Abstract

On September 26, 2012, the Canadian government tabled a new Agreement for the Promotion and Reciprocal Protection of Investments with China, a bilateral investment treaty (BIT), also referred to as a Foreign Investment Protection and Promotion Agreement (FIPA). The BIT was signed on September 8, 2012 at the Asian Pacific Economic Cooperation Leaders’ Meeting in Vladivostok, Russia. This will be Canada’s third BIT to come into force in 2012 and brings to 24 the number of BITs Canada has signed and brought into force. Canada also has concluded negotiations on BITs with five other countries and is currently in active negotiations with 13 other countries.

Over the last decade or so, BITs have quickly emerged as an important consideration for businesses seeking to understand what protection their investments have in foreign jurisdictions. Traditionally, when investment disputes arose, foreign investors were limited to seeking remedies either through the domestic courts of the host country or through diplomatic channels. These BITs are an attractive alternative because they provide a mechanism for investors to pursue damages claims directly against host states through independent international arbitration.

Negotiations With China

Negotiations for the China-Canada BIT commenced in 1994, but slowed as China prepared for accession to the WTO and as Canada drafted its 2004 Model FIPA. Negotiations were re-started in September 2004. The China-Canada BIT is comprised of 35 articles and some four pages of reservations and exceptions. A typical Canadian BIT contains under 20 articles.

Concluding a BIT with China was seen as a priority given the increasing level of investment the two nations are making into each other’s markets. The stock of Canadian Foreign Direct Investment (FDI) in China was valued at nearly C$4.5 billion at the end of 2011. The stock of Chinese FDI into Canada for the same time period was C$10.9 billion.

Key Substantive Protections for Foreign Direct Investment

Canada’s BIT with China contains, as does its BITs with other countries, three core substantive obligations which can be briefly described as follows:

non-discriminatory treatment: the foreign investor and the investment must be accorded treatment no less favourable than that accorded to domestic investors (national treatment) and investors from any other country (most-favoured-nation treatment or MFN treatment);

fair and equitable treatment: the foreign investment must be accorded fair and equitable treatment in accordance with international law, including full protection and security; and

compensation for expropriation: expropriation, or indirect measures equivalent to expropriation, must be for a public purpose, non-discriminatory, in accordance with due process of law and accompanied by payment of prompt, adequate and effective compensation.

There are, however, several key elements of these obligations under the China-Canada BIT which deserve particular attention:

(i) protections for "returns": the reference to the "returns of investors" is absent from the operative provisions of the BIT including the provisions concerning fair and equitable treatment, expropriation, national treatment and MFN treatment. The BIT’s obligations apply to investors and covered investments, but not necessarily to the returns from those investments. However, to address potential issues with expropriation measures that would impact returns but not the underlying investment, the BIT provides that returns of investors shall not be expropriated, nationalized, or subject to measures having those effects.

(ii) MFN and national treatment: There is a key difference in the protections offered by the MFN provisions in Article 5 and the National Treatment provisions in Article 6. The MFN applies to the "establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments in its territory". The national treatment provision makes no mention of "establishment" or "acquisition". Thus, while MFN applies both pre- and post-establishment, National Treatment is only accorded to post-establishment investors and covered investments.

(iii) MFN treatment exceptions: the BIT limits the ability of Canadian and Chinese investors to benefit from the host government’s MFN obligations. Article 8 contains broad exceptions available to the host government seeking to avoid according MFN treatment to investors.

Under Article 8:1, the host government need not extend to investors treatment as favourable as that extended to investors from other countries under agreements existing prior to the entry into force of the January 1, 1994. MFN treatment also does not have to be extended to any future or existing bilateral or multilateral agreement establishing, strengthening or expanding a free trade area or customs union.

Further, Article 5:3 explicitly provides that MFN treatment does not encompass dispute resolution mechanisms that are provided for in international investment treaties or trade agreements.

(iv) MFN, national treatment, senior management exceptions: Article 8 of the BIT also exempts all existing non-conforming measures maintained within the territory of the contracting parties. The renewal and timely continuation of these measures is also allowed for under Article 8 of the BIT. These measures may also be amended, provided that they are not made less conforming by the amendment.

Article 8 also excludes from the core obligations any measures imposed at the time of sale or other disposition of a government’s equity interest in, or assets of, an existing state enterprise that put limitations on ownership or control of equity or assets or imposes nationality requirements relating to senior management or directors.

