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Canada’s BIT (FIPA) negotiating programme

Canada Department of Foreign Affairs and International Trade

2002-12-06

Canada’s Foreign Investment Protection and Promotion Agreements (FIPAs) Negotiating Programme

What is a FIPA?

A FIPA is a bilateral reciprocal agreement aimed at protecting and promoting foreign investment through legally-binding rights and obligations.

Why negotiate a FIPA?

Enhancing Canada’s investment opportunities is essential to Canada’s ongoing international competitiveness. FIPAs provide important disciplines that help to open international markets and make them more secure for Canadian investors. This has attendant benefits for Canadian job creation, the encouragement of increased domestic economy efficiencies and opportunities to attract new investment and technology in support of Canadian competitiveness, economic growth and prosperity.

Emerging economies and economies in transition are increasingly important destinations for Canadian investors. By specifying the rights and obligations of the signatories respecting treatment of foreign investment, a FIPA encourages a predictable investment framework and contributes to engendering a stable business environment. From the perspective of developing countries, there is virtually unanimous agreement that investment flows have a positive impact on development and that FIPAs are a positive and useful vehicle in that regard. Developing countries need and want the capital that investment brings and they want to ensure that investment flows predictably to their countries. FIPAs provide for that necessary signal of stability.

In addition to direct market access gains for investors, bilateral FIPA negotiations are used strategically to develop consensus on important investment principles with key countries in regional and multilateral fora, such as the Asia Pacific Economic Cooperation (APEC) and the World Trade Organization (WTO). They also provide detailed background information that is essential to developing the Canadian positions for negotiations in fora such as the Free Trade Area of the Americas (FTAA).

Finally, FIPA negotiations are pursued in a manner consistent with other multilateral and bilateral policies. A FIPA promotes the rule of law and, in particular, fosters the principles of fairness, transparency and non-discrimination. These contribute to democratic development and underscore Canada’s support for human rights within a broader United Nations (UN) context.

Main elements of Canada’s Model FIPA

Generally speaking, FIPAs accomplish their objectives by delineating the respective rights and obligations of the signatories to the treaty with respect to the treatment of foreign investment. Consequently, FIPAs foster foreign investment by promoting a stable investment climate. The Canadian model FIPA consists of 15 articles and two annexes that can be grouped into the following general areas:

1. Definitions;
2. Treatment of Investments - General and Specific Obligations;
3. Protection of investments - Expropriation, Compensation, and Transfers;
4. Subrogation (this is an insurance term, used for situations where the insurer has the rights of its insured after it makes an insurance payment)
5. Dispute Settlement Mechanisms;
6. Entry Into Force;
7. Exceptions and Special Provisions.

Principles

Several key principles run throughout the FIPA and are important to understand how the FIPA works. One key principle is to "encourage the creation of favourable conditions for investors".

There is no obligation to eliminate all existing measures that restrict foreign investment. However, the FIPA enshrines a principle that the Contracting Parties will not adopt new, more restrictive, investment measures unless specifically allowed for in the Agreement. This is known as the standstill principle. As measures are liberalized, the new level of treatment becomes the acceptable minimum; in this way, conditions for investors improve permanently over time.

A further key principle is that of transparency, which requires the Contracting Parties to list "to the extent possible" their exceptions to the general rules set out in the FIPA. In the case of an investment dispute, a Contracting Party must prove that a measure existed prior to it signing the FIPA; this list simplifies the process and provides information to investors.

Definitions

The definition section sets out the scope of the Agreement. There are definitions for investment, for measures, and investors to whom the rights and obligations of the FIPA apply.

The definition of investment contains a non-exhaustive list that includes "movable and immovable property", portfolio investments, money or claims for money, intellectual property, as well as intangible "rights" to undertake any economic or commercial activity.

Intellectual property rights include patents, trademark, and copyright, as well as layout designs of semiconductors, integrated circuits, geographical indications and industrial design, and plant breeders’ rights.

Included in the FIPA are definitions for financial services, and financial institutions. What qualifies as a financial institution is to be determined by the laws of the Contracting Party in whose territory it is located. The definition for financial services is important because financial services are specifically exempted from certain National Treatment obligations.

