On September 8, 2012, Canada and the People’s Republic of China signed the Canada-China Foreign Investment Promotion and Protection Agreement (Canada-China FIPA). The Canada-China FIPA is in the process of being ratified and could become binding international law as early as November 2012. The execution of the Canada-China FIPA marks the formal end of a series of negotiations that spanned an 18-year period, with efforts beginning in 1994, tapering prior to China’s accession to the World Trade Organization and redoubling from 2004 onward.
In general terms, the Canada-China FIPA is a reciprocal international legal agreement that provides Canadian and Chinese national investors with protection against arbitrary or discriminatory government actions when investing abroad in the other country, while at the same time promoting the Chinese market as an investment destination for Canadian companies and vice versa. The Canada-China FIPA obliges the host state to adhere to certain standards of treatment with regard to counterparty foreign investors and their investments, and sets out arbitral mechanisms to resolve any disputes that arise related to such investments to ensure the foreign investors receive impartial treatment.
SCOPE OF AGREEMENT
The Canada-China FIPA includes substantive investor protections by providing for:
- Most favoured nation (MFN) treatment: MFN rights ensure that each of the parties treats the other’s investors at least as favourably as it would an investor from any third-party country. Under the Canada-China FIPA, the parties have agreed to “pre-establishment” MFN rights. As such, MFN protections are available to an investor as soon as it initiates an acquisition or investment, rather than only applying once such acquisition or investment has been made. This ensures that investors from a counterparty state are at least on equal footing with other outside entrants into the host state’s market.
- National treatment: National treatment rights stipulate that the host country will treat foreign investors and investments no less favourably than it treats its own domestic investors and investments. Unlike the MFN rights under the Canada-China FIPA, the national treatment rights do not apply to acquisitions and only begin once the investment has been established. If there is one major limitation of the Canada-China FIPA, in terms of ensuring market openness, it is in this respect.
- Minimum standard of treatment: The minimum standard of treatment provision obligates both parties to accord fair and equitable treatment, and full protection and security to investments, consistent with international law.
- Transfers of funds: The Canada-China FIPA protects the ability of investors to transfer funds arising from their investments freely and without delay.
- Transparency: Both countries have committed, through the Canada-China FIPA, to ensure transparency in the passage of laws and in making decisions that pertain to, or affect, investors and their investments.
- Expropriation: Covered investments and investor returns are protected from expropriation, including through indirect expropriation, except for a public purpose, under due domestic procedures of law and in a non-discriminatory manner, and even then only with compensation at fair market value.
- Dispute resolution: The Canada-China FIPA includes robust investor-state dispute resolution provisions that feature detailed rules on the standing of the investor, procedural requirements and judgment enforcement. Dispute settlement mechanisms of this sort allow aggrieved foreign investors to seek remedies against the host country outside of national court systems, pursuant to the rules and procedures of one of the various international arbitration regimes, such as the International Centre for the Settlement of Investment Disputes (ICSID). China has historically negotiated bilateral investment treaties characterized by significant limitations with regard to non-discrimination and dispute resolution. The Canada-China FIPA reflects China’s recent tack toward allowing more robust protections in its international investment treaties, as also evidenced in its recent bilateral investment treaties with Germany and the Netherlands.
The FIPA carves out a number of exceptions to which its protections do not apply. The FIPA does not prohibit Canada and China from adopting or maintaining measures, including environmental measures that are necessary to protect human, plant and animal life, preserve the integrity of financial institutions and the financial system; or for national security reasons. Another important exception surrounds the Investment Canada Act. Under the FIPA, a decision following a review under the Investment Canada Act (or under the corresponding Chinese laws) is not subject to the dispute settlement provisions above. Therefore, while some critics have attacked the Canada-China FIPA, arguing it results in a forfeiture of Canadian sovereignty with respect to Chinese foreign investment in Canada, this exception ensures the Government of Canada retains the ability to exercise oversight in this area.
STRENGTHENING ECONOMIC TIES
The signing of the Canada-China FIPA comes amid a period of intensification in Sino-Canadian investment activity. At the end of 2011, the stock of Canadian direct investment in China was valued at nearly C$4.5-billion, an increase of 9.6% over 2010 levels, while Chinese foreign direct investment in Canada amounted to C$10.9-billion. Examples of this activity include CNOOC Limited’s proposed C$15.1-billion acquisition of Nexen Inc. and the Bank of Nova Scotia’s pending purchase of the Bank of Ghuangzhou. The strengthening economic relationship between the countries was also noted in the August 15, 2012 release of a joint Canada-China study that recommended fostering even deeper trade links. To this effect, there is speculation that Canada and China may eventually announce the beginning of formal negotiations to strengthen their bilateral trade relationship through a free trade agreement.
RATIFICATION AND IMPLEMENTATION
In Canada, the ratification process for bilateral investment treaties (such as the Canada-China FIPA) involves a 21-sitting day period, during which the treaty is tabled in the House of Commons for consideration and debate. After this, the treaty is brought into force pursuant to an Order-in-Council authorized by the Governor General, Canada’s head of state. The Canada-China FIPA was tabled on September 26, 2012. Given that October 31, 2012 will mark the treaty’s 21st day in the House of Commons, we expect the Canada-China FIPA may be brought into force as early as November.
Companies that have made or are considering investments in Canada or China would be well served to educate themselves about international investment treaty protections that the Canada-China FIPA will afford. The Canada-China FIPA will be particularly helpful to Canadian businesses looking for greater certainty and security when making investments in China. It may also provide reassurance to Chinese investors assessing Canadian targets but concerned about recent decisions under the Investment Canada Act.
For further information, please contact:
Greg Kanargelidis 416-863-4306
Aaron Libbey 416-863-5288
or any other member of our International Trade & Investment Group.