Windstream Energy v. Canada (II)

By a Notice of Arbitration dated 22 December 2020, the Claimant commenced arbitration proceedings against the Respondent on its own behalf and on behalf of its enterprise Windstream Wolfe Island Shoals Inc. ("WWIS") pursuant to Article 3 of the 2013 UNCITRAL Arbitration Rules (the "UNCITRAL Rules") and Articles 1116, 1117 and 1120 of the North American Free Trade Agreement (the "NAFTA"). The Claimant also invoked Annex 14-C of the United States-Mexico-Canada Agreement ("CUSMA").

On 21 December 2021, the Tribunal issued Procedural Order No. 1 establishing, among other things, the Procedural Calendar of the arbitration. As set out in the Procedural Calendar, the Initial Phase of the proceedings shall culminate in a Decision on Bifurcation, following which one of two alternative scenarios shall apply depending on the outcome of such Decision.

On 18 February 2022, the Claimant submitted its Memorial (the "Memorial").

A NAFTA arbitration then proceeded between the same disputing parties, PCA Case No. 2013-22 ("Windstream I"), which culminated in an Award dated 27 September 2016 (the "Windstream I Award").⁵ In this Award, the Windstream I tribunal granted, inter alia, the "Claimant's claim that the Respondent [had] failed to accord the Claimant's investments fair and equitable treatment in accordance with international law, contrary to Article 1105 of NAFTA" and awarded compensation to the Claimant "for the Respondent's breach of its obligations under Article 1105(1) of NAFTA in the amount of CAD 25,182,900".⁶ The Windstream I tribunal further dismissed the Claimant's claims concerning the alleged breach of NAFTA Article 1110 (Expropriation) and of the most-favoured nation ("MFN") and national treatment standards.⁷

[e]ncouraged by the tribunal's decision and Canada's representations that the Project had a future, Windstream emerged from the NAFTA proceedings with the expectation that the Project would proceed. While courting substantial third-party interest in investing in the Project, Windstream worked to advance the Project and attempted to engage the Government of Ontario and the Independent Electricity System Operator ["IESO"] in discussions about the path forward. The Ontario Government ignored those requests – and its promise in 2011 to "freeze" the FIT Contract – and allowed the IESO to terminate the FIT Contract in February 2020.⁸

In this proceeding, the Claimant "seeks the full value of its investment", which it alleges "has now been destroyed – not just damaged – as a result of the Ontario Government's actions (and inaction) after the Windstream I Award",⁹ including the Government's alleged:

(a) failure to complete in a timely manner the work it considered necessary in order to lift the moratorium, in order to ensure that the moratorium would not further prejudice WWIS by causing further delays to the Project (claiming that the Government has not conducted any of the studies that were the stated pretence of the application of the moratorium, and does not appear to be taking any steps to lift the moratorium);

(b) decision to continue to apply the moratorium to WWIS, despite knowing that its continued application as against WWIS would create the conditions that would allow the IESO to terminate the FIT Contract (in direct contradiction with its promise to protect the Project from the effects of the moratorium); and

(c) failure to direct the IESO not to terminate the FIT Contract, or to amend the FIT Contract to ensure that, consistent with its promise, the Project would be "deferred", "frozen" and "on hold".¹⁰

First, the Respondent rejects the Claimant's inference that the Windstream I tribunal "declined to award Windstream damages for the full value of its investments" because the FIT Contract was "'still formally in force' and could be 'reactivate[d]' and 'renegotiate[d]' to adjust its terms to the moratorium."¹⁵ In the Respondent's view, such decision "had everything to do with the CAN$6 million security deposit that was still owed to Windstream [under the FIT Contract], and nothing to do with any increase in value that the Project might experience in the future."¹⁶ It was for this reason, the Respondent avers, that the Windstream I tribunal concluded that the Claimant had not been substantially deprived of the value of its investment and thus that no breach of NAFTA Article 1110 (Expropriation) occurred.¹⁷