Lastly, FIPA protection extends to investments owned or controlled indirectly by an investor of one Contracting Party through an investor of a third country; however, the FIPA, with respect to Canada, does not apply to a permanent resident of Canada who holds both citizenship of Canada and of the Contracting Party.

Treatment of Investments

A FIPA formalizes the standard of treatment that the Contracting Parties must afford to the investments of each other’s investors. There are three standards of treatment: Minimum, National, and Most Favoured Nation (MFN).

- Minimum Treatment:

The Minimum Standard of Treatment ensures investments of investors fair and equitable treatment and full protection and security in accordance with the principles of customary international law. The minimum standard provides a "floor" to ensure that the treatment of an investment cannot fall below treatment considered as appropriate under generally accepted standards of customary international law.

- National Treatment:

The National Treatment standard requires a Contracting Party to treat an investment of an investor of the other Contracting Party no less favourably than it treats, in like circumstances, an investment by its own nationals. The National Treatment standard only guarantees a relative standard of treatment. For example, a Contracting Party may require a license for the establishment of a new enterprise by a national of the other Contracting Party, if it also requires a license for the establishment of a similar new business by its own nationals. The phrase "in like circumstances" clarifies the comparative standard to assess whether or not a Contracting Party’s national is being discriminated against.

- Most Favoured Nation Treatment (MFN):

MFN treatment means that one Contracting Party must give to the investors of the other Contracting Party treatment no less favourable than the treatment given to the investors of any third country. In other words, if Canada and country A agree to MFN treatment, and then country A agrees to more favourable terms with country B, then Canada will receive the benefit of the same standard of treatment country A agreed to with country B. Again, the phrase "in like circumstances" has been included to clarify the comparative standard of assessment.

The model FIPA differentiates between measures affecting potential investment entering the territory of a Contracting Party (establishment or pre-establishment) and measures affecting investment already inside the territory of a Contracting Party (post-establishment or established). National Treatment and Most Favoured Nation treatment apply both before establishment and to established investments.

A number of exceptions to MFN and National Treatment are listed in the Annex to a FIPA. Notably, there is an exception for social services. It is also Canada’s policy to preserve its ability to maintain or establish measures in sectors such as health, environment, safety and public education.

- Key Personnel and Performance Requirements:

Although not mentioned explicitly in most agreements signed by other countries, provisions on key personnel and performance requirements are often considered to be part of the National Treatment and MFN obligations. The provision on key personnel ensures that investors have the right to employ senior management and specialists of their choice, regardless of nationality, and obliges the Contracting Parties to admit them temporarily in accordance with their laws on entry of aliens. It allows a Contracting Party to require that members of boards of directors be nationals or residents of the host country, so long as the requirement does not materially impair the investor’s management of its investment.

The performance requirements provision restricts Contracting Parties from imposing performance requirements such as local content requirements, minimum levels of exports, links between imports and exports or foreign exchange inflows, and obligatory technology transfer. These obligations are similar in scope to the Trade Related Investment Measures Agreement (TRIMs) in the WTO.

Expropriation, Compensation and Transfers

These three obligations are the main priorities of investors. They provide a high level of protection with few exceptions, which often goes beyond the standard applied to nationals of the host country.

- Expropriation:

The expropriation provision does not prohibit a Contracting Party from expropriating an investor’s property or investment, but it clarifies the rules governing expropriation and measures tantamount to expropriation by stipulating the following conditions: for a public purpose; under due process of law; in a non-discriminatory manner; and against prompt, adequate and effective compensation.

Certain tax measures can have an effect tantamount to expropriation, and therefore they are mentioned here. However, if the tax authorities of both Contracting Parties agree that a tax measure is not expropriatory, the investor has no right to international arbitration.

- Compensation:

Compensation for an expropriation is to be based on "fair market value", and some valuation criteria are given for guidance. Interest must be paid at a "normal commercial rate", which offers better protection to an investor than a requirement to merely pay interest.

The better of MFN or National Treatment standard applies to the compensation for losses of a contracting party’s investments due to armed conflict, a national emergency or a natural disaster. As discussed, these standards only guarantees a relative standard of treatment; it therefore does not oblige a contracting party to compensate. This means if a Contracting party does not pay compensation to its own nationals or other foreign investors for losses as a result, for example, of a natural disaster, then it does not have to pay compensation for losses of the same disaster to an investor of the other Contracting Party.

