and Catherine Walsh2
Negotiations for a bilateral Foreign Investment Promotion and Protection Agreement ["FIPA"] between Canada and China have been ongoing for over a decade. An agreement was finally signed on September 9, 2012 during Prime Minster Harper's visit to China. This agreement represents China's 140th bilateral investment treaty and Canada's 25th. Once ratified by both Governments, the Canada-China FIPA ["C-C FIPA" or the "Agreement"], will come into force, for a minimum period of 15 years. Part I3 in this series compared the substantive investor protections afforded under the C-C FIPA including national treatment, most-favoured-nation, minimum standard of treatment, performance requirements and expropriation with those provided under Canada's Model FIPA ["Model"]. This second note will look at the C-C FIPA's investor-state dispute settlement provisions through a similar lens, with a focus on the process of making a claim.
Canada's Model FIPA
Canada's Model FIPA was designed to be used as a template in negotiations for bilateral investment rules, building on lessons learned from Chapter 11 of the North-American Free Trade Agreement ["NAFTA"]. The Model sets a base for Canadian negotiators and fosters transparency and efficiency in the overall dispute settlement process.4 It is useful to compare the C-C FIPA's text with that of the Model to learn more about the Agreement and to identify areas of contention in the negotiations leading up to the Agreement.
Investor-State Dispute Settlement in General
Investment treaties have increasingly been including provisions relating to investor-state dispute settlement ["ISDS"] mechanisms in their text. In general, the ISDS mechanisms found in investment treaties such as FIPAs or Bilateral Investment Treaties provide foreign investors the right to seek compensation for damages arising out of breaches of investment-related obligations by host state governments.5 These provisions allow private investors of a contracting party to launch an action for compensation directly against a contracting state where that state implements or enforces measures that damage the foreign investor's investment.
Under the C-C FIPA, the ISDS mechanism gives an investor the option of pursuing its rights for damages before an impartial international tribunal. This is perhaps the most important development in international investment law – the provisions of direct access to third-party adjudication. Arguably, NAFTA Chapter 11 and the Canadian Model FIPA's provisions represent a very advanced form of this tool.
It is important to note that the process leaves damages as the only remedy. In other words, the contracting parties to a FIPA cannot be forced to eliminate or amend measures to bring them into compliance with treaty obligations. That said however, the presence of FIPA obligations is often the best way to discourage and eliminate potential and continuing liability for a contracting party.
Any citizen (corporate or individual) with an investment in the other contracting party's state is eligible to launch a claim. Pursuant to Article 23 of the C-C FIPA, the contracting parties are bound by a general consent to arbitration as long as the claimant meets certain preconditions set out in Article 21. Article 21 sets out the procedure – commencing with a Notice of Intent to commence a claim – required at least four months in advance of the submission of the claim. In addition, there is a general three-year limitation period on all arbitration claims and a six-month waiting period from the time of the allegation of breach before which the claim to arbitration can be made.
The C-C FIPA's ISDS Provisions
The ISDS provisions in Part C of the C-C FIPA provide the parameters for the settlement of investment disputes. As we have indicated, these provisions strive to provide equal treatment of investors in accordance with the principles of international reciprocity and due process before an impartial tribunal.6
The Model generally aims for a more open and transparent process than that found in earlier Canadian agreements. Under the Model, all disputes must be publicly notified, and all arbitration proceedings, in addition to all documents and pleadings, are to be accessible to the public. Pursuant to Article 38, the Model also requires hearings to be open to the public unless the tribunal decides to move in camera to ensure the protection of confidential information, including business confidential information. Although the C-C FIPA requires that parties adapt the laws and regulations affecting covered investments in a transparent manner, the transparency of the arbitration process as a whole is somewhat more restricted under Article 28. Pursuant to Article 28, the ultimate decision of the tribunal is the only document that must be made available to the public, subject of course to the redaction of confidential information. All other documents submitted or issued by the tribunal will be publicly available only if a disputing party determines that it is in the public interest to do so. In addition, the arbitral proceedings themselves will only be open to the public if, after consulting with a disputing investor, a disputing party determines that it is in the public interest to do so. Therefore, when defending a claim, a party will have the power to unilaterally make documents available to the public. As a whole, this amounts to a departure from the Model in terms of transparency although some degree of accommodation for China's traditionally more restrictive approach to public access in proceedings should not come entirely as a surprise.
A point of difference to note in the C-C FIPA relates to the conditions precedent with respect to the eligibility of claims for submission to arbitration under Article 21. Annex C.21 of the Agreement goes one step further and deals specifically with party-specific requirements for submission of a claim. Pursuant to Annex C.21, if a Canadian measure is at issue, the investor initiating the arbitration will be deemed to waive the right to initiate or continue actions relating to the matter of the claim before any court or dispute settlement body with the exception of injunctive, declaratory or other extraordinary relief. On the other hand, where a Chinese measure is at issue, an investor will first have to navigate through China's administrative reconsideration procedure. The claim may only be submitted to arbitration after four months have elapsed without resolve from China's administrative reconsideration procedure. In addition, the claim may only be submitted under Article 20 if the investor has withdrawn the case from the Chinese national courts before judgment has been made on the dispute. If a case is withdrawn after judgment has been rendered, then that case may no longer qualify for arbitration.
In terms of notice periods, the time limit for a contracting party to give notice of its intent to submit a claim to arbitration is ninety days under the Model. Under the C-C FIPA, this time limit has been extended to "at least four months prior to submitting the claim."7 This slight extension of time is based on the relevant provisions of the law of the People's Republic of China on administrative reconsideration, and will likely not have a large impact on the rights of foreign investors.