In turn, the Respondent considers that the Windstream I tribunal's determinations regarding the breach of NAFTA Article 1105 (Minimum Standard of Treatment) are at odds with the Claimant's position "that the findings by the Windstream I Tribunal and Canada's representations in the proceeding created the expectation that its Project had a future."¹⁸ In this respect, the Respondent references the Windstream I tribunal's findings that "many of the [Ontario Government's] research plans did not go forward at all, including some for lack of funding", that "at the hearing counsel for the Respondent confirmed that Ontario did not plan to conduct any further studies", and that "the studies that have been conducted [have not] led to any amendments to the regulatory framework."¹⁹

The Respondent submits that the Claimant's attempts "to replead claims or relitigate issues that it put before the Windstream I Tribunal" are precluded by general principles of international law applicable under NAFTA Article 1131, namely, res judicata, collateral estoppel and abuse of process.²⁵ Flowing from these principles, the Respondent asserts that the Claimant's claims must be dismissed because it has failed to identify any measures following the Windstream I Award that can sustain an independent cause of action under NAFTA Chapter 11.²⁶

According to the Respondent, the six measures identified by the Claimant as breaching NAFTA following the Windstream I Award²⁷ boil down to two complaints of a NAFTA breach: "(i) the continued application of the moratorium; and (ii) the termination of the FIT Contract, as opposed to its deferral or amendment".²⁸ In the Respondent's view, at their core, these complaints reflect the same claim that was the subject of the Windstream I arbitration, by the same investor and for the exact same investment.²⁹ On this basis, the Respondent submits that the Claimant is barred from: (i) making a claim that the continued imposition of the moratorium following the Windstream I Award breaches NAFTA; (ii) claiming that the termination of the FIT Contract breaches NAFTA; (iii) reopening the determination that its CAD$6 million security deposit constituted a substantial portion of the value of its investment; or (iv) seeking additional damages based on a valuation of its investment contrary to the determination of value in the Windstream I Award.³⁰

The Respondent submits that the Claimant cannot establish, as it is its burden, prima facie loss or damage "by reason of, or arising out of" the breach of an obligation under Section A of NAFTA Chapter 11, which is a condition precedent to the Tribunal's jurisdiction pursuant to NAFTA Articles 1116(1) and 1117(1).³¹

Second, the Respondent considers that the Claimant's damages claim requires overturning matters that have been conclusively determined by the Windstream I Award.³³ For this reason, it requests the Tribunal to reject the "Claimant's argument that its project had value that continued after the Windstream I Award, as demonstrated by the alleged interest of other investors" and the DCF analysis performed by its hired expert.³⁴

On the basis of its three Objections, the Respondent requests that the proceedings be bifurcated pursuant to Article 17(1) of the UNCITRAL Rules.³⁸ According to the Respondent, bifurcation should be guided by principles of fairness and procedural efficiency, as invoked by the Accession Mezzanine v. Hungary tribunal and other tribunals faced with requests for bifurcation.³⁹ The Respondent further relies on the standard for bifurcation articulated in Philip Morris v. Australia, pursuant to which it submits that bifurcation is appropriate when: (i) the objection is prima facie serious and substantial, (ii) the objection can be examined without prejudging or entering the merits, and (iii) the objection, if successful, could dispose of all or an essential part of the claims raised.⁴⁰ In the Respondent's view, each of its three Objections clearly satisfies this standard.⁴¹

Lastly, the Respondent also considers the Damages Objection to be suitable for preliminary consideration. It says this objection is prima facie serious and substantial because it is premised on "a necessary element to ground the Tribunal's jurisdiction", i.e., a showing of prima facie damage.⁴⁸ Moreover, in the Respondent's view, addressing the Damages Objection will not require fact and expert witnesses; rather, it requires focusing "on the legal standard as well as what the parties pleaded and the Tribunal decided in Windstream I to determine from which measure the alleged damage originates."⁴⁹ It notes that the tribunal in Westmoreland v. Canada, faced with a similar situation, reached the decision not to proceed to an evidentiary hearing on quantum of loss.⁵⁰ Since a failure to make a prima facie damage claim pursuant to NAFTA Articles 1116(1) and 1117(1) would deprive the Tribunal of jurisdiction, the Respondent concludes that the Damages Objection would also dispose of the entirety of the dispute.⁵¹

