Regional and Bilateral Initiatives
Canada's Foreign Investment Protection and Promotion Agreements
(FIPAs) Negotiating Programme
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 those in transition are increasingly important
destinations for investments made by 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, investment has a
positive impact on development. 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.
Canada’s policy is to promote and protect investment through
a transparent rules-based system in a manner that reaffirms the
right of Governments to regulate in the public interest, including
developmental interests. As an instrument that supports the rule
of law and fosters fairness, transparency, non-discrimination and
accountability, a FIPA encourages good governance. A FIPA also promotes
sustainable development principles by ensuring that Governments
will not lower health, safety or environmental measures in order
to attract investment. Moreover, Governments may condition advantages
or incentives offered to a foreign investor on requirements, such
as, locating production in certain areas, providing services, training
or employing workers, constructing or expanding certain facilities,
or carrying out research and development in the territory of the
host country.
Canada’s FIPA negotiating programme is complemented by promotion
of corporate social responsibility principles and standards. Through
corporate social responsibility initiatives, Canadian investors
abroad are contributing to broader developmental objectives, including
social and environmental dimensions, of the communities in which
they operate.
Canada’s FIPA model
A new FIPA model to reflect lessons learned from its experience
with the implementation and operation of the investment chapter
of NAFTA (North American Free Trade Agreement) was approved by Cabinet
in the fall of 2003. It provides for a high standard of investment
protection and incorporates several key principles: treatment that
is non-discriminatory and that meets a minimum standard; protection
against expropriation without compensation and restraints on the
transfer of funds; transparency of measures affecting investment;
and dispute settlement procedures. The new model serves as a template
for Canada in discussions with investment partners on bilateral
investment rules. As a template, the provisions contained therein
remain subject to negotiation and further refinement by negotiating
parties. Thus, although all FIPAs can be expected to follow this
approach, it is highly unlikely that any two agreements will be
identical.
Canada’s FIPA model consists of 5 Sections and four Annexes
as set out below.
Canada’s FIPA
model (pdf)
Section A - Definitions
Article 1: Definitions
Section B – Substantive Obligations
Article 2: Scope
Article 3: National Treatment
Article 4: Most-Favoured-Nation Treatment (MFN)
Article 5: Minimum Standard of Treatment
Article 6: Senior Management, Boards of Directors and
Entry of Personnel
Article 7: Performance Requirements
Article 8: Monopolies and State Enterprises
Article 9: Reservations and Exceptions
Article 10: General Exceptions
Article 11: Health, Safety and Environmental Measures
Article 12: Compensation for Losses
Article 13: Expropriation
Article 14: Transfer of Funds
Article 15: Subrogation
Article 16: Taxation Measures
Article 17: Prudential Measures
Article 18: Denial of Benefits
Article 19: Transparency
Annex B.13(1): Expropriation
Section C - Settlement of Disputes between an Investor
and the Host Party
Section D – State-to-State Dispute Settlement
Procedures
Section E – Final Provisions
Article 49: Consultations
Article 50: Extent of Obligations
Article 51: Commission
Article 52: Application and Entry into Force
ANNEXES
ANNEX I: Reservations for Existing Measures
and Liberalization Commitments
ANNEX II: Reservations for Future Measures
ANNEX III: Exceptions from Most-Favoured-Nation
Treatment
ANNEX IV: Exclusions from Dispute Settlement
Section A - Definitions
Article 1: Definitions
The definition section sets out the scope of the Agreement by defining
and delineating the operative terms in the FIPA, such as, investment,
measures, and investors to whom the rights and obligations
of the FIPA apply. In order to enhance the clarity of the substantive
obligations, the open asset-based definition of investment in Canada’s
previous model was replaced by a comprehensive, but finite, definition
of investment in the updated FIPA model.
Section B – Substantive Obligations
Article 2: Scope
The scope article states that the Agreement applies to measures
adopted or maintained by a Party insofar as they affect investors
of the other Party and the investments of such investors in the
territory of the host Party.
Article 3: National Treatment
The National Treatment standard requires a Party to treat an investment
of an investor of the other 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.
The phrase "in like circumstances" clarifies the comparative
standard to assess whether or not a Party's national is being discriminated
against.