A disputing investor who meets the conditions precedent under Article 21 will be allowed to submit its claim to arbitration pursuant to Article 22. Pursuant to the Agreement, the investor may submit the claim under the International Centre for Settlement of Investment Disputes ["ICSID"] Convention provided that both contracting parties are parties to the ICSID Convention. The Additional Facility Rules of ICSID and the United Nations Commission on International Trade Law ["UNCITRAL"] Arbitration Rules are two other available avenues under which to submit a claim to arbitration where one contracting party, but not both, is a party to the ICSID Convention. Although China has ratified the ICSID Convention, Canada is not yet a member and therefore the only available options to submit a claim for arbitration under the C-C FIPA are the Additional Facility Rules of ICSID and UNCITRAL Arbitration Rules.
As the process continues, the two sides each nominate an arbitrator pursuant to Article 24. The disputing parties must then agree to appoint the third and presiding arbitrator for the arbitral panel. Under the Agreement, arbitrators are required to have expertise or experience in international law, be independent of either disputing party and comply with any additional rules where such rules are agreed to by the contracting parties.8 Notably, where a dispute arises as to the interpretation or application of the Agreement, the presiding arbitrator must be a national of a third state which has diplomatic relations with both contracting parties.
Article 31 of the C-C FIPA provides for interim measures of protection, such as preserving the rights of a disputing party, preserving evidence and protecting the tribunal's jurisdiction and effectiveness. An important difference between the Model and the C-C FIPA is that the latter states that "a tribunal may recommend an interim measure of protection [...]" whereas the Model uses the words "a tribunal may order [...]." Interestingly, NAFTA also uses the term "order" in its article relating to interim measures. Some of Canada's more recent FIPAs, such as the Canada-Latvia9 and the Canada-Romania10 FIPAs also use the term "order" in their respective articles. The difference between the word "recommend" in the C-C FIPA and "order" in the Model leads one to the conclusion that an arbitral tribunal will have less power or authority to order interim measures of protection under the C-C FIPA. The tribunal's restricted authority may be a potential problem area for foreign investors attempting to ensure the preservation of their rights in the event of a dispute.
In Article 32, the C-C FIPA, similarly to the Model, confirms that each party is responsible for the enforcement of an arbitral award in its territory. It is therefore imperative for Canada to ensure that a system of enforcement for awards is properly implemented in China. At this point in time, it remains to be seen as to whether both the Canadian and Chinese governments will implement systems to actively enforce awards made by the arbitral tribunal. Without these systems in place, the relevance of awards will be significantly diminished – indeed, the inevitable lack of certainty that would follow might possibly dissuade foreign investment.
Domestic Implications for Canada
The recent arbitral application in Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium11 [the "Ping An Case"], filed on September 19, 2012 before the ICSID deals with banking and financial services matters and is the first investor-state claim of significant magnitude to be filed before ICSID on behalf of a company from China's mainland.12 Details regarding this landmark arbitration have yet to be published, however the claim is most likely tied to the losses incurred by Ping An, China's second largest insurer, as a result of measures taken by the Belgian government in the wake of the 2008 global financial crisis. Ping An was forced to write down a nearly $3.8-billion investment in Fortis, a Belgo-Dutch bank, when the latter was nationalized by the Belgian government and subsequently sold.13
This case has led some to foresee the potential of Chinese investors seeking to make more use of arbitration clauses in existing bilateral treaties. Moving forward, some observers indicate that legal challenges from Chinese corporations are likely to multiply as those corporations look to invest in Canada pursuant to the terms of the C-C FIPA, which now provides comprehensive legal mechanisms to protect such investments.14 Concerns in Canada about potential claims should be balanced by consideration for the increased protection that is afforded to Canadian investors operating in China. It will be important to monitor developments regarding the application and enforcement of the C-C FIPA and its impact on the promotion of investment between the two countries.
Footnotes
* We are grateful to Jonathan Nuss from the Montreal Heenan Blaikie office for his assistance with this piece.
2 Catherine Walsh is an articling student at Heenan Blaikie's Ottawa office and graduated from the University of Ottawa in social sciences with a concentration in criminology, after which she completed her LL.B. before pursuing a Master's in Business Administration. Prior to beginning her articles, Catherine worked for an international company as a corporate sales executive.
3 Catherine Walsh & Michael G. Woods, " The Canada-China Foreign Investment Protection and Promotion Agreement: A Comparative Analysis to Canada's Model FIPA" Heenan Blaikie (December 2012).
4 Andrew Newcombe, "Canada's New Model Foreign Investment Protection Agreement" (2004) University of Victoria Faculty of Law.
5 Katia Yannaca-Small, "Improving the System of Investor-State Dispute Settlement: An Overview" (2006) 1 Working Papers on International Investment 3.
6 Bronwyn Pavey & Tim Williams, "The North American Free Trade Agreement: Chapter 11" (2003) PRB 02-54E.
7 Agreement Between the Government of Canada and the Government of the People's Republic of China for the Promotion and Reciprocal Protection of Investments, C 2012, Article 21.
9 Trade Negotiations and Agreements, Canada Treaty Information: Foreign Affairs and International Trade Canada.
10 Ibid.
11 ICSID Case No. ARB/12/29.
12 Simon Rabinovitch and James Fontanella-Khan, "Ping An Arbitration Claims over Fortis" Financial Times (24 September 2012).
13 Fiona Law, "Ping An Insurance Files Arbitration Claim Over Fortis Losses" Wall Street Journal (25 September 2012).
14 Shawn McCarthy, "China turns to courts in business disputes with western goverments" The Globe and Mail (5 October 2012).
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