On May 12, 2021, Canada published its new Model Foreign Investment Promotion and Protection Agreement (the “New Model BIT”), revising the 2004 Model Agreement for the Promotion and Protection of Investments (the “2004 Model BIT”).
The New Model BIT modernizes Canada’s framework and brings a few interesting innovations in the Bilateral Investment Treaty (“BIT”) world. This post will briefly address some of the novel provisions of the New Model BIT, such as: (i) the narrower definitions of “investment” and “investor”; (ii) key changes to the substantive protections to investors; (iii) the promotion of “responsible business conduct”; and (iv) innovations in relation to investor-state dispute settlement (“ISDS“) mechanisms.
Definitions of “Investment” and “Investor”
The New Model BIT narrows the definition of “investment”, when compared to the definition that was contained in the 2004 Model BIT, by adding the criteria that an “investment” must involve “the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.” Additionally, the New Model BIT expressly provides that the following are not an “investment”: (i) a claim to money that arises solely from a commercial contract for the sale of a good or service by a national or enterprise in the territory of a Party to an enterprise in the territory of the other Party, or the extension of credit in connection with a commercial transaction, such as trade financing; (ii) an order or judgment in a judicial or administrative action, or (iii) any other claim to money, that does not involve the kinds of interests set out in the New Model BIT. Any covered investment must also be “made in accordance with the applicable domestic law of the Party at the time the investment is made.”
The New Model BIT defines the “investor” as “a Party, or a national or an enterprise of a Party, that seeks to make, is making or has made an investment.” An “enterprise of a Party” qualifies as an investor if it is constituted or organised under the law of that Party and either has “substantial business activities” in that Party’s territory, or is owned or controlled by a national or enterprise of that Party. Furthermore, the New Model BIT imposes restrictions on dual nationals by specifying that they will be deemed exclusively as nationals of their “dominant and effective nationality.”
Changes to Investors’ Substantive Protections
National treatment and most-favoured-nation provisions
The New Model BIT prohibits nationality-based discrimination by preserving national treatment (“NT”) and most-favoured-nation (“MFN”) clauses. The NT and MFN clauses specify that a “difference in treatment accorded to an investor or covered investment and a [Party’s own investors or investments of its own investors / a non-Party’s investors or investments of a non-Party’s investors] does not, in and of itself, establish discrimination based on nationality.” Whether or not the treatment accorded to an investor of the other Party is less favourable than the treatment accorded to other investors “in like circumstances” for the purpose of the NT and MFN protections will depend “on the totality of the circumstances, including whether the relevant treatment distinguishes between investors or investments on the basis of legitimate public policy objectives.”
With regards to the MFN protection, the New Model BIT states that the MFN clause cannot be invoked in relation to the resolution of investor-state disputes provided for in other international investment treaties and other trade agreements. Equally, it provides that “substantive obligations in other international investment treaties and other trade agreements do not in themselves constitute “treatment”, and thus cannot give rise to a breach” of the MFN protection.
Minimum standard of treatment (“MST“) and the absence of fair and equitable treatment (“FET”) protection
The New Model BIT extricates the explicit obligation to give foreign investors “fair and equitable treatment” that was contained in the 2004 Model BIT. It also provides that the obligation to accord minimum standard treatment “in accordance with the customary international law” will be breached according to the terms of the New Model BIT only if a measure constitutes: (a) denial of justice; (b) fundamental breach of due process; (c) manifest arbitrariness; (d) targeted discrimination on manifestly wrongful grounds such as gender, race or religious beliefs; (e) abusive treatment of investors; or (f) a failure to provide full protection and security. A measure is “manifestly arbitrary” when it is evident that the measure is not rationally connected to a legitimate policy objective, such as when a measure is based on prejudice or bias rather than on reason or fact. The New Model BIT further provides that “full protection and security” refers only to the physical security of an investor and their covered investment.
Although the New Model BIT maintains the criteria of the 2004 Model BIT for direct and indirect expropriation generally, for indirect expropriation purposes, it clarifies that a non-discriminatory measure taken in good faith to protect legitimate public welfare objectives will not constitute indirect expropriation, “even if it has an effect equivalent to direct expropriation.”
Responsible Business Conduct
The New Model BIT promotes responsible business conduct, expressly mentioning that investors should aim to observe the OECD Guidelines for Multinational Enterprises and the United Nations Guiding Principles on Business and Human Rights, amongst other guidelines and principles of responsible business conduct. Article 16 of the New Model BIT also provides that investors and their investments must comply with domestic laws and regulations of the host state, including “laws and regulations to human rights, the rights of Indigenous peoples, gender equality, environmental protections and labour.” With regards to dispute resolution mechanisms (see section below), the New Model BIT also encourages the Parties “to consider greater diversity in arbitrator appointments, including through the appointment of women.”
The New Model BIT further affirms the Parties’ right to regulate based on “legitimate policy objectives, such as with respect to the protection of the environment and addressing climate change; social or consumer protection; or the promotion and protection of health, safety, rights of Indigenous peoples, gender equality, and cultural diversity.”
Investor-State Dispute Settlement Innovations
The New Model BIT empowers the investor submit a claim to settle a dispute under either the ICSID Convention (provided that both Parties are parties to the ICSID Convention), the ICSID Additional Facility Rules (if only one Party is a party to the ICSID Convention), the UNCITRAL Arbitration Rules or “any other rules on agreement of the disputing parties,” while requiring the investor to first “seek to resolve the dispute through consultations, which may include the use of non-binding, third party procedures, such as good offices, conciliation or mediation.”