Article 4: Most-Favoured-Nation Treatment
(MFN)
MFN treatment means that one Party must give to the investors of
the other 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, subject to
any agreed MFN limitations and exceptions, 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 FIPA model differentiates between measures affecting potential
investment entering the territory of a 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 when investors are making a commitment to invest
and after they have established operations in the host country.
A number of exceptions to MFN and National Treatment are listed
in the Annexes to the 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.
Article 5: Minimum Standard of 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.
The model incorporates the clarification of the Minimum Standard
of Treatment obligation in accordance with the NAFTA Free Trade
Commission’s FTC) Notes of Interpretation issued in July 2001.
The clarification states that these concepts must be interpreted
according to the customary international law minimum standard of
treatment of aliens. Moreover, the fact that a Tribunal may find
that a Party has breached another obligation of the FIPA, such as
National Treatment, does not mean that that constitutes a violation
of the minimum standard of treatment obligation. These are two separate
obligations. The FTC's clarification may be accessed at the following
address: http://www.dfait-maeci.gc.ca/tna-nac/NAFTA-Interpr-en.asp
Article 6: Senior Management, Boards of
Directors and Entry of Personnel
Although not mentioned explicitly in most agreements signed by
other countries, provisions on Senior Management and Boards of Directors
are often considered to be part of the National Treatment and MFN
obligations. This provision ensures that investors have the right
to employ senior management and specialists of their choice, regardless
of nationality, and obliges the Parties to admit them temporarily
in accordance with their laws on entry of aliens. It allows a 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.
Article 7: Performance Requirements
Performance requirements are sometimes referred to as “trade-related
investment measures” because they aim to ensure that the host
country does not impose conditions on investment that would be inconsistent
with the protection for goods, services and intellectual property
provided in trade agreements. Performance requirement provisions
restrict Parties from imposing or enforcing requirements, such as
local content requirements, minimum levels of exports, links between
imports and exports or foreign exchange inflows, and obligatory
technology transfers. They also prohibit using specified performance
requirements as conditions attached to advantages, such as subsidies
and tax incentives. Exception is made for subsidies tied to such
requirements as locating production in a certain locale, training
or employing workers, or performing research and development. Exception
is also made for measures that require the use of specific technology
to meet generally applicable health, safety or environmental requirements.
Article 8: Monopolies and State Enterprises
While the Parties are permitted to designate and maintain monopolies
and state enterprises, the Agreement places disciplines on a Party
with respect to the activities of such entities. Under these disciplines,
each Party must ensure that where such entities exercise regulatory,
administrative or other governmental authority delegated to them,
these entities do not act in a manner that is inconsistent with
the Party’s obligations under the Agreement.
Article 9: Reservations and Exceptions
Consistent with the NAFTA, the FIPA model requires Parties to
list existing exceptions to the substantive obligations set out
in the FIPA. The listing of non-conforming measures allows Parties
to exchange information relating to specific reservations from the
obligations of the agreement. Such listing provides greater regulatory
transparency to investors. This requirement does not go beyond Canada’s
current practice as exemplified by the NAFTA (e.g., it
does not require the listing of provincial or other sub-national
non-conforming measures).
Article 10: General Exceptions
General exceptions to the disciplines of the Agreement are included
in order to meet several important policy goals: the protection
of human, animal or plant life or health, as well as the conservation
of living or non-living exhaustible resources; to ensure that Parties
may adopt or maintain reasonable measures for prudential purposes;
to guarantee a Party’s ability to protect information related
to, or to take measures necessary to protect, its essential security
interests; and to exclude cultural industries from the provisions
of the Agreement.
The Agreement will also acknowledge that measures taken in conformity
with decisions of the WTO to suspend certain obligations in WTO
agreements will also apply to the FIPA.
Article 11: Health, Safety and Environmental
Measures
The FIPA model incorporates the language of NAFTA Article 1114,
which states that Parties recognise that it is inappropriate to
encourage investment by relaxing domestic health, safety or environmental
measures. A party may request consultations if it considers that
the other Party has offered such encouragement.
This provision is complemented by the general exception that permits
a Party to take measures necessary to protect human, animal or plant
life or health, the environment and safety, or measures primarily
aimed at the conservation of exhaustible natural resources, provided
that these measures are not applied in an arbitrary or unjustifiable
manner and are not disguised restrictions on trade or investment.
