Co-author: Stephen Brown-Okruhlik, student at law
On December 1, 2013, Canada will become one of the last OECD countries to join the ICSID Convention, formally known as the Convention on the Settlement of Investment Disputes between States and Nationals of other States. There are nearly 150 states around the world that are parties to the ICSID Convention and Canada's absence from this large community has been notable for a country that prides itself on its adherence to widely ratified international treaties.
Canada's decision to ratify the ICSID Convention will provide an important dispute resolution option for Canadian companies doing business in countries where the rule of law is weak and political risk is high. Canadian companies are leaders in the energy and natural resource sectors and have significant experience in creating infrastructure based on public-private partnerships. Increasingly, companies doing business in these sectors are seeking out opportunities in emerging markets. This has lead to a corresponding rise in disputes that are governed by the arbitration provisions of investment contracts with host states or by international investment treaties. These treaties contain promises by host states to grant foreign investors with certain basic protections against expropriation, unfair and inequitable conduct and discrimination in favour of their own nationals or nationals of third countries. Foreign investors can enforce these rights through international arbitration and obtain an award of damages for their losses.
What is ICSID?
The word "ICSID" commonly refers both to the ICSID Convention and to the International Centre for the Settlement of Investment Disputes, a facility of the World Bank that administers international arbitrations between foreign investors and host states. However, the two meanings should not be confused. The Centre routinely administers investor-state arbitrations that are not governed by the Convention. Meanwhile, the Convention creates important rights facilitating the enforcement of arbitral awards arising out of disputes between foreign investors and a host state. These rights do not arise just because the Centre has agreed to administer the dispute.
To benefit from the rights created by the ICSID Convention, an investor must be a national of a state that has ratified the Convention. For corporations, nationality is generally based on the place of incorporation although the ICSID Convention also deems foreign subsidiaries of a member state parent company that are incorporated under the law of a host state party to have the same nationality as the parent. Until now, Canadian investors have not enjoyed rights under the ICSID Convention and, in some cases, this problem has voided the arbitration clauses in certain investment contracts between Canadian companies (or their subsidiaries) and foreign states.
Currently, Canadian companies wishing to enforce a foreign arbitral award arising out of an investment contract with a foreign state or an investment protection treaty must do so under the United Nations Convention on the Recognition and Enforcement of Arbitral Awards, known as the New York Convention. Under this regime, a domestic court at the seat of the arbitration can set aside the award. Even it does not do so, another domestic court where the debtor's assets are located can refuse to enforce the foreign award. Although the grounds for setting aside or refusal of an award under the New York Convention are narrow, the courts of some countries have given these grounds a broad interpretation.
While the ICSID Convention also provides limited grounds for annulment, it does not permit any domestic court to set aside the award or to refuse to enforce it. Instead, decisions regarding the narrow grounds for annulment are made by Annulment Committees appointed by the President of the World Bank. If an ICSID award is not annulled, it must be enforced by member states without further review as if it was a domestic court judgment. Implementing legislation to this effect has been passed in most Canadian provinces and is reportedly under consideration in the remaining provinces in light of understandings reached during the Canada-Europe Trade Agreement negotiations.
The ICSID Convention does not create any substantive protections for Canadian investors. Instead, Canadian companies doing business abroad must either negotiate rights to arbitration under investment contracts with state parties or be in a position to take advantage of an international investment protection treaty such as NAFTA Chapter 11 or one of Canada's Foreign Investment Promotion and Protection Agreements ("FIPAs"). An investment protection treaty may provide for ICSID arbitration as one option for dispute settlement or as the exclusive option where both Canada and the foreign state are parties to the ICSID Convention.
Canada has recently signed a FIPA with China and has negotiated a number of new FIPAs with countries in Africa and the Middle East. However, only 24 FIPAs are currently in force, leaving significant gaps in Canada's investment treaty network. The ratification of the ICSID Convention does not close these gaps and therefore Canadian businesses should still ensure that their foreign investments are protected though appropriate contract or treaty protections.
Where Canadian investors can choose between arbitration under the ICSID Convention and arbitration under the New York Convention, the advantages of ICSID arbitration must be weighed against certain risks. These risks include potential additional jurisdictional hurdles and an arguable willingness on the part of ICSID Annulment Committees to be even more activist than domestic courts in some cases. ICSID arbitration can also be longer and costlier than non-ICSID arbitration, depending on the circumstances of the case.
Nonetheless, Canada's ratification of the ICSID Convention is helpful to Canadian companies that invest in emerging markets and desire additional protection against political risk. Where contract or treaty protections are available, the ratification of the ICSID Convention gives Canadian investors greater comfort that any arbitral award resulting from a dispute with a foreign state can be enforced without judicial interference.
The foregoing provides only an overview. Readers are cautioned against making any decisions based on this material alone. Rather, a qualified lawyer should be consulted.
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