David Collins

On the occasion of the UK’s ongoing re-negotiation of the placeholding UK-Canada Free Trade Continuity Agreement rolled over last year from the Comprehensive Economic and Trade Agreement (CETA) between Canada and the EU, it is useful to draw attention to Canada’s newly issued model Foreign Investment Promotion Agreement (FIPA). Upgraded from the 2014 version, the 2021 model FIPA sets out Canada’s starting asks for its trading partners in the field of investment – a key feature of modern Free Trade Agreements (FTAs) as well as a vital contributor to the economies of both countries. In 2019, the inward stock of foreign direct investment (FDI) in the UK from Canada was £20.0 billion accounting for 1.3% of the total UK inward FDI stock.

The model FIPA treaty, which defines ‘investment’ broadly to include indirect investments such as shares, contains some unusual modifications to the non-discrimination standards: National Treatment (prohibiting discrimination which favours local firms over foreign ones) and Most Favoured Nation (MFN) (prohibiting discrimination which harms investors from certain states over other ones). On National Treatment, Canada’s new model international investment agreement clarifies that the treatment accorded by a sub-national government can only be compared with treatment by that same government. This means that a foreign investor cannot cite better treatment offered in another Canadian province to an equivalent investor as evidence of discrimination. For Most Favoured Nation, the model treaty provides that investors cannot “treaty shop” by accessing preferable substantive or procedural provisions of Canada’s other treaties through MFN.

The agreement contains a clause guaranteeing the minimum standard of treatment to foreign investors, essentially enshrining what is understood to exist under customary international law. The model IIA helpfully sets out the kinds of measures which will amount to an infringement of this article, including a fundamental breach of due process and targeted discrimination, providing some clarity to an opaque area of international investment law.

As in Canada’s other investment agreements such as the United States Mexico Canada Agreement (USMCA), the model FIPA prohibits performance requirements. These are obligations placed on foreign investors to engage in certain conduct, such as the requirement to purchase local goods, in order to access the treaty’s protections. A new addition to this model treaty is the fact that the prohibition on performance requirements also prevents parties from restricting the cross-border transfer of information, which is similar to rules found in the digital trade chapters of some of Canada’s newer treaties, including the Comprehensive Progressive Trans-Pacific Partnership (CPTPP).

On indirect expropriation the new model FIPA sets out an unusual test of good faith in order to limit the government’s use of the police powers exception to preclude a finding of compensable indirect expropriation. This new approach leaves out references to severity of impact as a check on this defence as found in earlier Canadian agreements. It is not clear what this change achieves as reliance on a test of good faith may only obscure this already complex area of investment law further.

Investor-state dispute settlement

More interestingly, Canada’s new model FIPA contains some uncommon procedural features in relation to the controversial investor-state dispute settlement (ISDS) in which investors can bring claims directly against host states based on treaty breaches before an international arbitration tribunal. In addition to mandatory consultations prior to submitting a claim to ISDS, the agreement contains enhanced mediation provisions. There is also an extension of time-limits for submitting a claim to an arbitration tribunal when the claimant is actively pursuing remedies under domestic laws, potentially encouraging the use of local courts. As seen in CETA, the FIPA contains an obligation on ISDS claimants to disclose third-party funding and there are expanded transparency provisions, capturing trends unfolding in this area over the last ten years in response to frustrations over the secrecy of the ISDS process. There is a requirement that hearings as well as documents from the proceedings must be open and available to the public – a drastic change from the typically confidential hearings associated with ISDS in the past.

With regards to the ISDS tribunals themselves, tribunals will also have the ability to appoint their own experts on issues such as the rights of Indigenous peoples, scientific matters and other factual issues, much as allowed for WTO dispute settlement panels. There is also an arbitrator code of conduct to prevent conflicts of interest and ensure appropriate qualifications, which appears to draw upon the Draft Code of Conduct for Arbitrators in ISDS promulgated by ICSID. An Annex to the FIPA encourages disputing parties to nominate women to arbitral tribunals, embodying another movement which has gained much traction in recent years.

Perhaps most innovative of all,  Canada’s new FIPA creates a consent-based expedited arbitration mechanism for claims under CAN $10 million. It is believed that this mechanism will significantly reduce the cost of dispute resolution by simplifying and shortening the arbitration process – a feature which could be vital for SMEs that are often excluded from the procedural protection of ISDS because of its high costs relative to award value. There is also the possibility to hold consultations through videoconference and to have a single arbitrator hear the claim, rather than the usual three or five.