Further, Annex B.8 reserves the right of Canada to adopt or maintain any measure that does not conform to these obligations, provided that in the Schedule of Canada, including its headnote, in Annex II to the Free Trade Agreement between Canada and the Republic of Peru (2008), Canada reserved the right to adopt or maintain that measure in respect of investors or investments of investors of Peru. China maintains a similar exemption as provided in Chapter 10 of their own Free Trade Agreement with Peru.

(v) fair and equitable treatment: the BIT provides that fair and equitable treatment is to be limited to treatment accorded to covered investments in accordance with the "customary international law minimum standard of treatment of aliens." This text very closely tracks the language contained in the NAFTA Free Trade Commission’s 2001 interpretive statement on Article 1105 of the NAFTA. The NAFTA interpretation has been considered by some commentators to limit the ability of Canadian investors to address host government behaviour that may be considered unfair or inequitable but which may be permissible under the historic customary international law minimum standard of treatment of aliens.

(vi) expropriation and compensation: the BIT also contains provisions that may operate to limit the protections available to investors from government measures constituting indirect expropriation. The expropriation obligation is one of the more controversial elements of BITs as scholars and arbitral tribunals continue to struggle to distinguish between measures that are confiscatory or equivalent to expropriation and measures that constitute bona fide or legitimate regulation. In particular, there has been a good deal of controversy in the BIT jurisprudence on the degree of government interference necessary to constitute what arbitral tribunals have referred to as "indirect" or "creeping" expropriation. Regarding indirect expropriation, Annex B.10 of the China-Canada BIT provides that the analysis requires a case specific fact-based inquiry and identifies factors that should be taken into consideration when making the determination of what constitutes compensable indirect expropriation (e.g. it provides that an adverse economic impact on the economic value of an investment does not, in and of itself, establish that an indirect expropriation has occurred). Annex B.10(3) also provides that non-discriminatory measures that are adopted and applied in good faith and that are designed to protect legitimate public welfare objectives will only constitute indirect expropriation in "rare circumstances." This clarification of the meaning of indirect expropriation may lead to the tolerance of a wider range of regulatory interference which has the effect of diminishing, but not completely destroying, an investment’s value.

Key Elements of the Arbitration Process

Several key characteristics of the investor-state dispute resolution mechanism in the China-Canada BIT will be of interest to foreign investors seeking to bring a damages claim against a State that has failed to comply with its investment protection obligations.

Access

There were questions prior to the BIT being released as to whether the arbitration process would be subject to extensive administrative waiting periods. The waiting periods are longer than required by Canada’s Model FIPA; however, they are shorter than many recent BITs that Canada has signed, such as those with the Slovak Republic and the Czech Republic in 2012. Though there are, under Article 20, extensive rights for an investor to raise a dispute directly against a Contracting Party for its treatment of the investor or its covered investments, the ability to bring a dispute is restricted to complaints as to expropriation and transfers if the investment is in a financial institution.

Before a complaint can be submitted to arbitration, the disputing parties must first hold consultations in the capital of the defendant Contracting Party, to attempt an amicable settlement. These consultations must be held within 30 days of submission of the notice of intent to submit a claim to arbitration. Even after such consultations, a claim may only be submitted if at least six months have elapsed since the alleged breach and at least four months have elapsed since the notice of intent. If the dispute relates to a Chinese measure, a four month internal administrative process is also required. Thus, it would be advisable to begin the administrative reconsideration procedure immediately so after four months, the dispute may be brought to arbitration without further waiting.

There is a limitations period of three years on all claims.

Fork in the Road

An additional issue during the negotiations leading up to the BIT was whether investors would be made to choose between domestic proceedings or claim arbitration. The final result can be found in Annex C.21 and is something of a mixed bag. If the claim concerns a Canadian measure, an investor who seeks arbitration because of an alleged breach waives any right to initiate or continue actions for that breach before any court or any other dispute settlement body. The only exceptions are for injunctive, declaratory or other extraordinary relief under the laws of Canada.

If the measure is a Chinese measure, then an investor is required to first make use of the Chinese administrative reconsideration procedure. If, after four months of trying to resolve the case, there is still an issue, it may be submitted to arbitration. However, doing so requires an investor to withdraw any case on that alleged breach from the national court before judgment has been made.

Standing

Under the China-Canada BIT, an investor has the right to bring a dispute against a State for the breach of obligations towards them or for a breach against a covered investment of the investor and to claim the damages arising out of that breach.

