Consent award in St. Marys VCNA, LLC v. Canada – should Brazil enter into BITs?, by José Ángel Rueda

On 12 April 2013 the arbitral tribunal[1] in St. Marys VCNA, LLC v. Canada notified the parties of the Consent Award that put an end to the dispute between them.[2]

The dispute was submitted by the claimant under Chapter 11 of NAFTA and the UNCITRAL Arbitration Rules 1976 and arose out of a decision on the part of the Government of Ontario (Canada) to adopt a Minister’s Zoning Order and subsequent Declaration of Provincial Interest, in respect to a site owned by St. Marys Cement Inc. (Canada) (“SMC”), along with related decisions by relevant provincial and local authorities of Canada.[3]

Three months after the claimant submitted its Notice of Arbitration, Canada notified the claimant of its jurisdictional concerns arising under NAFTA Article 1113(2), Denial of Benefits, and requested documents confirming claimant’s “ownership structure, assets, holdings, and business activities in the United States.”[4] Canada also notified the US Department of State that it would deny to the claimant the benefits of NAFTA Chapter 11 unless claimant provided satisfactory evidence of its US business activities.[5] In March 2012 Canada confirmed it was invoking NAFTA Article 1113(2) to deny Chapter 11 benefits to the claimant and to its alleged investment SMC.[6]

According to the award the parties did not exchange memoranda on jurisdiction or the merits. However, in the course of an exchange of document production requests the claimant produced to Canada “certain documents that it subsequently argued had been produced in error and should be return on the basis of privilege.”[7]

After the appointment by the tribunal of a neutral third party for the determination of whether they were privileged documents and the release of the report by Justice James Spigelman, AC, QC,[8] the parties seemed to be for settling the dispute amicably. In fact, in 28 February 2013 the parties wrote to the tribunal confirming that they had signed a Settlement Agreement and requested that the tribunal adopt that agreement in a Consent Award.[9]

The tribunal, pursuant to Article 34(1) of the UNCITRAL Rules and NAFTA Article 1136, agreed to record the terms of the Settlement Agreement verbatim as a Consent Award. We would like to highlight the following features of the Settlement Agreement:

  • On the claimant’s side the Agreement is not only signed by the original claimant, St. Marys VCNA, LLC (SMVCNA), a Delaware LLC, but also by SMC, an Ontario corporation, and Votorantim Cement North America Inc., another Ontario corporation. The three companies are thereinafter referred to as the Votorantim Group.[10] Through this we realize that the dispute affected Votorantim, a major Brazilian cement company and industrial conglomerate.[11]
  • SMVCNA withdrew its Notice of Intent and its Notice of Arbitration against Canada.
  • The Votorantim Group released and discharged Canada from the claims arisen during the proceedings.
  • The Votorantim Group acknowledged that SMVCNA “lacks and has always lacked” standing to bring a claim under NAFTA Chapter 11 in respect of the claims.
  • The Votorantim Group acknowledges that no payment has been made to it by Canada in respect of the claims or in respect of the Settlement Agreement; and,
  • Canada agrees not to pursue any claim against the Votorantim Group for its costs incurred until 28 February 2013 in respect of the claims.

The point at issue is that the Votorantim Group acknowledged that Canada’s argument under NAFTA Article 1113(2) was correct. Article 1113 states as follows:

1. A Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investor if investors of a non-Party own or control the enterprise and the denying Party:

(a) does not maintain diplomatic relations with the non-Party; or

(b) adopts or maintains measures with respect to the non-Party that prohibit transactions with the enterprise or that would be violated or circumvented if the benefits of this Chapter were accorded to the enterprise or to its investments.

2. Subject to prior notification and consultation in accordance with Articles 1803 (Notification and Provision of Information) and 2006 (Consultations), a Party may deny the benefits of this Chapter to an investor of another Party that is an enterprise of such Party and to investments of such investors if investors of a non-Party own or control the enterprise and the enterprise has no substantial business activities in the territory of the Party under whose law it is constituted or organized.”

As a result, we understand that Canada expressly invoked paragraph 2, stating that Votorantim, an investor of a non-Party (Brazil), owned or controlled the enterprise (SMVCNA) and SMVCNA had no substantial business activities in the territory of the Party under whose law it is constituted or organized (United States of America, as a Delaware LLC). In addition, it has been reported that SMVCNA was in fact incorporated after the investment dispute arose, in particular to gain NAFTA Chapter 11 protection (*).

Leaving apart the question of whether the Delaware LLC was created fraudulently or not, it is clear that Brazilian investments abroad are soaring and need protection against investment disputes (South-North and South-South). Nonetheless, Brazil has no BITs in force so Brazilian companies have to structure their investments abroad to gain BIT protection (via the Netherlands or elsewhere).

As a result, a question arises: should Brazil put an end to its anti-BIT strategy in order to protect Brazilian investments beyond its boundaries?


[1] Members of the Tribunal: Professor Michael Pryles, chair (Australia), Professor Richard Stewart (USA) and Professor Brigitte Stern (France).

[3] See Award, ¶ 3 of Procedural History.

[4] Ibidem, ¶ 4.

[5] See ibidem, ¶ 4.

[6] See ibidem, ¶ 5.

[7] Ibidem, ¶ 11.

[8] See ibidem, ¶¶ 11-13.

[9] See ibidem, ¶ 18.

[10] See ibidem at p. 6.

[11] See also http://www.stmaryscement.com/saintmaryscementinc/

(*) I hereby thank Luke Eric Peterson for kindly sending us IA Reporter’s comment on the case; see J. Hepburn, “In newly-released report tribunal-appointed expert urged lifting of attorney-client privilege on documents at center of NAFTA denial of benefits battle”, IA Reporter, April 16, 2013.

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