Article 12: Compensation for Losses
The better of MFN or National Treatment standard applies to the
compensation for losses of a Party's investments due to armed conflict,
civil strife or a natural disaster. As noted earlier, the MFN and
National Treatment standards only guarantee a relative standard
of treatment; this provision does not, therefore, oblige a Party
to compensate. In short, if a 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 Party.
Article 13: Expropriation
The expropriation provision does not prohibit a Party from expropriating
an investor's property or investment, but it clarifies the rules
governing direct and indirect expropriation by stipulating the following
conditions: expropriations must be for a public purpose and undertaken
in accordance with due process of law, in a non-discriminatory manner,
and against prompt, adequate and effective compensation.
The updated FIPA model incorporates a clarification of indirect
expropriation which provides that, except in rare circumstances,
non-discriminatory measures designed and applied to protect legitimate
public welfare objectives, such as health, safety and the environment,
do not constitute indirect expropriation and are not subject, therefore,
to any compensation requirements. (See Annex B.13(1): Expropriation)
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 "commercially reasonable rate",
which offers better protection to an investor than a requirement
merely to pay interest.
Article 14: Transfer of Funds
The general rule on capital transfers guarantees the investors
of each Party the right to unrestricted transfer, without delay,
of investments and returns. Transfers may, however, be restricted
in certain circumstances. Most importantly, Parties have the right
to apply their laws regarding, for example, bankruptcy, taxation,
securities, criminal or penal offences and reports of transfers
of currency. Additionally, neither Party can force its investors
to repatriate returns from an investment in the territory of the
other Party. Finally, a 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.
Article 15: 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). Subrogation does not
remove any defences that the host country may have against an investor’s
claims.
Article 16: Taxation Measures
Except where expressly referred to, the FIPA does not cover taxation
measures. Moreover, the Agreement does not affect rights and obligations
arising under bilateral tax treaties. Taxation measures are subject
to Performance Requirements obligations tied to advantages or incentives.
Moreover, taxation measures are subject to the Expropriation provisions
of the FIPA unless the competent tax authorities of the two Parties
agree that the measures are not expropriatory.
Article 17: Prudential Measures
Articles 10(2) (General Exceptions) and 14(6) (Transfer of Funds)
of the FIPA permit a Party to take reasonable measures for prudential
reasons to ensure the integrity of the Party’s financial system
or the consumers of financial services. Where a Party invokes these
Articles as a defence against an investor-state claim by an investor
of the other Party, this provision permits the defending Party to
request a written report by the Parties on whether these Articles
are indeed a valid defence against the claim of the investor.
Article 18: Denial of Benefits
This provision allows a Party to deny the benefits of the Agreement
to investors of the other Party in two distinct sets of circumstances:
1) where the investment is owned by an investor of a non-Party against
whom the Party has taken measures that prohibit transactions with
that non-Party and investors of that non-Party; and 2) where the
investment is owned or controlled by an investor of a non-Party
and where the investor has no substantial business activities in
the territory of the other Party.
Article 19: Transparency
A key factor in engendering a stable investment climate and attracting
high quality long-term investment is the Parties’ commitment
to transparency in making their investment rules and regulations
readily available and accessible to investors, be they domestic
or foreign. This provision ensures that, to the extent possible,
Parties will publish or otherwise make available their laws, regulations,
procedures and administrative rulings of general application respecting
the matters covered by the FIPA. Parties also undertake to provide
for an opportunity for interested persons to comment on proposed
measures and to exchange information, upon request, on measures
that may have an impact on the investments of investors of the other
Party.
Annex B.13(1): Expropriation
(See the explanation provided under Article 13 (Expropriation).)
Section C - Settlement of Disputes
between an Investor and the Host Party
In the event that an investor feels it has not been afforded these
protections, it can seek redress before an arbitral tribunal, established
under international rules to determine if there has been a breach
and if there are monetary damages owing to the investor.
For disputes arising between an investor and a host 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 involving claims for damages.
