Canada and China conclude major investment treaty negotiations 

publication 

February 2012

International Trade Law Bulletin

During the February 2012 state visit of Canadian Prime Minister Stephen Harper to China, the countries announced the completion of negotiations on a Foreign Investment Protection and Promotion Agreement ("FIPA"). The Agreement reflects the growing importance of international trade and investment between the two countries.

investment treaty protections

The Canada-China FIPA is the latest addition to a worldwide network of over 2,500 bilateral investment treaties. While the text has not yet been published, FIPAs usually contain a basic set of protections for foreign investment that require host governments to:

  • pay compensation for direct or indirect expropriation;
  • treat foreign investment fairly and equitably by respecting legitimate expectations and providing due process before courts and tribunals;
  • apply their laws in a transparent and impartial manner;
  • refrain from discriminatory or protectionist conduct; and
  • allow for repatriation of profits and transfer of capital.

the importance of dispute settlement

Unlike many types of international treaties, modern investment agreements have strong dispute settlement mechanisms. Foreign investors can enforce their rights directly through international arbitration. Arbitral tribunals have rendered significant damage awards to foreign investors whose rights have been violated. These awards are enforceable against host state assets in over 140 countries – leading host governments to take meritorious claims seriously.

Given the growing importance of China as a destination for Canadian investors and an important source of inbound investment, a FIPA with China has been a high priority for the Canadian government. However, negotiations were lengthy due to significant differences between Canada's Model FIPA and the standard Chinese approach. Most of these differences relate to dispute settlement provisions, with Canada seeking fewer preconditions and greater transparency for dispute settlement than China has typically allowed in its treaties.

Although China has a vast network of bilateral investment treaties with other countries, most of these treaties have limited the rights of investors to bring direct international arbitration claims. However, China has recently broadened the scope of investor-state arbitration in its treaties. Last year saw the first claim under such a treaty against China registered by the International Centre for the Settlement of Investment Disputes ("ICSID"). It also saw the first ever award issued by an ICSID tribunal in favour of Chinese investors against a foreign state.

Canada has a very good but not perfect record for the treatment of foreign investors and their investments. Providing protections to Chinese businesses making investments in Canada should further enhance the growing flows of Chinese investment into Canada - particularly in natural resources but increasingly also in other sectors.

entry into force will take time

Entry into force of the Canada-China FIPA will require a review by each government's legal team, signature and then ratification by the Canadian and Chinese authorities. Once it is in force, existing investments made will benefit from the treaty protections. In the interim, businesses may mitigate some of the risks of doing business in a foreign country through careful investment planning and contract drafting. Investors should consider international arbitration clauses that provide a neutral forum for dispute resolution and channeling investments through vehicles established under the laws of third countries with effective investment treaties.

Canada is open for business

The Conservative Government led by Prime Minister Harper has been in a stronger position to pursue open trade and investment policies since their re-election with a solid Parliamentary majority in 2011. The FIPA with China is part of a broader effort to expand two-way trade and investment with China. The Canadian government is also pursuing free trade agreements with Europe and various other jurisdictions and seeking to join the Trans-Pacific Partnership. Canada maintains its foreign investment review regime (the Investment Canada Act ) in order to ensure that large acquisitions of domestic enterprises are expected to be of "net benefit to Canada", but this screening process rarely impedes proposed transactions. Significant investments by Chinese investors have already been approved under the Investment Canada Act.

by Robert Wisner and Neil Campbell

McMillan LLP provides advice on all aspects of foreign investment from planning and protection to regulatory approval and implementation.



a cautionary note

The foregoing provides only an overview and does not constitute legal advice. Readers are cautioned against making any decisions based on this material alone. Rather, specific legal advice should be obtained.

© McMillan LLP 2012