Northern Cross drops a $2-billion bomb on YG
Getting sued for up to $2.2 billion certainly makes you sit up and take notice.
Northern Cross’s lawsuit against the Yukon government’s fracking moratorium could work out to about $60,000 per Yukoner. It is over two years’ worth of federal transfer payments, or more than six years of operating budget for our Department of Health and Social Services.
If ministers and government lawyers misplay this one, it will do to the territorial budget what Cyprus Anvil’s mine did to the landscape around Faro.
I’m not a lawyer, and have no idea how likely Northern Cross is to win its case or, if it does, how much compensation it will be awarded. All we know at this point is that the case will take years and that a lot of lawyers will be driving new Teslas to newly renovated vacation homes by the end of it.
Law and economics are of course closely linked. The dispute between Northern Cross and the Yukon government raises a bunch of classic economic issues that we have been struggling with for as long as we’ve had governments and companies.
Canadians are accustomed to hearing about how our constitution’s Charter of Rights and Freedoms protects our political and civil rights. However, the Charter does not explicitly protect Canadians’ property rights. Some countries, such as Australia and the United States, have language in their constitutions that give greater protection and rights to compensation if the government seizes property.
Some prominent economists, including legendary Friedrich Hayek, have argued that the right to own property is closely linked to personal and political rights. It is a lot harder, as people in many countries could tell you, to exercise your political rights if the government can take away your home or business.
Despite all this, Canadians have traditionally enjoyed very robust property rights. Indeed, this is why so many rich people around the world want to park their money in Vancouver or Toronto real estate.
Canada has generally balanced well the need to give people confidence they will be able to invest money and enjoy the future benefits it generates, while at the same time allowing government to collect taxes and set rules in the public interest.
In some countries, you can wake up to find out that someone else’s name is on your title deed, or that the government has nationalized your company. This kind of thing can raise money for the government in the short term, but tends to be very damaging for the economy in the long run.
Instead, in Canada, we tend to have disputes in complicated grey areas. Consider an example. Say you buy a house in the expectation of running a home-based business, and then your city council changes the zoning so that you aren’t allowed to do so. To you, that reduces the value of your property. But can big, scary words like “expropriation” be used in such cases?
Or, suppose you had a permit to operate a hot dog stand at the corner of Front and Main. Then the government passes a law saying only organic veggie-dogs may be sold and your revenues plummet. Have your economic rights been violated?
Which gets us to Northern Cross. Their statement of claim, extremely simplified, is that they put down good money and invested a lot of time in getting permits to explore for oil and gas in the Yukon. Then, on top of YESAB and the other approval processes they knew about when they invested, the Yukon government added a new “no fracking” rule. They claim they should be compensated for money spent and also for lost future profits.
You may think the hot dog stand owner above deserves compensation for the new government rules. Or you may think the government has a duty to protect public health and the hot dog stand owner can either figure out how to sell veggie dogs or get another job.
In either case, your opinion doesn’t matter, unless you are a Yukon Supreme Court judge.
One would hope that any politicians passing a law mandating organic veggie dogs would have good legal advice about whether hot dog stand owners could sue successfully. I also hope the politicians behind the fracking moratorium had good legal advice before setting us up for Northern Cross’s entirely predictable lawsuit.
Another area where law and economics overlap is in international trade and investment law. Since Northern Cross’s owners included large foreign investors, I had been wondering if one of Canada’s international trade deals would be invoked. Governments can get into big trouble under these agreements, especially if they have treated foreign investors worse than local investors.
However, that does not appear to be the case here, since the moratorium on fracking applies to all investors in the affected region.
The third topic where economics and law get entangled are so-called “vulture” or “troll” investors. Trolls are people who buy obscure patents and then assert them against companies for compensation, sometimes making very large profits. The term “vulture” is applied to investors who buy bad bonds from poor countries for pennies on the dollar, then conduct multi-year legal campaigns until the affected government settles. Even if you only get paid 20 cents on the dollar, that’s still a pretty good profit if you only paid 10 cents.
Such investors are not popular, but they are within their rights. I have already heard some muttering that Northern Cross may get compensated for oil it never produced and, according to others, was never likely to produce. Even if that turns out to be the case, is that the fault of Northern Cross’s owners or the politicians who designed and implemented the new fracking policy?
We’ll see over the coming years whether Northern Corss wins, loses or settles out of court for a smaller sum. Even a fraction of $2.2 billion would be a significant hit for the Yukon government. That’s life in the post-devolution world, I suppose. We own the the decision-making power on resource development, and we own the consequences too.
Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He is a Ma Murray award-winner for best columnist.