By Matthew S. Kronby, Partner, Bennett Jones
The Canada-China bilateral investment treaty (BIT), which comes into force October 1, signals a deepening of the bilateral economic relationship. While it somewhat less ambitious than recent BITs that Canada has concluded with other trading partners, it nevertheless establishes important rights for Chinese and Canadian investors, and the tools to enforce those rights.
The significance of BITs for investors is better reflected in the Canadian term for them: foreign investment protection agreements, or FIPAs. 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 imposes substantive obligations on the host country in its treatment of foreign investors of the other party with respect to concerns like discrimination, arbitrary treatment and expropriation. In the event those obligations are breached, most BITs, including the Canada-China FIPA, 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 who 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 with more than two dozen other countries while China has more than 70 such treaties in force.
China's BITs have evolved significantly as China has become more open to inward investment and also a major exporter of capital. The Canada-China FIPA reflects this trend; relative to what China has provided under its other BITs to date, the Canada-China FIPA is cutting-edge, offering Canadian investors protections that are equal to or better than those available to other foreign investors in China.
However, in keeping with Chinese practice, and in contrast with other Canadian FIPAs, the protections in the Canada-China FIPA against discrimination are rather circumscribed. Most notably, a typical Canadian FIPA extends national treatment (the obligation on the host State to treat the other Party'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.
Also, the FIPA does not restrict Canada's freedom to review and decide whether to approve acquisitions of Canadian businesses under the Investment Canada Act, or China's freedom to do likewise under its laws. In keeping with Canadian practice, those decisions are not subject to challenge under the arbitration procedures in the FIPA, either by investors or either Party.
That is, it does not give Canadian investors the same rights as Chinese investors to make investments in China, nor does it give Chinese investors the same rights as Canadian investors to make investments in Canada. In that sense, the FIPA does not aim to further open the Chinese market to investments from Canada, or vice versa. Importantly though, China may grant pre-establishment protections that are absent in the Canada-China FIPA in BITs it is now negotiating with the European Union and the United States. If so, those protections will accrue to Canadian investors too, by virtue of the most-favoured nation (MFN) obligation in the FIPA, which requires each Party 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 comports with Chinese practice while departing from that of Canada in carving out from its non-discrimination obligations all existing non-conforming measures rather than just those at the sub-national level and those individually identified at the federal level.
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 (a) to new measures; and (b) to existing measures only to the extent that they are either (i) made more restrictive or (ii) liberalized, in which case they will be subject to a "ratchet" that locks in the liberalization and prohibits the Party from subsequently reverting to more restrictive measures.
The Canada-China FIPA offers other important protections too to each Party’s investors and investments. These include 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. Despite the FIPA's limitations in opening the Chinese market to new investment, the protections the FIPA offers are especially likely to engender confidence for outbound Canadian investment in China.
Matthew Kronby is partner at Bennett Jones. He practices in the areas of international trade, investment and foreign business transactions and compliance. He represents clients in matters relating to the WTO, the NAFTA and other trade agreements, investment treaties, export controls, trade sanctions and foreign corrupt practices. Before joining Bennett Jones he was head of the Government of Canada's Trade Law Bureau from 2009 to 2012 and previously served in the Bureau as a manager and legal counsel for more than 15 years. He has appeared frequently before WTO panels and the Appellate Body and led legal teams in numerous high-profile trade disputes, including on softwood lumber, aircraft subsidies, biotech products and automotive trade, as well as in investment arbitrations under the NAFTA.
Republished with permission from Bennett Jones LLP