The FIPA model promotes transparency in the dispute settlement
process by providing that all documents submitted to or issued by
the Tribunal, including transcripts of hearings, will be promptly
made available to the public subject to redaction for confidential
business, third party information, and otherwise privileged information.
In addition, the transparency provisions of the updated FIPA model
guarantee Canada’s prerogative to share confidential documents
with sub-national governments.
The FIPA model also provides for all hearings in arbitrations under
the FIPA to be open to the public, subject to the protection of
confidential business, third party information, and otherwise privileged
information.
Clear provision is made for ensuring consistency with the requirements
of domestic legislation relating to such issues as the status of
Cabinet confidences, the maintenance of national archives and access
to information.
One of the most significant improvements in the FIPA model is the
Institutionalisation of the possibility for non-disputing individuals
or organisations to seek leave from the Tribunal to make their views
known on the matters at issue in the arbitration. Guidelines for
the acceptance of such written “amicus curiae”
submissions by a Tribunal have been established, similar to those
procedures under domestic law, including a required assessment of
the proposed submission’s relevance and assistance in resolving
the dispute. These provisions based on the NAFTA Free Trade Commission
declaration issued in October 2003. This statement may be accessed
on the DFAIT website.
With a view to improving the efficiency of the dispute settlement
procedures, the following innovations have been added:
-
standardized waiver forms to ensure that unconditional waivers
from continuing litigation in other fora are filed before pursuing
international arbitration;
-
setting of reasonable time lines for submissions and the setting
of tribunal members’ fees and expenses to expedite the
arbitration process and make it more financially predictable;
-
formalisation of the stages of arbitration, including an admissibility
and jurisdictional phase requiring that the documents initiating
a claim be sufficiently clear and detailed. The Tribunal will
be required to dismiss summarily claims that do not meet these
standards;
-
agreement to adopt of a Code of Conduct for arbitration panels
setting out, in general terms, ethical obligations for members
of the Tribunal.
Section D – State-to-State Dispute
Settlement Procedures
This provision provides for consultations and, where consultations
prove insufficient to resolve a dispute, for State-to-State dispute
settlement procedures.
Section E – Final Provisions
Article 49: Consultations
The consultations provision allows the Parties to request consultations
on any actual or proposed measure or any other matter that might
affect the operation of the FIPA, without the implicit threat of
subsequent State-to-State dispute settlement proceedings.
Article 50: Extent of Obligations
This provision commits the Parties to respect their obligations
under the FIPA throughout their respective territories, including
by sub-national governments, subject to the reservations and exceptions
set out in the Agreement.
Article 51: Commission
This provision provides for the establishment of a Commission with
the powers, inter alia, to supervise the implementation
of the Agreement, issue binding interpretations and clarifications
on the provisions of the Agreement, and adopt a Code for Conduct
for arbitrators. The provision also states that the Commission will
establish its own rules and procedures.
Article 52: Application and Entry into
Force
This provision requires each 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 Parties. For
investments made prior to the notification of termination, the provisions
of the Agreement remain in force for 15 years.
ANNEXES
ANNEX I: Reservations for Existing
Measures and Liberalization Commitments
Schedule of Canada……
Schedule of the other Party……
As in the NAFTA, Annex I allows Parties to list existing non-conforming
measures that they wish to retain and to which one or more of the
following substantive obligations would not apply: National Treatment,
Most-Favoured-Nation Treatment, Senior Management & Boards of
Directors and Performance Requirements.
ANNEX II: Reservations for Future
Measures
Schedule of Canada……
Schedule of the other Party……
Annex II sets out sectors or activities to which the National Treatment,
Most-Favoured-Nation Treatment, Senior Management & Boards of
Directors and Performance Requirements obligations would not apply,
both for existing non-conforming measures and for possible new or
more restrictive measures.
ANNEX III: Exceptions from Most-Favoured-Nation
Treatment
Annex III sets out exceptions to Most-Favoured-Nation Treatment,
including all existing or future free trade agreements (e.g.,
the NAFTA or the WTO General Agreement on Trade in Services - GATS),
as well as existing and future bilateral agreements in sectors of
the economy such as aviation or fisheries.
ANNEX IV: Exclusions from Dispute
Settlement
Annex IV sets out areas that are not subject to dispute settlement,
either at the State-to-State level or the Investor-State level.
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