Canada is making its case today in Federal Court to overturn a potentially expensive NAFTA ruling that it wrongly rejected an American company seeking to set up a quarry in Digby Neck, N.S., a decade ago.

Ottawa is asking the Federal Court of Canada to set aside a 2015 international arbitration tribunal decision in favour of Delaware-based concrete company Bilcon.

Bilcon successfully argued the rejection of its proposed 152-hectare quarry and marine terminal on Digby Neck in 2008 violated investor protections contained in Chapter 11 of the North American Free Trade Agreement.

The company is seeking hundreds of millions of dollars in compensatory damages.

The test is whether the tribunal award falls outside the scope of the arbitration. Bilcon argues that the Federal Court can only set aside the tribunal ruling on limited and narrow grounds, and says that test has not been met.

"Interference with the award rendered by the arbitral tribunal would be unlawful, contrary to the Canadian doctrine of judicial deference to arbitration awards, and would bring the integrity of Canada's commitment to the NAFTA, and thereby its national honour, into disrepute," Bilcon lawyer Gregory Nash said in a court document.

Canada rejects tribunal's ruling

Canadian Justice Department lawyers argue the arbitration tribunal had no jurisdiction to hear Bilcon's complaint, which centred on its treatment at the hands of a joint federal-provincial review panel in 2008.

After public hearings, the review panel decided the quarry project's impact on what it called "community core values" was a significant environmental effect that could not be mitigated.

The proposed project was to be a 152-hectare quarry and marine terminal on Digby Neck, N.S. (CBC)

The project was killed.

Bilcon said it was blindsided by the decision because "community core values" was a vague criterion and never raised at the hearings. Bilcon appealed under NAFTA's Chapter 11, arguing it was unfairly treated.

By a vote of 2-1, the NAFTA tribunal agreed and ruled the review panel's decision was unfair, arbitrary and broke Canada's own environmental assessment rules.

Canada's case

Canada said Bilcon should have taken its objections to the Federal Court for a judicial review, arguing "the tribunal determination that the panel breached domestic law was the sole determinant of its liability findings."

NAFTA tribunals are only empowered to decide questions of international law, federal lawyers Karen Lovell and Roger Flaim said in court documents. Those are "questions of Canadian law that are reserved for this Court," they said.

In its brief to the court, Canada argued the tribunal's decision was without precedent in NAFTA Chapter 11 jurisprudence with significant implications, including putting a "chill" on future environmental assessments.

"Where a NAFTA investor is a proponent in an environmental assessment, any judicially reviewable error will immediately give rise to potential liability under 1102 if Canadian proponents were not subjected to the same error."

A test of Canadian sovereignty

The appeal is supported by a number of Canadian environmental groups, who see the Bilcon case as a test of sovereignty.

"It has an impact on decision-making in Canada, decisions around how we in Canada protect our environment, how we assess large, resource-based projects that will have an impact our environment," said Lisa Mitchell, executive director of the East Coast Environmental Law Association.

The association and the Sierra Club of Canada are intervenors in the case.

Bilcon argues it was not obliged to pursue a judicial review in Canadian courts.

Nash said it's well-established that tribunals consider domestic law in deciding whether a NAFTA violation occurred.

The tribunal's finding that the review panel departed from standards of evaluation required by Canadian law is "merely a matter of fact," he said.

"When the decision is read as a whole, the arbitral tribunal found that Canada had breached its international law obligations under the NAFTA based on numerous factors leading to the conclusion that Canada had breached Articles 1105 and 1102 of the NAFTA under international law."