by Jason Tsoukas and Caroline Klinkhoff
Although the Canada-China Foreign Investment Promotion and Protection Agreement (FIPA) has sparked a great deal of debate, noticeably absent from the discussion has been an adequate exploration of what this treaty means for existing and/or future Canadian investors with investments in China. In fact, this FIPA provides Canadian investors with important new tools with which they can ensure that their investments in China are protected. In order to better illustrate the effect of the Canada-China FIPA on Canadian investors in China, we hope that this short FAQ will serve to provide much-needed answers to the most common questions posed by Canadian investors.
1. What is a FIPA?
A FIPA is a bilateral agreement aiming to protect and promote foreign investment through legally-binding rights and obligations. It is an agreement that is signed by the Government of Canada and the Government of China. In particular, the FIPA sets out the rights and obligations of the Government of China with respect to how it treats Canadian investors and vice versa. It is important to note that a FIPA is not a trade deal. It does not provide permission to invest, nor does it exempt an investor from abiding by the laws of either country.
2. How many FIPAs does Canada currently have in force?
There are currently twenty-four FIPAs in force between Canada and other nations. Seventeen of these FIPAs were negotiated during the 1990s. The list of countries with which Canada has signed FIPAs includes Russia, former Eastern Bloc nations, countries in South America and several from Central America, the Caribbean and the Middle East. In addition, Canada has concluded negotiations for FIPAs with seven other countries- including India. Currently, Canada is engaged in ongoing negotiations with thirteen other countries.
3. What is the Canada-China FIPA?
The Canada-China FIPA, signed by Prime Minister Stephen Harper in Vladivostok, Russia on September 8, 2012, has attracted a great deal of attention in recent weeks. Made public when it was tabled in the House of Commons on September 26, 2012, the treaty was subject to a twenty-one day sitting period, which expired on November 1, 2012.
Before the treaty comes into force, the Canadian cabinet must ratify it. Once ratification takes place, the Government of Canada will notify the Government of China that Canada has completed the internal legal procedures for entry into force of the treaty. The Government of China must also notify the Government of Canada once their internal legal procedures have been completed. The FIPA enters into force on the first day of the following month after receipt of the second notification. Although the date on which the FIPA will come into force is unknown, ratification appears imminent.
4. How do Canadian investors and investments stand to benefit from this FIPA?
The treaty confers a number of important benefits on Canadian investors and their investments in China. Under the FIPA, for example, both existing and future Canadian investors are guaranteed the same treatment in China that is provided to all other foreign investors. This creates a level playing field on which Canadian investors can compete with investors from over seventy other countries that already have similar investment treaties with China in place or from the many other countries that may soon have them.
Secondly, once established in China, Canadian investors will be entitled to the same treatment as domestic investors with respect to the expansion, management, conduct, operation and sale or other disposition of their investments in China. This means that Canadian companies cannot be singled out and treated less favourably than Chinese domestic investments.
Thirdly, Canadian investments are protected from expropriation, nationalization or measures having the effect equivalent to expropriation or nationalization in China. The treaty states that such actions are prohibited except if there is a public purpose, under domestic due procedure of law, which is applied in a non-discriminatory manner. Furthermore, even in the event that such actions occur, a Canadian investor is guaranteed compensation at fair market value under the FIPA.
Fourthly, Canadian investors will now have recourse to a new dispute resolution mechanism. While this mechanism will be described in further detail below, essentially it would allow a Canadian investor to claim damages from a breach of the FIPA, by any level of the Government of China, directly to an independent arbitration tribunal, and the tribunal would have the power to order an award of compensation to that Canadian investor.
4. How much bilateral investment is there between Canada and China?
In 2011, Canadian firms had $4.5 billion in direct investment in China. That same year, Chinese investment in Canada amounted to $10.9 billion.
5. Under this FIPA, how will disputes be settled between the two states and/or between investors?
Under the FIPA, Canadian investors are accorded extensive rights to raise a dispute directly against the Government of China for its treatment of the investor or one of investments. If a Canadian investor or one of its investments suffers loss or damage, as a result of a breach of the FIPA by the Government of China, the investor may submit a claim directly to an international arbitral tribunal for monetary compensation. If the investment in question is in a financial institution, however, the ability to make a claim is restricted to complaints related to expropriation and/or transfers.
Before submitting a claim to arbitration, the disputing parties must hold consultations in an attempt to settle the claim amicably. These consultations must be held within thirty days of a submission of a notice of intent to submit a claim to arbitration. Following such consultations, a claim may only be submitted after at least six months have elapsed since the alleged breach and at least four months since the notice of intent. All claims are subject to a limitations period of three years.
An arbitral panel will be composed of three arbitrators: one selected by each party, who will jointly select a third arbitrator. The arbitrators must be experienced in international law, trade, investment or dispute resolution and must be independent of the contracting governments and disputing parties. Once a decision is rendered, it will be made publicly available, subject to the redaction of any confidential information. The arbitral proceedings themselves, however, will only be open to the public if the investor and the state party agree. Under the FIPA, both the Government of China and Government of Canada guarantee the enforcement of an arbitral award in their respective territories.
When a dispute arises between the Government of Canada and Government of China as to the interpretation or application of the FIPA, both states must engage in a consult with one another in an attempt to resolve such a dispute. If this consultation process is insufficient, the FIPA provides for state-to-state arbitration. The decision of the arbitral tribunal is binding. If a party fails to implement the decision of the arbitral tribunal then the unsuccessful state party must compensate the successful state party with a sum equal to the value of the arbitration award.
6. How long will this FIPA be in force?
While the FIPA officially remains in force for a period of fifteen years, it may have an effect on investment for a period of thirty years. After the expiration of fifteen years, the Government of Canada or the Government of China may at any time terminate the FIPA by giving the other party one year’s written notice. For investments made before the date of termination becomes effective, the provisions of the FIPA remain in force for an additional fifteen years.
7. How does the Canada-China FIPA affect CNOOC’s bid for Nexen?
The treaty does not change Canada’s ability to reject deals such as Nexen or on the conditions it can impose for approving them. Canada has reserved the right to review and approve new investments and takeovers under the Investment Canada Act, including those by state-owned enterprises. As is consistent with Canada’s other FIPAs, decisions under the Investment Canada Act are not subject to any dispute settlement claims by aggrieved prospective investors.
8. How does this deal compare to NAFTA?
A FIPA differs significantly from a free trade agreement. While a free trade agreement such as NAFTA eliminates barriers to trade in goods and services, a FIPA is a bilateral agreement between states with the intent to merely protect and promote investment by assigning legally binding rights to both parties in foreign investment matters.
Disclaimer: This blog is intended to provide information to members of the CCBC on recent developments in Canada-China relations. Articles and posts on this blog are not legal opinions and readers should not act on the basis of these articles without first consulting a lawyer who will provide analysis and advice on a specific matter.
About the Author:
Caroline Klinkhoff
Caroline is in her fourth year of completing a joint civil and common law degree (B.C.L./LL.B.) at McGill University, while also working as a student at the law firm Stikeman Elliott LLP in Montreal.
Caroline worked in the Shanghai office of the international law firm Bonnard Lawson in 2010 and also completed semesters at Beijing University in 2008 and Fudan University in 2007. Caroline completed her undergraduate degree in Political Studies at Queen’s University in 2009. She is currently an Executive on the Quebec-Asia Law and Business Association, as well as a member of the CCBC Youth Committee.