- Transfers:

The general rule on capital transfers guarantees each Contracting Party the right to unrestricted transfer, without delay, of investments and returns. However, transfers can be restricted in certain circumstances, which are spelled out in Annex I of a FIPA. Most importantly, Contracting Parties have the right to apply their laws regarding, for example, bankruptcy, taxation, securities, criminal or penal offenses and reports of transfers of currency. Additionally, neither Contracting Party can force its investors to repatriate returns from an investment in the other Contracting Party. Finally, a Contracting Party may prevent or limit transfers through the non-discriminatory and good faith application of measures relating to the soundness and integrity of financial institutions.

Subrogation

Subrogation is the substitution of one person by another with respect to a right or claim. It generally appears in an insurance context where the insurer assumes the insured’s position. The purpose of the subrogation article in a FIPA is to ensure that when an investor obtains insurance in the home country for an investment in the host state and then makes an insurance claim, the insurer’s rights are recognized when it seeks compensation. For example, the Canadian Export Corporation (EDC) is in the business of selling foreign investment insurance. This Article ensures that the EDC, in the event of a claim, may step into the shoes of the investor and assume all of the investor’s rights in respect of the insured investment in the host country. This includes not only compensation rights, but also the right to carry on business and transfer funds (including by the investor, if authorized by the insurer).

This Article is an improvement over the older Foreign Investment Insurance Agreements (FIIAs), which dealt only with subrogation rights for Canadian investors. The reciprocal rights and obligations of the FIPA subrogation article are gradually replacing the forty-two FIIAs which had been signed up to 1988.

Dispute Settlement Mechanisms

Two types of disputes may arise: those between the Contracting Parties and those between an investor and the host Contracting Party.

- Contracting Parties:

This provision establishes the framework in which disputes between the Contracting Parties are to be solved. The standard recourse contained in all FIPA agreements is consultation, or if that fails, compulsory arbitration.

- Investor and Host Contracting Party:

For disputes arising between an investor and a host Contracting Party, the FIPA offers international arbitration in accordance with practices contained in the International Convention on the Settlement of Investment Disputes (ICSID) and in the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).

An investor may pursue either local remedies or international arbitration. The investor has up to three years to assess whether to pursue international arbitration, after which time international arbitration is barred. Conversely, an election to international arbitration acts as a bar to continuing to seek local remedies.

Entry Into Force and Annex

This provision requires each Contracting Party to notify the other in writing when the procedure for enacting the FIPA into force has been completed in their country. The FIPA comes into the force on the latter date of the two notifications and remains in force until one year after a notification of termination is given by one of the Contracting Parties. For investments made prior to the notification of termination, the provisions of the Agreement remain in force for 15 years.

Exceptions and Special Provisions

The FIPA has a number of important exceptions to the general rules of treatment, such as the MFN exception, which exempts a Contracting Party from providing the benefits of existing or future free trade agreements (e.g. the NAFTA or the WTO General Agreement on Trade in Services - GATS). Bilateral agreements in sectors of the economy such as aviation or fisheries are also exempted.

There is a National Treatment exception for existing non-conforming measures, along with an exemption for the privatization of state-owned enterprises. This includes a further exemption to the standstill clause by allowing each country to list sectors or areas where no commitment is made with regard to future National Treatment standards.

In addition, there are exceptions related to the environment, as well as an exemption for reasonable prudential measures. Investment in financial services, for example, may be restricted to protect depositors or the stability of the financial system.

Cultural industries are exempted completely from the agreement. Unlike the other sectors which have been exempted from certain obligations, there are no guarantees with regard to expropriation, compensation or dispute settlement in the case of cultural industries.

The MFN and National Treatment, key personnel, and performance requirements provisions of the agreement do not apply to procurement, subsidies, development assistance programmes and special programmes for the aboriginal peoples of Canada.

Each country retains the right to screen potential investment without risk of investor-state dispute settlement. Further, a dispute relating to existing screening measures cannot be taken to state-state dispute settlement. However, if a Contracting Party enacts new, more restrictive screening, it could face state-to-state dispute settlement.

Except where expressly referred to, the FIPA does not cover taxation measures, with the exception of where a measure is taken to break a tax-holiday agreement. Finally, there are special procedures for disputes involving prudential and taxation measures, and for cases where an enterprise is indirectly controlled by an investor.


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