Canada: The Canada-China FIPA: Energizing Canadian Oil & Gas Investment In China

On Friday, September 14, Ottawa announced the ratification of the Canada-China Foreign Investment Promotion and Protection Agreement (the Canada- China FIPA). The Canada-China FIPA, which comes into force on October 1, 2014, is the newest addition to Canada's growing list of foreign investment protection agreements (FIPAs).

A FIPA is not a full-blown free trade agreement, but rather a bilateral agreement between two signatory states intended to protect and promote foreign investment through legally-binding rights and obligations to protect foreign investors. Specifically, a FIPA grants foreign investors from each signatory state the right to claim damages against the host state when the guarantees contained in the FIPA are contravened. These claims are heard by international arbitration tribunals, which have the power to grant legally binding awards against host states, and whose decisions are not reviewable by domestic courts.

The Canada-China Trade Relationship and the Energy Industry

Canada's energy industry has been a particular benefactor of China's recent investment relationship with Canada. As the largest foreign investor in Canadian energy, China has invested over $30 billion in Canadian oil and gas assets over the last six years. The ratification of the Canada-China FIPA may therefore facilitate further Chinese investment into the Canadian energy industry.

Perhaps more important, however, is the impact that the Canada-China FIPA may have on Canadian investment in the growing Chinese energy industry. Canadian players have already entered China's oil and gas market, providing energy expertise and services. With the new protections afforded to investors under the ratified Canada-China FIPA, Canadian investors in all sectors have an even stronger incentive to enter China's growing market.

Content of the Canada-China FIPA

Protection Against Expropriation and Discriminatory Treatment

The Canada-China FIPA protects investors by guaranteeing that all investments, subject to exceptions outlined in the agreement, will be protected against government expropriation. Specifically, the Canada-China FIPA states that investments will be granted "fair and equitable treatment and full protection and security, in accordance with international law". Since customary international law recognizes a host state's right to regulate in order to protect or promote the public interest, Canadian investors in China, and Chinese investors in Canada, will not be granted protection against regulation when legitimate public policies are uniformly applied. Customary international law also recognizes, however, that targeted regulation which deprives an investor of expected benefits of its investment can – in some circumstances – amount to deemed expropriation. The Canada-China FIPA is therefore designed to reassure investors in each country that they will benefit from the rule of law insofar as targeted measures are concerned.

Exceptions in the Canada-China FIPA

The Canada-China FIPA does include several exceptions to the protections afforded to investors. For instance, the Canada-China FIPA allows host states to advance legitimate public objectives through the regulation of areas such as health, safety, and the environment. The Canada-China FIPA also excludes "cultural industries" of each state from application of the agreement, and grants each state considerable power to regulate securities, and to take action in times of financial difficulties. Additionally, the Canada-China FIPA does not allow claims to be made against existing non-conforming measures maintained by each host state. Therefore, the Canada-China FIPA only protects investors against new expropriation and discriminatory measures enacted by the Canadian and Chinese governments after October 1, 2014.

Expiry and Termination

The initial term of the Canada-China FIPA is 15 years. After the expiration of the initial 15 year term of the agreement, the Canada-China FIPA may be terminated by either the Canadian or Chinese government by giving one year's prior written notice. However, any foreign investment made prior to termination is protected for an additional 15-year period.

Conclusion

Given the predominance of Chinese investors in the Canadian energy landscape, the ratification of the Canada-China FIPA should provide Chinese investors with further incentives to participate in the continued expansion of Canada's energy industry. More significantly, however, the new protections granted to investors under the Canada-China FIPA could provide Canadian energy investors a better opportunity to participate in China's growing domestic energy industry, resulting in greater participation by Canadian technology and service providers into the Chinese energy market.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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