, the initiator of the opening of the border to the US. They pushed the hardest to get the border open and were the most visible US company in the Canadian market that had a compelling disposal option to the sky-high prices of Chem-security.
Shortly before the Alberta border opening, I was aware that the Myers Companies had spent considerable efforts establishing themselves with Canadian PCB Waste holders as a viable option to Swan Hills. This marketing work translated into a significant amount of goodwill which amounted to a strong head start for the Myers Companies over other U.S. competitors who eventually entered the Canadian market. No other US competitors to SDMI took the steps or the effort to develop a strong market presence in Canada the way that the Myers Companies did.
When the Alberta border opened there was not a flurry of activity from US Companies, other than the Myers Companies. No one else appeared ready to go. The others did not have enforcement discretions. As a person in business, I recognize the advantages of being the first into a market. When you develop a marketplace like The Myers Companies did, you get a significant advantage - we are developing another recycling business right now. We were told by the Customs and Revenue Canada officials that when you develop a business your competition tries to clone you within about six months. You can clean house in that first six months, but you’ve got to be first off the mark. The Myers Companies had a distinct competitive advantage because they had the vision no one else had.76
The lengthening period of the Canadian border closure also resulted in an increasing credibility gap for SDMI and PBC service providers like Green-Port who offered the lower priced US options to their customers. We had a number of joint projects with SDMI during this period and it became increasingly difficult to hold onto these proposals when no one could accurately predict if the border was in fact going to be open, or if it would open at all.
It was only in February 1997, when the border actually opened, that our customers were again able to take seriously again [sic] the idea of sending PBCs to the US for disposal. For many of the quotes related to SDMI, it was clearly too late. It was necessary for those affected to rebuild their credibility, then build up moment all over again. Much of the goodwill that was created in 1995, and the momentum that existed then, was in a holding pattern by 1997. The SDMI lost credibility and so did we77
...it was actually close to when the border was actually going to open up the second time... and even though we showed a better price, a better US price than the Swan hills version, they couldn’t wait because what happens if the border doesn’t open. This is part of the credibility problem we had.78
So what happened initially when we were giving out the Myers pricing through Green-Port we were telling people in ’95 okay, the borders are going to open, the borders are going to open. Then the borders did open, but then they shut down right away, so we lost a head of stem there. And the longer it went on, there were customers that...we lost credibility because you can only say the borders are going to open so long and the longer you go on in that continuum, you just continue to lose credibility. And not only Green-Port lost credibility, but Myers lost credibility. So that when the borders open up, unless people saw it in print in the Canadian Gazette or however it came out, they wouldn’t believe it. They said no, no, you guys have been telling us the borders are open, we don’t believe. And it was tough then building that momentum up again to get people to consider shipping to the U.S79
The Canadian competitors in 1995 that were just setting up to go, they were very well entrenched. They had market penetration, they had a brand name. It was a much different market and it was way more competitive and the margins were much smaller.81
Q. Did S.D. Myers have a price advantage vis-a-vis American competitors by February 1997? There's evidence that they had some depending on which job — such that the Canadian competitors would stick to the 20 percent rule. What about vis-a-vis American competitors in February 1997, when the border reopened?
A. The American competitors weren't prevalent, I can tell you that They weren ’t very aggressive in the marketplace. We didn’t encounter American pricing from other competitors. The only exception to that, I would say, would be on a real big job like, for instance, we bid on Toronto Hydro cable recycling job back in... I think it was 1997, and TCL actually submitted a quote and we said ‘These guys actually quote ’...
We had the low bid with the Myers price because we were showing both options, the Canadian option and the U.S. option, and our quote for the Myers — with Myers doing it at their facility was lower than TCI, but it ended up going to a Canadian company who — you know, because the U.S. border wasn't open.84
Q. But I'm thinking relative to Myers because that was the comparison that you were — made earlier. You saw the Myers facility, you were very impressed with it, and then you said that when the border was closed by Sheila Copps that secretly you had a sigh of relieve. When the border reopened, and I'm thinking relative to Myers, what was your feeling or your sense at that point?
A. Well, Myers, in terms of ballast recycling, we couldn't touch their prices so we decided to retire our trailers, and same with Comtech.
I want to tell this anecdote. We were bidding on a deal with S.D. Myers as Hamilton-Wentworth. They had something like 11 shipping containers full of transformers and ballasts, it's all recyclable stuff and Green-Port was going to do the crane work and the site services, and we were going to load the trucks to Myers. And to give you an idea even back then how competitive Myers prices were compared to the rest of the recyclers, the Canadian recyclers, and the reason for that was Myers was carrying the U.S. incineration prices and the Canadian recyclers were carrying Swan Hills incineration prices, a huge difference. The — Swan Hills incineration prices were double the U.S. incineration price, and we walked out of the meeting and one of the Canadian competitors, and I won't say which one it is, he said, ‘There's only two groups that have a chance at this tender ’, and he said, ‘S.D. Myers and God. ’ And that gave you an idea — and we talked with another competitor and I said, ‘How come you're not going to bid this one? ’ And he says, ‘I'm not going to bid something I'm not going to get. So that gives you and idea of how competitive Myers prices were on transformers and valves and we knew we were going to be reduced to the role of the broker....85
Apparently, the volume of PCB wastes shipped from Canada to the United States from February to July 1997 was not great for two major reasons. Because there was not much notice that the Canadian border would be reopened it took time for Myers Companies to become operational...PCB waste disposal customers in Canada did not contract with Myers Companies...because they thought that the Canadian border might be closed again soon after it reopened.88
Q. Now, in 1995, ‘96, or ‘97 did you identify any need to expand the capacity of the plant?
A. No. No, sir. We were trying to find additional work.89
Q. Now, in terms of the volumes that were dealt with in the quotes that you did issue in Canada, assuming that the borders were open, would those volumes stretch the capacity of S.D. Myers, Inc. ?