Place of Arbitration and Governing Law

A claim to arbitration may be submitted under the ICSID Convention provided that both States are parties to that convention (China is a party, Canada is currently only a signatory and has not yet ratified the ICSID Convention). If only one party is a party to the ICSID claim may be submitted under the Additional Facility Rules of the ICSID. Regardless of other circumstances, claims may always be submitted under the UNCITRAL Arbitration Rules. Article 30 of the China-Canada BIT provides that any Tribunal shall decide the dispute in accordance with the BIT and international law; while taking the laws of the host Contracting Party into consideration where appropriate.

Enforcement

Article 23 provides that both countries consent to arbitration provided the rules for applying for arbitration have been followed. Further, both countries are required to provide for the enforcement of an award in their territories. This is in line with Canada’s Model FIPA and it effectively ensures that a Canadian investor will not face a Chinese refusal to submit to arbitration.

Transparency

On the one hand, the BIT requires that the parties adapt their laws and regulations affecting covered investments and do so in a transparent manner. They also require that the enforcement and administration of those laws be done in a manner that enables investors of the other Party to become acquainted with them.

On the other hand, the transparency of the arbitration process is more restricted. The ultimate decision of the any Tribunal shall be made publicly available; subject to the redaction of confidential information. However, the arbitral proceedings themselves will only be open to the public if the investor claimant and the State agree. This is a significant reduction in transparency compared to an open Tribunal process. This is also a significant deviation from the Model FIPA which requires hearings to be open to the public unless the Tribunal decides to move in camera to protect confidential information. This is also a departure from Canada’s other BITs that have entered into force since 2004 except for the Canada-Czech Republic BIT.

Other Exclusions

Canada follows the 2004 Model FIPA by excluding decisions made under the Investment Canada Act with respect to initially approving an investment that is subject to review or permitting an investment that is subject to a national security review. China has a similar exemption following a review under its own Law, Regulations and Rules relating to foreign investment. This gives both nations a measure of control over pre-establishment approvals for new investors.

Article 33 of the BIT also contains a series of broad exclusions from the application of any measure within the agreement. These exceptions include matters such as "cultural Industries" (including film and radio), environmental measures, or protection for depositors. The broad exceptions also allow for non-discriminatory actions to be taken in pursuit of monetary or credit policy by the Contracting parties.

Canada's Existing BITs

Canada has concluded BITs with the following countries (entry into force date): Argentina (1993), Armenia (1999), Barbados (1997), Costa Rica (1999), Croatia (2001), Czech Republic (2012), Ecuador (1997), Egypt (1997), Hungary (1993), Jordan (2009), Latvia (2011), Lebanon (1999), Panama (1998), Peru (2007), Philippines (1996), Poland (1990), Romania (2011), Russian Federation (1991), Slovak Republic (2012), Thailand (1998), Trinidad and Tobago (1996), Ukraine (1995), Uruguay (1999), Venezuela (1998).

Canada has currently concluded negotiations but not yet enacted BITS with the following countries (negotiations concluded date): Bahrain (2010), India (2011), Kuwait (2011), Madagascar (2008), Mali (2011).

Conclusion

While signed, the China-Canada BIT is not yet in force. The Conservative Government has indicated that they intend to table the BIT in Parliament for a 21-sitting-day period prior to its ratification entering into force. The BIT was tabled on September 26, 2012. The sitting period should expire on November 1, 2012.

After the expiry of the sitting-period, the treaty will be ratified by the cabinet. Once this has occurred, the Canadian Government will notify the Government of China that Canada has completed the internal legal procedures for entry into force of the BIT. The Chinese Government must also notify the Canadian Government that they have completed their internal legal procedures for entry into force of the BIT. The BIT enters into force on the first day of the following month after the second notification is received.

This China-Canada BIT is likely to become one of Canada’s most significant investor protection treaties.  It provides a key strategic opportunity for Chinese and Canadian investors seeking to expand and protect their interests in each country. Chinese and Canadian businesses and their advisors should be carefully reviewing the BIT and the mechanisms available to them for protecting their investments in each country.

About Us

McCarthy Tétrault’s International Trade & Investment Law Group has significant knowledge and experience in dealing with investment and trade agreements and works closely with our China Group in addressing specific foreign investment and trade issues facing our clients in the Chinese and Canadian markets, including advising on remedies available to foreign investors under bilateral investment treaties and international trade agreements, anti-corruption laws and policies, economic sanctions and export controls, government contracting, customs and tariff issues and other investment and trade matters.