Canada: Canada Examining its Foreign Investment Protection Treaty Program

Canada’s Department of Foreign Affairs and International Trade (DFAIT) is currently considering expanding the countries covered by its bilateral investment protection agreements. Potential future partners include a number of Caribbean and Latin American countries, as well as Pakistan, Vietnam, South Korea, Japan, Libya, Israel, and South Africa, among many others.

International business carries with it inherent risks, not the least of which is the risk of harmful measures taken by foreign governments. Traditionally, when their operations were subject to discriminatory measures, unfair treatment, or expropriation, foreign investors had only two means of addressing the problem: seek a diplomatic resolution of the issue between the investor’s government and the host state government, or take action in the domestic court systems of the host state. For many reasons, these alternatives can be less than adequate.

Over the last decade or so, bilateral investment treaties or BITs have quickly emerged as a third option for businesses seeking protection of their investments in foreign jurisdictions. (In Canada, these BITs are referred to as foreign investment protection and promotion agreements or FIPAs.) These BITs are an attractive alternative since they enable an investor to directly seek damages from the host foreign government by bringing a claim before an independent arbitral tribunal. At the end of 2004 there were approximately 2,400 BITs in force worldwide, over eight times the number of BITs that existed in 1990. In 2004 alone, 73 of these agreements were concluded worldwide. The cumulative number of know and reported BIT cases is up to 229 by the end of 2005, with over two thirds being brought after 2001 (at least 48 cases were brought in 2005).

Although the substantive investment obligations imposed on host governments may differ from one BIT to another, they typically include the following:

(i) non-discriminatory treatment – the foreign investor must be accorded treatment no less favourable than that accorded in like circumstances to domestic investors (national treatment) and investors from any other country (most-favoured-nation treatment);

(ii) standard of treatment – the foreign investor must be accorded fair and equitable treatment in accordance with international law, including full protection and security;

(iii) expropriation – expropriation or measures equivalent to expropriation must be for a public purpose, non-discriminatory, in accordance with due process of law, and accompanied by payment of prompt, adequate and effective compensation.

A BIT may include other obligations relating to transfers of profits and other amounts out of the host territory, performance requirements, and measures concerning the nationality of senior management and boards of directors. BITs may also contain a so-called "umbrella clause" which provides that a host government must observe contractual obligations it undertakes with respect to investments in its territory.

The primary attraction of a BIT is its dispute resolution mechanism. In addition to government-to-government procedures, BITs also contain a private investor-state dispute mechanism enabling private foreign entities to sue host governments for damages arising out of their failure to comply with the investment obligations set out above. This mechanism is available regardless of whether the investor already has a contractual or arbitration arrangement with the host state or one of its governmental entities.

Under most BITs, the foreign investor has the option of proceeding with an ad hoc arbitral panel under the United Nations Commission on International Trade Law (UNCITRAL) Rules or proceeding with an institutional alternative, such as an arbitral panel established under the auspices of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID). Most BITs provide that the government consents to the submission of a claim to arbitration under the BIT in accordance with the requirements of international conventions for the recognition and enforcement of arbitral awards, including the 1958 New York Convention.

Canada has concluded investment protection agreements with the following countries:

In addition, Canada has also concluded investment protection agreements with the United States, Mexico, and Chile under the auspices of the North American Free Trade Agreement and the Canada-Chile Free Trade Agreement.

At the present time, Canada is negotiating BITs with three countries – Peru, India and China. These will be the first BITs negotiated on the basis of Canada’s new Model Foreign Investment Protection Agreement (2004). The new model modifies many of the existing provisions under Canada’s current BITs, and as some have observed, has significantly diluted investor protections, particularly in the areas of expropriation and fair and equitable treatment.

DFAIT has indicated that negotiations with Peru are near completion, while the text for the BIT with India is well-advanced and a final agreement in 2006 is realistic. Although there is progress in negotiations with China, a number of significant issues remain outstanding.

DFAIT has categorized priority countries, including those partners with whom existing BITs could be upgraded as well as future BIT partners, into four groups:

(i) Of interest in the context of free trade agreement negotiations – the Central American Four (El Salvador, Guatemala, Honduras, and Nicaragua), Singapore, South Korea, Japan, the Andean Community (Bolivia, Columbia, Peru and Venezuela), and CARICOM ( the 15 member countries of the Caribbean Community and Common Market);

(ii) Of interest if "policy impediments" can be addressed – Indonesia, South Africa, Russia and Cuba;

(iii) Of interest, but reciprocal interest uncertain - Malaysia, Tanzania, Kazakhstan, Sri Lanka, Libya, Serbia & Montenegro, Kyrgyz Republic, Qatar, Israel; and

(iv) Of interest, and appear willing to negotiate - Dominican Republic, Hong Kong, Algeria, Kuwait, Pakistan, Uzbekistan, Vietnam, Mongolia, Jordan, Paraguay, Morocco, United Arab Emirates.

This fourth group is of particular significance as the Canadian government is considering entering into exploratory discussions with these countries. DFAIT is also seeking to engage stakeholders to raise awareness and obtain feedback.

If you have, or are considering making, investments in any of the countries listed above, it will be important to ensure that your interests benefit from BIT protections, including fair and equitable treatment, national and most-favoured nation treatment, and compensable expropriation. For further information, please fee free to contact any member of our International Trade and Investment Law Group.

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.