Lastly on dispute settlement, Canada also expresses its support in the FIPA for the EU’s Multilateral Investment Court (MIC) concept, built on the Investment Court System seen in CETA. There is a commitment in the FIPA to consider using a permanent first instance investment tribunal or an appellate mechanism, ‘should it be developed under other institutional arrangements.’ With the support of both Canada and the EU there is a good chance that the MIC initiative may gain more backing around the world.

Right to regulate

As in many modern FTAs with investment chapters, Canada’s new model IIA provides that parties maintain the ‘right to regulate’ in order to achieve legitimate policy objectives such as health, the environment, gender equality, rights of Indigenous peoples and cultural diversity. Taking a page from Australia’s book, the FIPA’s right to regulate is further extended by an exclusion to ensure that all present or future tobacco control measures are automatically excluded from ISDS. Unusually for Canada, the general exception provision does not include an equivalent of GATT Art XX(b) which allows measures necessary for animal plant life and health or (d) relating to the protection of natural resources. These seem to be rather significant omissions given the scope of these concepts; however their vagueness has rendered them nearly meaningless, both in the trade and investment context. Going beyond the conventional focus of an investment treaty, the new model FIPA further states that parties should try to encourage enterprises to consider greater diversity in senior management positions, such as by nominating women to sit on boards.

Rights of Indigenous peoples

Growing resentment towards extractive sector companies which infringe on the rights of Indigenous groups or which engage in environmentally harmful activities has led many commentators to urge meaningful avenues of participation for Indigenous groups in investment decisions by host states. Canada has been no stranger to these conflicts, with a number of high-profile energy projects delayed or cancelled as a consequence of Indigenous objections. In light of these trends, the new FIPA model aims to better reflect Indigenous peoples’ rights in several ways.

There is a novel general exception from the agreement’s obligations for any measure necessary to fulfil the constitutional rights of Indigenous peoples of Canada. The model treaty further requires the parties to make their laws and regulations pertaining to Indigenous peoples easily accessible to foreign investors. Significantly in terms of establishing state practice in a controversial area but perhaps further muddling an already complicated area of law, the new FIPA clarifies that the concept of “public purpose” with regards to an expropriation can have a different meaning for Indigenous peoples. As mentioned above, ISDS tribunals constituted under FIPA are permitted to appoint their own experts to report on issues concerning the rights of Indigenous peoples. There is also a non-regression clause mandating that parties shall not relax measures relating to the rights of Indigenous peoples to encourage investment (a requirement which also applies to environmental and labour laws as in the USMCA). Finally, parties to the agreement should encourage foreign investors to undertake and maintain meaningful engagement with both Indigenous peoples and local communities where they operate, an issue which has featured prominently in several recent investment arbitrations.

Building upon this, the new FIPA model expands what it terms Responsible Business Conduct (RBC) provisions (better known as ‘Corporate Social Responsibility (CSR)’, a term which is evidently obsolete). This involves for example promoting internationally recognized RBC standards, an obligation to encourage enterprises to incorporate these standards into their internal policies, and, as noted above, encouraging enterprises to engage with local communities and Indigenous peoples, which are often the most vulnerable to illegitimate behaviours undertaken by foreign firms, especially in the extractive sector.

‘Progressive’ investment agreements

The model agreement’s emphasis on Indigenous and gender issues as well as the environment reflect the Canadian Liberal government’s pre-occupation with ‘progressive’ issues which currently enjoy much popularity among the global community and world leaders (at least in the West). Whether they are genuinely supported by Canadians, let alone citizens in other countries, is another matter. Nor is it clear that the inclusion of so many non-trade (or non-investment) elements in a model treaty will work well for Canada as it seeks to court other countries, like the UK, to sign onto these obligations, through FTAs. Other aspects of the FIPA, such as the emphasis on digital trade, the fast-tracking ISDS and the willingness to entertain a global investment court are encouraging ‘offers’, demonstrating that Canada is very much at the forefront in global trends in international investment treaty making.

The relevance of Canada’s new model FIPA to its ongoing FTA re-negotiations with the UK may be limited given that it is only a model – it is by no means certain that Canada will get all of its ‘wants’ from the UK, particularly given Canada’s modestly weaker bargaining position. Still, the FIPA is illustrative of Canada’s innovative approach to the investment chapter of an enhanced UK FTA and as such it is broadly promising in terms of scope and fit with the UK interests. For the most part the new model agreement does not depart significantly from what the UK has included in its recent FTAs with investment chapters, including the Canada Free Trade Continuity Agreement itself.

 

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