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Canada signs Bilateral Investment Treaty with Peru — India and China are next

McCarthy Tétrault LLP

Canada: Canada Signs Bilateral Investment Treaty with Peru - India and China Are Next

28 November 2006

Article by John Boscariol and Orlando Silva

On November 14, 2006, Canada and Peru signed a bilateral investment treaty (BIT), otherwise referred to as a Foreign Investment Protection and Promotion Agreement (FIPA). This is Canada’s first BIT to be negotiated in eight years and the first BIT to be based on Canada’s new 2004 Model FIPA. This will bring the number of BITs Canada has with developing and newly industrialized countries to a total of 22. Canada is currently in the process of active negotiations with two other countries: India and China. The BIT with India is expected to be finalized within the next four months and the BIT with China within the next eight to 12 months.

Over the last decade or so, BITs have quickly emerged as a viable option for businesses seeking protection of their investments in foreign jurisdictions. Traditionally, when investment disputes arose, foreign investors were limited to seeking remedies through either the domestic court of the host country system or diplomatic espousal claims. These BITs are an attractive alternative because they provide a mechanism to pursue damages claims directly against host states through international arbitration. There has been phenomenal growth in the negotiation of these agreements worldwide-in 1989, there were less than 400 BITs in force and by the end of 2005, that number increased to approximately 2,500.

Negotiations with Peru

Negotiations for the Canada-Peru BIT commenced in the early 1990s, but were put on hold for several years while Canada drafted the new 2004 Model FIPA, taking into account its experiences as a respondent in investment claims brought under NAFTA Chapter 11. After a hiatus of several years, negotiations were re-started in December 2003 after Cabinet had approved the new 2004 Model FIPA. The BIT that was signed on November 14, 2006 closely mirrors the 2004 Model FIPA (with a few exceptions) and is comprised of 52 articles and some 50 pages of reservations and exceptions. Canada’s existing BITs typically contain less than 20 articles and few reservations and exceptions.

Canada’s BIT with Peru contains, as does its BITs with other countries, three core substantive obligations which can be briefly described as follows:

• (i) non-discriminatory treatment: the foreign investor and the investment must be accorded treatment no less favourable than that accorded to domestic investors (national treatment) and investors from any other country (most-favoured-nation treatment or MFN treatment);

• (ii) fair and equitable treatment: the foreign investment must be accorded fair and equitable treatment in accordance with international law, including full protection and security; and

• (iii) compensation for expropriation: expropriation, or measures equivalent to expropriation, must be for a public purpose, non-discriminatory, in accordance with due process of law and accompanied by payment of prompt, adequate and effective compensation.

Significant Changes in Investment Obligations

The obligations contained in the Canada-Peru BIT differ in a number of respects from those contained in other Canadian BITs. The following are areas where we consider that the Canada-Peru BIT has made significant changes in the key substantive areas of investment protection:

• (i) narrower scope of protected investments: the definition of "investment" in Canada’s earlier BITs can generally be described as a relatively broad and open-ended asset-based definition with a list of specific types of investments that is indicative rather than definitive. It embraces "any kind of asset" and is followed by a non-exhaustive illustrative list of specific rights and assets. In addressing the meaning of investment, the Canada-Peru BIT departs from the previous open asset-based definition, replacing it with a closed list of defined investments. The BIT also defines what is not included in the definition of investment (e.g. claims to money that arise solely from commercial contracts).

• (ii) the removal of protections for "returns": the reference to the "returns of investors" is absent from the operative provisions of the Canada-Peru BIT, including the provisions concerning fair and equitable treatment, expropriation, national treatment and MFN treatment. The Canada-Peru BIT’s obligations apply to investors and covered investments, but not necessarily to the returns from those investments. Given recent expropriation jurisprudence, aggressive measures taken by a host government against investments which significantly impact returns but do not remove the underlying investment itself may be difficult to characterize as compensable expropriation, and will likely be more difficult to challenge under the provisions of the BIT. The protections for "returns of investors" in Canada’s earlier BITs was a rather novel approach when compared to the vast majority of BITs worldwide.

• (iii) MFN treatment: the Canada-Peru BIT limits the ability of Canadian investors to benefit from the host government’s MFN obligations, including the potential to benefit from more favourable treaties negotiated by Peru with third countries. Annex III to the BIT contains broad exceptions available to the host government seeking to avoid according MFN treatment to investors. Pursuant to these exceptions, the host government need not extend to investors treatment as favourable as that extended to investors from other countries under agreements existing prior to the entry into force of the Canada-Peru BIT. Further, Annex B4 (unlike the 2004 Model FIPA) explicitly provides that MFN treatment does not encompass dispute resolution mechanisms that are provided for in international treaties or trade agreements. Annex B4 seeks to directly address relatively recent BIT jurisprudence suggesting that the MFN obligations apply to allow an investor to benefit from BITs that the host government has concluded with third countries.

