On 12 April 2013, an ICSID arbitral tribunal (the “Tribunal“) issued a Consent Award in the case of St Mary’s VCNA LLC v. Government of Canada, a case brought under Section B of Chapter 11 of the North American Free Trade Agreement (“NAFTA“). The Consent Award adopted a settlement agreement between St Mary’s VCNA LLC (the “Claimant“) and the Government of Canada (the “Respondent“, together the “Parties“) whereby the Claimant irrevocably and permanently withdrew all claims against the Respondent. The Settlement Agreement was adopted following a Report on Inadvertent Disclosure of Privileged Documents (the “Report“) issued on 27 December 2012. In that Report, Justice Spigelman determined that Canada had demonstrated a strong case that the Claimant was the vehicle for a scheme to manufacture jurisdiction under NAFTA. He found this to be an improper purpose and concluded that no privilege attached to several of the documents he was tasked to review.
The claim involved a dispute between a Canadian corporation, St Mary’s Cement Inc. (“SMC“) and the Respondent. SMC acquired land in Ontario (the “Site“) and sought to transform this into a quarry. However, on 12 April 2010, the Ontario Minister of Municipal Affairs and Housing exercised his statutory discretion to issue a zoning order (the “Order“) freezing zoning on the Site to existing permitted uses under applicable by-laws, prohibiting its use as a quarry. SMC then applied to revoke and/or amend the Order.
The Claimant, which was constituted on 18 October 2010, is a Delaware Limited Liability Company owned and controlled by the Votorantim Group of Brazil (“Votorantim“) and asserted ownership of SMC. On 13 May 2011, the Claimant submitted to the Respondent a Notice of Intent to submit a claim to arbitration and subsequently served a Notice of Arbitration (“NOA“) on 14 September 2011, seeking compensation for damages arising from the adoption of the Order.
The Respondent raised several jurisdictional objections to the claim brought by the Claimant, one of which invoked the Denial of Benefits Clause of NAFTA (Article 1113(2)). The Respondent asserted that the Claimant was owned and controlled by Votorantim and had no “substantial business activities” per Article 1113(2) in the United States at any relevant time; therefore, it was not entitled to the benefits of Chapter Eleven of NAFTA.
The Tribunal ordered bifurcation of the arbitration to address the jurisdictional objections raised by the Respondent, subsequent to which the Parties exchanged requests for production of documents. In the course of document production, the Claimant inadvertently handed over certain documents to the Respondent that it then asserted were privileged and, as such, should be returned. The Respondent requested the Tribunal to establish a process whereby a neutral third party would review the documents and determine whether they were privileged; on 29 November 2012, the Tribunal appointed Justice James Spigelman, former Chief Justice of the Supreme Court of New South Wales, to fulfil this role.
Justice Spigelman was tasked with resolving two questions: (i) whether the documents in question were privileged; and (ii) if so, whether privilege had been waived.
The Respondent submitted that Votorantim transferred ownership of SMC to the Claimant to manufacture NAFTA jurisdiction and created misleading evidence concerning the Claimant’s business activities in the United States. In the Report, Justice Spigelman asserted a general principle that documents created for an improper purpose are not entitled to privilege because privilege exists to serve the public interest in the administration of justice. He found, on an interlocutory basis, that the Claimant had not established “substantial business activities” at the “relevant time” which he determined to be the time of the challenged conduct or, at the very latest, when the NOA was filed. He concluded that the Respondent had “a strong case that the Claimant was a vehicle to obtain the right under NAFTA to institute and pursue proceedings, being a right to which neither it nor its controllers were entitled” (page 12) and that the case was sufficiently strong to overcome privilege for documents that came into existence as part of that scheme or which otherwise evidence the scheme. Of the 11 documents Justice Spigelman was given to review, he concluded that seven documents were not entitled to privilege.
Even if the documents were privileged, Justice Spigelman found that any privilege had been waived by the Claimant’s actions. He examined two NAFTA cases cited by the Respondent (Glamis Gold v. United States of America and Bilcon of Delaware v. Canada) dealing with the question of privilege where documents had inadvertently been disclosed. On the basis of this examination, he identified five factors relevant to determining whether privilege had been waived in the case of inadvertent disclosure: (a) the reasonableness of the precautions taken to prevent inadvertent disclosure in view of the extent of the document production; (b) the number of inadvertent disclosures; (c) the extent of the disclosure; (d) any delay and measures taken to rectify the disclosure; and (e) whether the overriding interests of justice would or would not be served by relieving the party of its error. Although Justice Spigelman found, on the facts, that factors (a) – (d) did not support waiver, he concluded that in the overriding interests of justice, privilege had been waived due to the fifth factor as granting privilege “would support an attempt to create the appearance of a right to pursue a NAFTA claim to which the Claimant [was] not entitled” (page 16).
The Consent Award, released on 12 April 2013, adopts a Settlement Agreement between the Parties. Under the Settlement Agreement, the Claimant irrevocably and permanently withdrew its NAFTA claim against the Respondent. In so doing, the Claimant acknowledged that it lacked and had always lacked standing to bring a claim under Chapter Eleven of NAFTA and that it had received no payment from the Respondent in respect of the claims or the Settlement Agreement. In return, the Respondent agreed not to pursue any claim against Votorantim for costs incurred.
In his Report, Justice Spigelman predicated the existence of privilege on the public interest in the administration of justice and asserting that privilege could be limited if it was in the public interest so to do. This stance adopts a strong public interest approach to the issue of privilege, as not only is privilege deemed not to be absolute, but if a document may be inconsistent with the public interest in the administration of justice, then it will not be protected. Given the narrow and fact-specific nature of Justice Spigelman’s inquiry, the precedential value of this Report remains to be seen and what, aside from the artificial manufacture of jurisdiction, might also constitute an improper purpose in the context of privilege.
Justice Spigelman also concluded that the Denial of Benefits clause found in Article 1113(2) of NAFTA was to be applied at the time of the adoption of the challenged measures, or, at the latest, the date of the NOA. In the present case, at the date of the NOA, the Claimant possessed a United States business bank account, a web page, and had applied for registration as a foreign limited liability company in Nevada, but was nevertheless found to have no “substantial business activities” within the sense of Article 1113(2). This Report therefore appears to be the first express pronouncement on the time at which the test of “substantial business activities” is to be applied; previous NAFTA jurisprudence, such as Metalclad Corp. v. United Mexican States and Waste Mgmt., Inc. v. United Mexican States, have referred only in general terms to Article 1113, without specific reference to subsection 2 or the time at which “substantial business activities” must be determined. That being said, Justice Spigelman’s determination was made on an interlocutory basis in conjunction with his document review and with attention primarily being directed to the question of privilege.
The Report outlined five factors relevant to establishing waiver of privilege, but gave the fifth factor (whether the overriding interests of justice would be served by relieving the party concerned of its’ error) determinative weight; this suggests that these factors are not cumulative and satisfaction of even one may be sufficient to give rise to a waiver of privilege. The Report of Justice Spigelman sets out several key principles, particularly regarding privilege and the Denial of Benefits clause under NAFTA; it remains to be seen how these assertions of principle will be received by future arbitral Tribunals.