Inch by Inch: Canada Moves Toward New Investment Protection Legislation
by Dierk Ullrich

Since Cabaret we know that “Money makes the world go round.” Indeed, Statistics Canada reports that in the fourth quarter of 2007, direct investment by Canadian firms abroad climbed to $508.6 billion, whereas foreign direct investment in Canada rose to $521.1 billion. With royal assent to the Settlement of International Disputes Act (“SIIDA”) on March 14, 2008, Canadians may look forward to an additional and effective layer of protection of their foreign investment. The legislation will implement, at the federal level, the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of other States (“ICSID”). British Columbia and four other jurisdictions have enacted parallel legislation.

ICSID establishes an international forum to resolve disputes between foreign investors and the recipient state of the investment (“host state”) by arbitration. ICSID monetary awards are binding on all member states. Thus, under the SIIDAs, awards will not be “subject to appeal, review, setting aside, or any other remedy.” For host states, the main benefits of ICSID membership are attractiveness for foreign investments, the de-politicization of disputes and increased protection for its nationals investing in other ICSID states. Currently, ICSID has 144 members, which may use its dispute resolution facilities. Although Canada signed ICSID in December 2006, it is the only G-8 state and one of only three OECD states not to ratify it.

To protect Canadian investment abroad, the federal government has concluded 25 “Foreign Investment Promotion and Protection Agreements” or FIPAs, and is negotiating a further nine with countries like China. FIPAs create reciprocal rules, which typically guarantee investors from either state the same treatment as domestic or other foreign investors; establish a minimum standard of treatment; and prohibit expropriation without compensation, or allow repatriation of funds. Certain free-trade agreements concluded by Canada, such as the NAFTA establish similar investment protection regimes. FIPAs and NAFTA provide a choice of fora to resolve investment-related disputes, including ICSID arbitration. However, until Canada ratifies ICSID, its dispute settlement and enforcement mechanisms will not be available to Canadian investors.

Since ICSID does not contain a federalism clause, provincial legislation is needed to implement the treaty across Canada. The federal government has lobbied its provincial counterparts for several years to ensure a uniform application of ICSID. Now, however, there is speculation Canada may move ahead with ratification, without waiting for the hold-out provinces. It has been suggested that Canada may invoke Article 70 of ICSID, which would allow Canada to identify by written notice the territories to which the treaty would not apply. Based on the treaty’s drafting history and its context, commentators have expressed doubt whether this provision would be available for situations other than a state’s overseas territories.

Assuming Canada could ratify ICSID with limited territorial application, the resulting regulatory patchwork would raise significant issues for Canadians planning to invest abroad. For example, if access to ICSID is a substantial factor, B.C., which has enacted the SIIDA, would be an appropriate incorporating jurisdiction, whereas Alberta would not. Although the passage of SIIDA has not attracted much public attention, it is an important development to watch for all involved in international business transactions.

Dierk Ullrich, Fasken Martineau

This article was published in the June 2008 issue of BarTalk. © 2008 The Canadian Bar Association. All rights reserved.