A. I believe that we could have done all the work that we were quoting with the facility that we had, perhaps some additional expansion.90
Income stream lost to others during the closure period
• Step 1. An assessment is made of the realistic value of the quotations relied upon by SDMI in support of its case on quantum.
• Step 2. An assessment is made of the price degradation that would have occurred if the border had remained open, and the value obtained in Step 1 is adjusted accordingly.
• Step 3. An assessment is made of the likely success rate for turning quotations into completed orders.
• Step 4. The success rate is applied to the value obtained in Step 2.
• Step 5. An assessment is made of the proportion of this value that would have been converted into a gross income stream for SDMI during the period of the closure.
• Step 6. The value of the remaining gross income stream is derived.
Income stream lost to others during the post-closure period
• Step 7. The value of post-closure quotations is calculated and added to the value obtained in Step 6, to produce the gross income stream available to SDMI when the border re-opened.
• Step 8. An assessment is made of the amount of the total post-closure gross income stream that was, or would have been, lost to others due to the closure.
Income stream not lost to others, but which would have been processed by SDMI during the 19 month "window of opportunity"
• Step 9. An assessment is made of the portion of the pre-closure inventory that was not lost to others.
Net income stream
• Step 10. An assessment is made of the net income streams that would have been derived from the total gross income streams, by deducting the cost of sales.
• Step 11. An assessment is made of the financial effect of the shortened time available to SDMI to process (or at least export) the remaining preclosure inventory, and of the financial effect of the delay.
Total recovery for SDMI
• Step 12. The compensation to be awarded to SDMI is the total of the two lost net income streams, plus the estimated income that would have been derived from part of the remaining pre-closure inventory that could have been processed (or exported) by SDMI before July 1997 when the border was closed by the USA, and the time-value of the delayed net income stream.
Each step now is discussed in turn.
|SDMI’s total quotations and bids||$101,774,735|
|bids delivered after July 1997:||$800,000|
|percentage of large soils bids:||$11,880,000|
|public works bid:||$19,800,000|
|Federal Government PCB’s: miscellaneous items (including "no files", "cut off’ items, duplications, and "others"||..$7,600,000|
|-$2,400,000, $986,745, $1,100,000|
We started off in Canada quoting prices that were 10, 15, 20 percent higher than our U.S. prices because we knew the prices would come down so we started higher so that we could come down a bit and still make the margins we wanted to make.103
Accountants typically refer to cost as being variable, semi-variable or fixed when dealing with the costs of making and processing a sale. A variable cost is a cost that varies directly with the volume of activity, such as trucking costs to bring the Canadian PCB’s to the SDMI facility. A semi-variable cost is a cost that varies with production or activity, but not in direct portion to volume typically, because it contains both fixed and variable elements. Maintenance is an example of a semi-variable cost. Finally, a fixed cost is a cost that remains relatively constant regardless of the volume of production within a fairly broad range of activities (eventually if sufficient production is added, additional fixed cost will be incurred to meet demand). The equipment necessary to process the PCB at SDMI’s Ohio facility is an example of fixed costs.110
In order to earn the additional revenues as outlined in this report (i.e. had the Event not occurred), the Investor/the Investment would have incurred incremental operating expenses.
The Tribunal is faced with experts who, after applying their professional judgements, have arrived at significantly different conclusions.116
• Step 1. The realistic value of SDMI’s relevant orders and quotations is assessed at CAN$50,294,735.
• Step 2. The price degradation that would have occurred if the border had remained open is assessed at 15%: this percentage applied to the value assessed in Step 1 = CAN$42,700,000.
• Step 3. The success rate is assessed at 44%.
• Step 4. The 44% success rate applied to the value obtained in Step 2 = CAN$ 18,800,000
• Step 5. The gross income stream lost by SDMI to others during the closure is calculated (applying 50+%) at CAN$9,700,000.
• Step 6. The remaining gross income stream from the pre-closure inventory available after CANADA re-opened the border was CAN$9,100,000.
• Step 7. To this figure is added the realistic value of SDMI’s post-closure quotations, giving a total gross income stream available to SDMI when the border re-opened assessed at CAN$11.9 million.
• Step 8. The post-closure gross income stream that was, or would have been, lost to others by reasons of the closure is assessed at CAN$2.1 million.
• Step 9. The remaining pre-closure income stream is assessed at CAN$7.5 million.
• Step 10. The lost net income streams (45% of gross) are calculated at CAN$4,400,000 (during closure), CAN$900,000 (post-closure) and CAN$3,400,000 (remaining pre-closure).
• Step 11. The compensation to be awarded in respect of the shortened time period available to SDMI to process the remaining pre-closure inventory, and for the time value of delay, is assessed at CAN$750,000.
• Step 12. The total lost net income plus compensation for the abridged opportunity and delay is assessed at CAN$6,050,000.
CHAPTER VII. INTEREST
CHAPTER VIII. COSTS
CHAPTER IX. DISPOSITIVE PROVISIONS OF THE AWARD