Longstanding FIPA negotiations with China
China's position shifts to protect its own investors
NAFTA plus... or minus?
More cumbersome dispute settlement for Canadian investors
Canada's pending foreign investment protection agreement (FIPA)(1) with China has generated a great deal of debate among opponents and supporters. This update does not address the dire predictions of opponents on the political left, other than to point out that Canada assumed the risk of investor-state claims by its largest and most frequent foreign investors on January 1 1994 when the North American Free Trade Agreement (NAFTA) entered into force. Contrary to the naysayers' predictions, the sky has yet to fall.
Longstanding FIPA negotiations with China
Canadian officials have been seeking a FIPA with China since 1994. The on-again, off-again negotiations were reputedly frustrated by China's intransigence on the important question of dispute settlement procedure.
Of central concern to Canadian investors has been the perceived ineffectiveness of the Chinese legal system to protect foreign investors from unwarranted interference by organs of the state and politically connected domestic partners. The lack of an independent judiciary, in particular, was seen to be a problem.
China was willing to allow international arbitration only in very limited circumstances. It was prepared to permit investor-state arbitration on the amount of compensation that an investor should be paid in the event of an expropriation of its investment, but the question of whether an expropriation or other treaty breach had occurred would not be the subject of independent adjudication.
Given that investor-state arbitrations more frequently engage consideration of whether regulatory or administrative action (or inaction) amounts to a compensable treaty breach than instances of actual direct expropriation, a FIPA with China that lacked an effective investor-state arbitration remedy would be of little practical benefit.
China's position shifts to protect its own investors
Investment treaties traditionally have been sought by:
- capital-exporting states anxious to protect investment by their nationals in developing countries; and
- developing countries seeking to attract foreign investment.
The rapid growth of China's economy and its rise in demand for natural resources has made it a capital-exporting state that needs to protect its own investors. According to Canadian government figures, Canadian direct investment in China was valued at nearly C$4.5 billion by the end of 2011, whereas investment in Canada from China had reached C$10.9 billion. Thus, the shoe is now on the other foot – at least in part.
On first impression, the Canada-China FIPA is much longer and more detailed than Canada's post-NAFTA model FIPA. On closer examination, it can be seen that it incorporates many provisions that appear in NAFTA, but outside the confines of the investment chapter. These include NAFTA's additional exceptions and exclusions for taxation measures, cultural industries and national security measures, and special provisions for investment in financial services.
There are also several embedded 'fixes' of problems that have arisen in NAFTA investor-state arbitrations, including an express statement that:
"'fair and equitable treatment' and 'full protection and security'... do not require treatment in addition to or beyond that which is required by the international law minimum standard of treatment of aliens as evidenced by general State practice accepted as law."
This mimics the binding interpretation of NAFTA Article 1105 issued by the Free Trade Commission in July 2001, after it became apparent that some arbitral tribunals were taking a broader view of 'fair and equitable treatment' than the NAFTA parties intended.
Another fix can be seen in an explanatory note to the expropriation provision, which states that:
"[e]xcept in rare circumstances... a non-discriminatory measure or series of measures of a Contracting Party that is designed and applied to protect the legitimate public objectives for the well-being of citizens, such as health, safety and the environment, does not constitute indirect expropriation."
This addresses a question that has yet to be definitively resolved under NAFTA and remains a key point of contention among critics of Canada's investment treaty regime.
Another difference affecting the scope of investor-state dispute settlement can be seen in the FIPA's more limited 'pre-establishment' rights. The text is carefully crafted to provide that the national treatment, the most-favoured-nation (MFN) treatment and minimum standard of treatment obligations extend only to 'covered investments' (ie, investments already admitted and established according to applicable law), and that investors of the other state are accorded establishment rights only on an MFN basis, not on a national treatment basis.
In NAFTA, the parties' investors were accorded national treatment for establishment, subject to various exceptions and reservations stated in annexes to the treaty. The NAFTA negotiations also included commitments by the parties to liberalise foreign investment in certain sectors and industries. Under the new FIPA, Canadian investors will have to rely on China's continuing movement to an open economy, which began with China's accession to the World Trade Organisation in 2001 and continues with the progressive relaxation and simplification of its foreign investment laws.
However, the inclusion of 'establishment' in the MFN provision means that Canadian investors will be entitled to whatever rights of establishment are accorded to their US, European and Asian counterparts. Thus, if the United States obtains special rights of establishment for its investors in its forthcoming bilateral investment treaty negotiations with China, those rights should also be granted to Canadian investors.
