The recent consummation of a Canada-China bilateral investment treaty (BIT), which came into force on 1 October, establishes important rights for Chinese and Canadian investors, and the tools to enforce those rights.
Host of advantages
In the absence of a BIT, the only legal recourse for a foreign investor aggrieved by the conduct of a host country is to the domestic courts of the host country, to the extent that the conduct may contravene local law, or to have the government of its home country pursue the matter through diplomatic channels.
By contrast, a BIT – or a foreign investment protection agreement (FIPA), to use the Canadian term – imposes substantive obligations on the host country in its treatment of foreign investors of the other state with respect to concerns like discrimination, arbitrary treatment and expropriation. In the event those obligations are breached, most BITs provide foreign investors with direct and enforceable rights to bring claims for damages before independent and impartial international arbitral tribunals.
BITs are therefore powerful tools for foreign investors that have been wrongfully treated by the host country and a deterrent against such wrongful conduct. The ability of investors under a BIT to bypass local courts and to obtain damage awards that to a large degree will be recognized and enforced around the world is a huge boon for investors operating abroad in difficult and unpredictable jurisdictions.
The advantages that BITs offer over traditional investor remedies explains their exponential growth in recent decades, as countries have concluded them both to protect their outbound investment and to attract inward investment. Canada now has similar treaties in force with more than two dozen other countries; China has more than 70 such agreements, but investor rights under the older ones in particular are very limited.
Most Canadian FIPAs extend national treatment (the obligation on the host state to treat the other state’s investors and their investments no less favourably than it treats its own investors and investments) to investors seeking to make an investment. This is known as the pre-establishment model. The Canada-China FIPA does not offer this pre-establishment protection. It instead follows the Chinese practice of protecting foreign investment only once it has been allowed in the country (post-establishment).
Importantly though, China may grant pre-establishment protections in BITs it is now negotiating with the European Union and the US. If it does, those protections will accrue to Canadian investors too, by virtue of the most-favoured nation (MFN) obligation in the FIPA, which requires each state to treat foreign investors and their investments no less favourably than investors and investments of third countries.
The Canada-China FIPA does offer national treatment protection for investments once they have been made, with respect to their “expansion, management, conduct, operation and sale or other disposition”. However, here too the Canada-China FIPA follows Chinese practice in carving out from its non-discrimination obligations all existing non-conforming measures.
Effectively, this means that commitments on national treatment and MFN, and with respect to the nationality of senior management and the admission of managers and key personnel needed to operate an investment, will apply fully to new measures. These commitments will also apply to the extent that existing measures are either made more restrictive or liberalized. Liberalizations will be locked in by a “ratchet” that prohibits the state from subsequently reverting to more restrictive measures.
The Canada-China FIPA also includes obligations to provide fair and equitable treatment, full protection and security, and regulatory transparency; to permit the prompt repatriation of earnings and capital; and not to expropriate investments except in accordance with conditions that include payment of fair market value compensation.
Accordingly, the Canada-China FIPA will help to ensure a more stable and predictable investment environment for investors from each country. The scope of the FIPA’s protections is likely to engender greater confidence in particular for outbound Canadian investment in China.
China’s desire to conclude this FIPA reflects its maturing interests as a capital exporter as well as importer. Canada’s ratification of the deal, after a long delay, and its successful conclusion of comprehensive trade agreement negotiations with the European Union, demonstrates its eagerness for new trade and investment treaties with important partners, including India. We hope that the Canada-China FIPA will inspire India to reignite its own BIT negotiations with Canada and to advance negotiations toward a comprehensive Canada-India free trade agreement.
Matthew Kronby, Milos Barutciski and Jesse Goldman are partners in the International Trade and Investment Group at Bennett Jones LLP, a law firm with offices in Calgary, Toronto, Edmonton, Ottawa, Vancouver, Washington DC, Dubai and Doha, and a representative office in Beijing.
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