In the Claimant's view, such considerations apply in this case.⁵⁹ The Claimant recalls that this case is about measures and conduct by the Ontario Government that took place after the Windstream I Award and should be taken by the Tribunal as such.⁶⁰ Further, the Claimant submits that the Respondent's own framing of the Memorial and its Objections requires the Tribunal to review and interpret post-2016 conduct to determine whether those events raise new measures or give rise to any additional damages, "which is at the heart of Windstream's claim and the focus of its fact and expert evidence".⁶¹ Such evidence includes seven witness statements and nine expert reports.⁶² Similarly, the Claimant observes that the Tribunal's analysis of the res judicata argument will require a determination of whether the new measures and alleged treaty breaches involve different facts and issues than those at stake in the earlier arbitration.⁶³ According to the Claimant, the Respondent acknowledges in its Request for Bifurcation and Memorial on Jurisdiction that the Tribunal will have to engage with this evidence.⁶⁴

The Respondent seeks to bifurcate the final determination of its three Objections as a preliminary issue based on the UNCITRAL Rules, Article 17(1). Article 17(1) provides as follows:

Subject to these Rules, the arbitral tribunal may conduct the arbitration in such manner as it considers appropriate, provided that the parties are treated with equality and that at an appropriate stage of the proceedings each party is given a reasonable opportunity of presenting its case. The arbitral tribunal, in exercising its discretion, shall conduct the proceedings so as to avoid unnecessary delay and expense and to provide a fair and efficient process for resolving the parties' dispute.

The disputing parties agree that the Tribunal has the power to bifurcate the proceedings in order preliminarily to hear and determine the Objections pursuant to the UNCITRAL Rules. However, Article 17(1) does not supply the applicable standard for bifurcation. Instead, the matter is left to the discretion of the Tribunal.

(a) prima facie serious and substantial;

(b) able to be examined without prejudging or entering the merits; and

(c) if upheld, would be dispositive of all or an essential portion of the claimant's claims.

Against that background, the Tribunal considers below the Respondent's request for bifurcation in respect of each of the three Objections, pursuant to UNCITRAL Rule 17(1) and based on the agreed factors to be applied through a lens of whether or not bifurcation would enhance procedural efficiency and economy and the overall fairness of the proceeding.

The Respondent's second preliminary objection is that the Claimant's claims in the Windstream II arbitration are precluded by general principles of international law applicable under NAFTA Article 1131, namely, res judicata, collateral estoppel and abuse of process.⁷⁷ It argues that the alleged continued application of the moratorium and termination of the FIT Contract constitute the same claim, by the same investor, regarding the same investment, as the Windstream I arbitration, which bars the Claimant from reopening prior claims or seeking any further determination as to loss.

The Respondent's third and final Objection is that the Claimant cannot establish prima facie loss or damage "by reason of, or arising out of" the breach of an obligation under Section A of NAFTA Chapter 11, which it alleges is a condition precedent to the Tribunal's jurisdiction pursuant to NAFTA Articles 1116(1) and 1117(1).⁷⁸

The Damages Objection, articulated on the basis that damages is a missing condition precedent to jurisdiction under Articles 1116(1) and 1117(1), more closely resembles a challenge to subject-matter jurisdiction than the earlier Objections (as discussed at paragraph 53 above). However, it does so on the basis of the preclusionary effect of the Windstream I Award, which the Tribunal has determined above is not, on balance, appropriate for bifurcation. Moreover, the Respondent does not appear to argue that there is no extant investment following the Windstream I Award. Rather, it argues that such investment would have no additional value beyond what has already been compensated, meaning no damage as required pursuant to Articles 1116(1) and 1117(1) was established.

On the basis of the foregoing, the Tribunal makes the following decisions:

(a) the Respondent's Request for Bifurcation is denied;

(b) the Tribunal reserves its decision on costs relating to the Request for Bifurcation;

(c) the arbitration shall proceed on the basis of the procedural timetable in Procedural Order No. 1, Annex A.2, which provides for the time periods that will apply if the Respondent's Request for Bifurcation is denied; and

(d) the disputing parties are directed to confer with a view to agreeing on a joint proposed timetable by inserting actual dates into Annex A.2 to Procedural Order No. 1, and to submit such a modified annex to the Tribunal, jointly if possible, and separately if not, on or before Friday, 30 September 2022.

Dated: 13 September 2022

Place of Arbitration: Toronto