The main potential impediment to Chinese investment in Canada is the review provision of the Investment Canada Act, which Canada has reserved the right to apply in its FIPAs and free trade agreements. It entitles the federal government to review proposed acquisitions of Canadian companies by foreign investors exceeding a monetary threshold (currently C$330 million) to determine whether they will result in a 'net benefit' to Canada. Under consideration at present are the proposed C$15.1-billion takeover of Calgary-based Nexen Inc by a state-owned Chinese energy company and the proposed C$6 billion takeover of Progress Energy Resources by PETRONAS, Malaysia's state-owned oil company.
More cumbersome dispute settlement for Canadian investors
Any investor planning to initiate a treaty-based claim must carefully consider whether to invoke any available domestic legal remedies before submitting a claim to arbitration under the treaty. As Canada's treaties typically allow an investor concurrently to seek judicial declarations that do not involve the payment of damages, an investor must carefully weigh the potential benefits and pitfalls of continuing litigation in the domestic courts or administrative tribunals of the host state. The answer to that question is predetermined under the Canada-China FIPA, which requires Canadian investors to seek administrative review, if available, under China's Law on Administrative Reconsideration for a period of at least four months. If a satisfactory solution is not reached within four months or if no remedy is available, the investor may submit a claim to arbitration under the FIPA. However, a FIPA claim may be submitted only if the investor discontinues court proceedings relating to the dispute, other than administrative reconsideration proceedings, before judgment is granted.(2)
While this may seem to present nothing more than a four-month delay that will run concurrently with the four-month cooling-off period that the investor would have to abide by in any event, it will add a level of complexity and uncertainty in any case where there has been a problem with the issuance of permits or other administrative action that the investor considers amounts to a breach of the treaty. China's aim, it appears, is to divert as many cases as possible to domestic courts and tribunals in the hope that the outcome will either resolve the problem or ameliorate the elements of unfairness that might form the basis of a treaty claim.
Depending on the circumstances of a given case, a Canadian investor may face a dilemma in deciding whether to continue the pursuit of domestic remedies at the possible risk of prejudicing the merits of a later treaty claim. For example, in Azinian v Mexico,(3) before the claimants submitted their claim to arbitration, they unsuccessfully challenged the administrative nullification of their municipal waste collection concession through three levels of the Mexican courts. In the NAFTA arbitration, the court decisions upholding the central grounds of nullification became juridical facts that impaired the claimants' ability to establish a treaty breach. Conversely, in Waste Management, Inc v Mexico(4) the claimant chose to abandon its local remedies, including a contractually based right of arbitration, in order to pursue timely a NAFTA claim. However, the tribunal held that the actions of the municipal government may have amounted to contractual breaches under the concession agreement, but did not rise to the level of a treaty breach. The tribunal also observed that the availability of unused local remedies is a factor to consider in deciding whether a treaty breach has occurred.
Canadian investors intending to rely on the FIPA may face a difficult choice after engaging in the prescribed administrative review proceedings for a four-month period. If the proceedings have been progressing appropriately, does the investor keep going and run the risk of the Azinian problem or terminate the proceedings and run the risk of the Waste Management problem? An investor that terminates an administrative review proceeding that is progressing in a timely manner may face an argument from the government side that its administrative regime was poised to correct the legal deficiency at issue.
Canadian investors in this situation will have to take stock of the relative strengths and weaknesses of their claims under both domestic law and investment treaty law in order to make a properly informed decision that best protects their interests. That said, if not a 'great leap forward', Canada's pending FIPA with China certainly represents a substantial improvement in the level of protection and security for Canadian investments in China. While investor-state arbitration under the FIPA will usually be considered a remedy of last resort, it should be viewed as an important achievement that was worth waiting for.
The text of the Canada-China FIPA can be found at www.international.gc.ca/trade-agreements-accords-commerciaux/agr-acc/fipa-apie/china-text-chine.aspx?lang=en&view=d. It will enter into force when ratified by the governments of both parties.
For further information on this topic please contact Cameron Mowatt at Borden Ladner Gervais LLP by telephone (+1 604 687 5744), fax (+1 604 687 1415) or email ([email protected]).
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription
Endnotes
(1) Bilateral investment treaties are called 'foreign investment protection agreements' in Canada's investment treaty regime.
(2) See Annex C21 and Endnote 11 of the FIPA.
(3) Robert Azinian v United Mexican States, ICSID Case No ARB(AF)/97/2, Award, November 1 1999.
(4) Waste Management Inc v United Mexican States, ICSID Case No ARB(AF)/00/3, Award, April 30 2004.
