This article was originally published in Blakes Bulletin on International Trade, March 2006
The greatest value of a BIT is the ability of an investor to pursue a claim for monetary damages directly against the offending state without the involvement or consent of their own government.
Bilateral investment treaties (BITs) have not received the same media attention attracted by NAFTA’s investment provisions. Like NAFTA Chapter 11, however, BITs provide investors with powerful rules protecting their investments in many far flung corners of the world. Critically, investors can enforce these rules against foreign governments directly by submitting claims for monetary damages to binding arbitration.
Canada began negotiating BITs, which it calls Foreign Investment Protection Agreements (FIPAs) in 1989. Since then, Canada has negotiated 21 FIPAs. Globally, the number of BITs has grown from about 300 in 1990 to well over 20,000 agreements involving 176 countries today. Each FIPA is the product of lengthy negotiations, but there is a high degree of commonality between the agreements. To aid in ensuring such consistency, Canada uses a model FIPA, based on NAFTA Chapter 11, as a template for negotiations with each prospective partner.
Core Protections Provided
Each BIT obligates a country to obey certain rules respecting foreign investors and their investments. The rules governing who may bring a claim are very liberal and it is rare that a claim is denied because an investor does not have standing to make the claim.
The recent decision in Encana v. Ecuador illustrates both the flexibility and limits of an investor’s ability to bring a claim founded on the breach of a BIT obligation. Encana is a Canadian energy company that entered into oil exploration and exploitation contracts with Ecuador through a subsidiary incorporated in the Barbados. Encana claimed that Ecuador’s refusal to continue refunding value-added taxes (VAT) paid on oil exports expropriated Encana’s investment, and violated the terms of the contracts and, therefore, the Canada – Ecuador FIPA. The arbitrators refused to consider Encana’s argument that Ecuador breached the terms of these contracts and that these breaches constituted a breach of the FIPA because Encana was not a party to the contracts and the Barbados corporation had no standing under the Canada – Ecuador FIPA. Nevertheless, Encana was permitted to argue that the refusal to refund the VAT expropriated its investment, although that argument ultimately failed.
The precise protections contained in a BIT will vary from one agreement to the next and are subject to reservations and exceptions, but certain core protections are common to all, in one form or another.
Key to these protections are anti-discrimination rules, including national and most-favoured nation (MFN) treatment. National treatment generally prohibits a state from treating foreign investors and their investments less favourably than its own investors and investments. MFN treatment requires a nation to treat investors and investments of one country as well as it treats those of any other third country.
Aside from anti-discrimination rules, BITs protect investors against the imposition or enforcement of performance requirements, such as local content requirements, minimum levels of exports, links between imports and exports or foreign exchange inflows, and obligatory technology transfers. They also prohibit using certain performance requirements as conditions of subsidies, tax incentives or other advantages. These prohibitions are not absolute and exception is made for subsidies tied to locating production in a certain area, training or employing workers, or performing research and development. Exception is also made for measures that require the use of specific technology to meet generally applicable health, safety or environmental requirements.
Like NAFTA Chapter 11, BITs impose rules concerning both direct and indirect expropriation. Although these rules have been the source of much controversy in the context of NAFTA Chapter 11, the rules do not prohibit expropriation. Rather, they clarify in what circumstances property may be expropriated. Specifically, expropriations must be made for a public purpose and undertaken in accordance with due process of law, in a non-discriminatory manner, in exchange for prompt, adequate and effective compensation. Compensation is to be based on “fair market value” and interest must be paid at a “commercially reasonable rate”.
Canada’s most recent FIPA model attempts to address some of the concerns surrounding expropriation of investment rules by clarifying that only in rare circumstances will a non-discriminatory measure designed and applied to protect legitimate public welfare objectives, such as health, safety and the environment, constitute indirect expropriation and give rise to a duty to pay compensation.
BITs As A Valuable Business Tool
A number of distinctive features of BITs make them powerful and flexible business tools for protecting overseas investments.
The greatest value of a BIT is the ability of an investor to pursue a claim for monetary damages directly against the offending state without the involvement or consent of their own government. The agreement’s obligations are made all the more real by the availability of a remedy that compensates the aggrieved party in a quantifiable manner, rather than attempting to secure the compliance of the offending state’s laws with international obligations, as is the case under WTO agreements.
This value is further enhanced by deciding claims through binding arbitration rather than the domestic judicial system. Not only does this avoid concerns with judicial systems in some parts of the world, it greatly enhances the ease with which an investor may make use of these tools. There is no need to retain local counsel familiar with the intricacies of the local legal system and who hopefully has some knowledge of the investment agreement and the issues in dispute. Instead the client can rely on counsel who are well-versed in the terms and treatment of many different BITs as well as the investment provisions of NAFTA Chapter 11.
In this regard, Canadian trade lawyers are ideally suited to litigate BIT claims. Their experience with NAFTA and its significant body of investment jurisprudence, coupled with the cost-effectiveness of Canadian counsel vis ŕ vis their U.S. counterparts gives Canadian trade lawyers a significant edge in interpreting and applying BITs to their client’s international investment issues.
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.