Prior to the commencement of arbitration, the investor is required to submit a written request for consultations, to be held in person, through conference call or virtually. If the investor has not started arbitration proceedings within one year of the delivery of the request for consultations, the investor is deemed to have withdrawn its request. Investors are also empowered to propose sole-member tribunals, and the New Model BIT provides that the State “may give sympathetic consideration to that request, in particular if the investor is a micro, small, or medium-sized enterprise or the compensation or damages claimed are relatively low.” The New Model BIT provides that, without prejudice to its authority to address other questions as a preliminary objection, a tribunal shall address and decide as a preliminary question an objection by the respondent Party (the State) that, “as a matter of law, a claim submitted is not a claim for which an award in favour of the investor may be made under this Agreement, including that a dispute is not within the competence of the Tribunal, or that a claim is manifestly without legal merit.”
The New Model BIT also encourages recourse to mediation by providing that “[r]ecourse to mediation is without prejudice to the legal position or rights of the disputing parties” and that if the disputing Parties agree to have recourse to mediation “all timelines pursuant to an arbitration […] are suspended […] and shall resume on the date on which either disputing party decides to terminate the mediation.”
The UNCITRAL Rules on Transparency in Treaty-Based Investor-State Arbitration (“UNCITRAL Transparency Rules“) ,as modified by the New Model BIT, will apply both in cases of dispute settlement proceedings and non-disputing party participation under the New Model BIT. Articles 36 and 37 of the New Model BIT include the modifications to the UNCITRAL Transparency Rules. They outline requirements relating to which documents are to be made publicly available, the redaction of confidential or protected information and the participation of a “Non-Disputing Party.”
Expedited process for “small claims”
Perhaps one of its most innovative features, the New Model BIT provides that disputes under CAD$ 10 million may be eligible for expedited investor-state arbitration. If all Parties to the dispute agree to using the expedited proceedings option, a sole arbitrator will be jointly appointed. The expedited procedure envisaged in the New Model BIT contain shorter deadlines for written submissions and the length of the hearing, which the Parties may also agree to hold virtually or through conference call. It also provides for documents-only arbitration and calls for limited document production.
The award under the expedited process must be issued within 180 days of the last day of hearing. Nonetheless, at any stage of the expedited process, any of the Parties may request to revert to the “normal” investor-state arbitration process. In that case, the sole arbitrator automatically becomes the president of the new tribunal.
Security for costs and third-party funding
Under the New Model BIT, a tribunal may order security for costs “if there are reasonable grounds to believe that there is a risk the disputing party may not be able to honour a potential costs award against it.” In so doing, the tribunal “may take into account evidence of third party funding,” and the claimant bears a continuing obligation to disclose the existence of a third-party funding arrangement and the funder’s name and address. The tribunal is also empowered to suspend or terminate the proceedings if security is not posted as directed.
New provisions on damages and interest
The New Model BIT prohibits hypothetical or speculative damages, establishing that monetary damages “shall be determined with reasonable certainty.” Pre- and post-award interest may be awarded at a reasonable rate, but the tribunal may not award punitive damages. In addition to monetary damages or restitution of property, the costs of the arbitration “shall in principle be borne by the unsuccessful disputing party or parties.”
Code of conduct for arbitrators
The New Model BIT contains a Code of Conduct for Arbitrators and specifies that it shall be interpreted in a manner consistent with other internationally recognized standards or guidelines regarding conflicts of interest such as the IBA Guidelines on Conflict of Interests in International Arbitration. Under the New Model BIT, the arbitrators shall disclose, among other things:
- “any public advocacy or legal or other representation concerning an issue in dispute in the Tribunal proceeding or involving the same investment.”
- “the existence of any interest, relationship, or matter that is likely to affect the candidate’s or arbitrator’s independence or impartiality, or that might reasonably create an appearance of impropriety or an apprehension of bias.”
The arbitrators must also “refrain, for the duration of the proceeding, from acting as counsel or party-appointed expert or witness in any pending or new investment dispute under this Agreement or any other international investment treaty.” The Code of Conduct for Arbitrators extends to arbitrators’ assistants and staff, and states that an arbitrator “shall take all reasonable steps to ensure that his or her assistants and staff comply” with relevant portions of the Code.
Canada’s New Model BIT features multiple technical changes to modernize ISDS mechanisms. It focuses on strengthening alternatives to resolve an investment dispute without having recourse to arbitration. For instance, the New Model BIT requires mandatory consultations prior to submitting an arbitration claim and specifies that recourse to mediation will suspend the ISDS process to allow the disputing Parties to engage without being pressed by competing ISDS timelines. It also contains enhanced transparency provisions and aims to make ISDS more inclusive by encouraging the disputing Parties to consider greater diversity in arbitrator appointments, including through the appointment of women. Its Arbitrator Code of Conduct, designed to prevent conflicts of interest, and its consent-based expedited arbitration mechanism for claims under CAD$ 10 million, designed to reduce the cost of ISDS by simplifying and shortening the arbitration process, are noteworthy enhancements to Canada’s BIT framework.
For more information, please contact Christian Leathley, Partner, Emily Westphalen, Associate, Louis Thivierge, Associate, or your usual Herbert Smith Freehills contact.