December 21, 2021

The Case for Northern Pulp

Last week, Northern Pulp filed a lawsuit against the Province of Nova Scotia, claiming for damages of $450 million on the allegation that the Province conspired to shut down “The Mill”, and in so doing cost Northern Pulp lost profits adding up to that amount. This was a predictable development, and there is a strategy behind what at first read may seem like an outrageous claim.

Many are now wondering how any kind of a lawsuit could even be possible. Northern Pulp was given a five-year legislated deadline to fix its effluent treatment system or else be shut down. It failed to build a new treatment system, the Province held fast to the deadline, and so the mill had to cease operations. It sounds simple, and if it were an interpersonal matter, and if the amount of money involved was less, perhaps that simplicity would be retained. This, however, is the world of corporations and shareholders, and so different principles apply.

To understand what is happening, we must think from the perspective of Northern Pulp, which is not a company lead from Pictou, but is rather a small part of a complex corporate entity that is ultimately based in Indonesia. Those who run the company are beholden to their shareholders, and are legally obligated to do whatever they are legitimately permitted to do to raise the value of those shares. This is the motivation that guides their actions.

The company views this mill in Nova Scotia, Canada as one of many assets they control whose value must be maintained and enhanced. To maintain or enhance the value of the asset, it must be possible to make a plausible claim that the mill is going to continue to operate, and that this will be done at the best price. Therefore, the management of the mill has every reason to publicly signal or suggest that there is a plan for a new effluent plant, and that there is a chance the Province is going to be forced to (or will agree to) pay for part of it.

An operation with such prospects is much more valuable as an asset than one without a chance of future operations, and so it is in the interests of Northern Pulp to promote the plan (or the façade, if that is all this is).

Indeed, the claim itself is not particularly strong, and we can at least confidently predict that it is not worth anywhere near $450 million. In fact, listing a number at all, perhaps especially a very large one such as this, is a sign of weakness. They could have just made the claim, and then put forth evidence as to the amount as the case wound its way towards a trial. Instead, they have tried to send a public signal, and thereby make a statement.

Northern Pulp has claimed that the Province conspired to close the mill, but that would seem to presume that there was obvious political gain from that closure, which was not the case. The lawsuit also tries to rely on assurances from bureaucrats, when Northern Pulp would have known that decisions on pushing back the 5-year deadline had to be made by political leaders.

Faced with the 5-year deadline, Northern Pulp had two options, apply to the courts to have the Boat Harbour Act declared invalid, or else design and build a new effluent treatment facility in the five years provided by the Act. They did neither.

If it is true that the Province refused to set effluent quality targets, this could weigh in favour of Northern Pulp, but that would not justify Northern Pulp just sitting idle. They had a responsibility to propose some plan that would take effluent out of Boat Harbour and be treated elsewhere. If then the Province rejected a reasonable alternative, Northern Pulp would have a much stronger claim.

(Not incidentally, if Northern Pulp really thought that future profits between 2020-30 are worth $450 million, then they would be spending a portion of that amount to build a new effluent facility so that they could operate and actually earn that money.)

All of this shows some of the tensions and risks associated with the Province being both a regulator and a party to private contracts. On the one hand they are providing indemnities for effluent plants, and on the other hand they are regulating those plants. As a result, any regulation is open to an extra degree of scrutiny. Not only must new legislation be appropriate in its own terms, but also it must not cause undue harm to anyone with an existing agreement with the Province.

Here, the Province had effectively given an insurance polity on the Boat Harbour effluent operation until 2030, and then legislated changes to that policy by ten years. Certainly the Province had the authority to act, and Pictou Landing First Nation had a strong nuisance case against the Province and Northern Pulp with respect to the pollution of Boat Harbour, but Northern Pulp’s contractual rights are not meaningless, and so the Province has some exposure.

The Province must also be cautious not to develop a reputation as a jurisdiction where the rule of law is not respected, even when that means dealing with a poorly thought out deal made by a previous government.  No doubt there have already been negotiations taking place in the background between Northern Pulp and the Province regarding a new effluent treatment facility.

Expect that this will be resolved by an announcement that the Province will be providing funding (much less than $450 million) to assist Northern Pulp (or whoever might buy the mill from Northern Pulp) to build a new effluent treatment facility. That will settle the litigation, and clean up parts of the messes left by previous governments.  Perhaps this time, the Province will take an equity position in the mill and become part owner, rather than just keep sending money to the mill’s foreign owners.