• (iv) fair and equitable treatment: the Canada-Peru BIT explicitly provides that fair and equitable treatment is to be limited to treatment accorded to covered investments in accordance with the "customary international law minimum standard of treatment of aliens." This text very closely tracks the language contained in the NAFTA Free Trade Commission’s 2001 interpretive statement on Article 1105 of the NAFTA. The NAFTA interpretation has been considered by some commentators to limit the ability of Canadian investors to address host government behaviour that may be considered unfair or inequitable but which may be permissible under the historic customary international law minimum standard of treatment of aliens. Although this is an evolving area of the law, in the past host governments have argued that the "customary international law" standard represents a higher threshold for demonstrating breach than the "international law" standard of treatment generally provided for in Canada’s existing BITs.

• (v) expropriation and compensation: the Canada-Peru BIT also contains new provisions that may operate to limit the protections available to investors from government measures constituting indirect expropriation. The expropriation obligation is one of the more controversial elements of BITs as scholars and arbitral tribunals continue to struggle to distinguish between measures that are confiscatory or equivalent to expropriation and measures that constitute bona fide or legitimate regulation. In particular, there has been a good deal of controversy in the BIT jurisprudence on the degree of government interference necessary to constitute what arbitral tribunals have referred to as "indirect" or "creeping" expropriation. Regarding indirect expropriation, Annex B.13(1) of the Canada-Peru BIT provides that the analysis requires a case specific fact-based inquiry and identifies factors that should be taken into consideration when making the determination of what constitutes compensable indirect expropriation (e.g. it provides that an adverse economic impact on the economic value of an investment does not, in and of itself, establish that an indirect expropriation has occurred). Annex B.13(1) also provides that non-discriminatory measures that are adopted and applied in good faith and that are designed to protect legitimate public welfare objectives will only constitute indirect expropriation in "rare circumstances." This clarification of the meaning of indirect expropriation may lead to the tolerance of a wider range of regulatory interference which has the effect of diminishing, but not completely destroying, an investment’s value.

The Canada-Peru BIT also modifies and supplements a number of other provisions under Canada’s existing BITs. These modifications in respect of such areas as investor-state dispute settlement, prudential measures and financial services, national security, public access to hearings and documents and participation by non-disputing parties should also be carefully reviewed and analyzed. Finally, the 50 some pages of reservations and exceptions, atypical to Canada’s existing BITs (but similar to NAFTA Chapter 11) should also be carefully scrutinized by Canadian investors seeking to understand the protections accorded under the Canada-Peru BIT.

Conclusion

As Canada’s first BIT in eight years, and as the first to be based on the 2004 Model FIPA, the negotiation of the Canada-Peru BIT represents a watershed moment in the development of Canada’s BITs. Arguably, the protections to investors under this treaty have been somewhat diluted when compared to Canada’s existing BITs. This may be a reaction by the Canadian government to its role as a respondent in several NAFTA Chapter 11 cases. The Canadian government has never been a respondent to a BIT claim and, to date, only one award has been issued under a Canadian BIT (EnCana Corporation v. Republic of Ecuador, LCIA Case No. UN3481, UNCITRAL, February 3, 2006, Canada-Ecuador BIT).

Investors and other stakeholders should take this opportunity to review the Canada-Peru BIT and the 2004 Model FIPA and consult with the Canadian government to stress the importance of maintaining strong investment protection provisions under these instruments. This is particularly so since the BITs with China and India have yet to be finalized and Canada’s Department of Foreign Affairs and International Trade has recently stated that it is currently in the process of reviewing the provisions of the 2004 Model FIPA.

Canada’s Existing BITs

Canada has concluded BITs with the following countries (entry into force date): Russia (1989); Poland (1990); Czech Republic (1992); Slovak Republic (1992); Argentina (1993); Hungary (1992); Ukraine (1995); Latvia (1995); Philippines (1996); Trinidad & Tobago (1996); Barbados (1997); Ecuador (1997); Egypt (1997); Romania (1997); Venezuela (1998); Panama (1998); Thailand (1998); Armenia (1999); Uruguay (1999); Lebanon (1999); Costa Rica (1999); and Croatia (2001).