In a major step to facilitate and grow investment and trade between Canada and the People's Republic of China, the two countries have signed a bilateral Foreign Investment Promotion and Protection Agreement (FIPA). The agreement, which is subject to ratification procedures on both sides, has been long-awaited, being the product of negotiations that commenced in 1994. The FIPA, which is broad in scope, is primarily intended to provide protection to investors against discriminatory treatment, primarily through each country's commitment to accord to investors of the other country treatment no less favourable than it accords to its own investors, supported by an effective and meaningful dispute resolution mechanism. The agreement, which features other reciprocal protections such as most-favourednation status and minimum standards of investor treatment, is subject to exceptions, including exceptions relating to investments in cultural industries, the regulation of financial institutions and the protection of essential security interests.
In addition to the benefits of the agreement in assisting Canadian investors with their investments in China, it is hoped that the FIPA will promote Canada as a market for Chinese investment and, more generally, raise the profile of Sino-Canadian business opportunities and strengthen the countries' reciprocal commercial relationships.
The FlPA provides investors from each country with additional legal protections for investments in the other country. The key obligations of each of the parties include:
- the national treatment obligation, requiring each party to treat investors of the other party no less favourably than they treat their own;
- the most-favoured-nation treatment obligation, requiring that each party treat investors of the other party no less favourably than investors of another country (this obligation excludes rights granted under free trade agreements, such as the North American Free Trade Agreement);
- the minimum standard of treatment obligation, which imposes a minimum standard of fair and equitable treatment for investments made by investors of the other party;
- the expropriation obligation, which prohibits a party from expropriating an investment made by an investor of the other party without the payment of prompt, adequate and effective compensation;
- the transfer of funds obligation, which permits transfers of capital into and out from the other country by investors, but in China subject to the formalities stipulated by the present exchange control regulations; and
- the performance requirements obligation, which prohibits the parties from imposing requirements on investors that are inconsistent with the parties' commitments under World Trade Organization agreements and commitments.
Remedies and Dispute Settlement
The FIPA provides for arbitration tribunals (generally of three arbitrators) to address breaches of the agreement. Investors of a country can make a claim for damages resulting from breaches of the FIPA by the other country directly to a tribunal, and the tribunal has the power to make orders for compensation.
Similar to other bilateral trade agreements, any disputes between China and Canada as to the interpretation or application of the FIPA are to be resolved by consultation and, if consultation is not successful after six months, binding arbitration. If the arbitration decision is not implemented by a party the other may claim compensation.
The FIPA, in particular the national treatment obligation, does not apply to the establishment or acquisition of an investment. Decisions under the Investment Canada Act and its Chinese counterpart are thus not covered. The FIPA also includes exceptions for certain categories of issues, including investments in cultural industries, environmental matters (subject to certain limitations), regulation of financial institutions, and the protection of essential security interests, and does not apply to tax matters which are governed by the existing tax convention between the countries.
Ratification and Implementation
The FIPA can come into force once the ratification processes in both countries have been completed and each party has submitted notice of ratification to the other.
In Canada the FIPA was tabled in the House of Commons on September 26. Pursuant to Canada's Treaties in Parliament policy, the text will now remain in Parliament for a 21 sitting-day waiting period, after which time ratification will depend on the timing of an Order in Council.
As for the ratification process in China, under applicable law the Ministry of Commerce and the Ministry of Foreign Affairs are required to coordinate the joint submission of the FIPA to the State Council for ratification. As there is no clear time period under Chinese law for this process, timing will be determined by the State Council.
The FIPA is a robust bilateral investment agreement which should help strengthen investment and trade between Canada and China. The agreement includes broad protections and remedies by its terms and sends a strong signal of governmental support in both countries for bilateral investments.
The content of this article does not constitute legal advice and should not be relied on in that way. Specific advice should be sought about your specific circumstances.