Where a Canadian investor encounters discriminatory or unfair treatment at the hands of a foreign government or government entity, it may be able to obtain compensation through an investor-state arbitration under the North American Free Trade Agreement, a foreign investment protection agreement or a bilateral investment treaty. Making such claims to an independent international arbitral tribunal is often more productive than seeking recourse in the courts of the host state.
In the past decade, investors have secured substantial awards of damages, and reached advantageous settlements, with host states. For example:
- Kazakhstan was recently ordered to pay $125 million for the expropriation of an investment in a telecom company;
- An investor recently settled with Ecuador for $69 million after it imposed a windfall petroleum revenue tax that made the investment unprofitable;
- An investor was awarded $465 million for the Czech Republic’s breach of a bilateral investment treaty; and
- Numerous investors have been awarded damages in the hundreds of millions of dollars from Argentina for the expropriatory effects of measures imposed during its 2001-2002 financial crisis.
Investor-state arbitrations are managed by the International Centre for the Settlement of Investment Disputes (“ICSID”) in Washington D.C. or an ad hoc arbitral tribunal under the United Nations Commission on International Trade Law (“UNCITRAL”) Arbitration Rules or other arbitration rules. Usually two of the three members of the arbitral tribunal, including the presiding arbitrator, are non-nationals of the host state. The investor is thus assured a level of impartiality that may not be available in the host state’s legal system.
In a changing global economy, where access to foreign natural resources and the development of foreign infrastructure call for substantial commitments of private capital, investment treaty protection is becoming increasingly important. Whenever there is concern about political, social or financial instability in the host state, the availability of investment treaty protection and, when appropriate, political risk insurance, are crucial considerations for prospective investors and their financiers. Recent examples of such concerns can be seen in the challenges faced by foreign investors in Venezuela, where sociopolitical change has resulted in interference with foreign-owned businesses, including outright nationalization. Similar problems have arisen elsewhere in Latin America, and in Africa, the Middle East and Eastern Europe.
The availability of investment treaty protection should be considered by senior executives, portfolio managers and corporate counsel for Canadian businesses and lenders investing abroad in:
- Natural resource exploitation rights;
- Concessions for the provision of public services;
- Contracts for the design, construction or operation of public works;
- Manufacturing and service industries;
- Banking, insurance and other financial services; and
- Loans and other forms of financing investment.
Structuring Foreign Investments for Maximum Investment Treat y Covera ge
Canada has 21 foreign investment protection agreements in force, and nine more under negotiation. Investors can often structure their investments to take advantage of such treaties, bearing in mind their specific social, political or economic concerns. Even where there is no agreement between Canada and the host state, it may still be possible to obtain protection by investing through a third state, such as a protectorate of the United Kingdom or the Netherlands, to take advantage of bilateral investment treaties between those countries and the host state.
Invoking Treat y Rights when Investment Disputes Arise
It is imperative for investors to understand the scope and nature of the remedies available under applicable agreements and treaties, and how they relate to the legal remedies available in the host state, before they enforce their rights. Some treaties allow investors to pursue foreign legal remedies before treaty rights. Others contain a “fork in the road” provision, requiring the investor to choose between investor-state arbitration and litigation in the foreign courts. Still others – such as NAFTA – allow the investor to pursue declaratory relief in the foreign courts while pursuing an investorstate arbitration for damages. Investors must obtain advice from both foreign counsel and counsel experienced in the conduct of investor-state arbitrations to preserve their treaty-based rights.
Property Rights Protected by Investment Treaties
Investment treaties typically contain:
- protection against uncompensated expropriation or measures amounting to expropriation;
- entitlement to “fair and equitable treatment” and “full protection and security” under international law;
- entitlement to “national treatment”;
- “most-favoured nation” treatment in compensation for losses suffered due to war or civil strife; and
- freedom to transfer investment returns.
Some treaties also contain “umbrella clauses” that can bring purely contractual disputes between the state and the investor within their coverage.
The key feature of investment treaties is that their provisions are independent of how an investment dispute may be treated in the courts of the host state. The fact that a measure is lawful under foreign law does not excuse international responsibility, if it contravenes the treaty’s provisions. An expropriation lawful under foreign law may be unlawful under international law. Similarly, a legislative change in a foreign state’s tax regime may breach an investment treaty, or a termination of concession rights upheld by the foreign courts may still be in breach of a treaty.
Direct Access to International Arbitration
Direct access to international arbitration is an extremely important development in foreign investment protection. Previously, under the “diplomatic protection regime”, an investor had to exhaust all foreign remedies before its claim could be taken up by its own state. This could mean years of fruitless foreign litigation. After that, the investor’s home state could espouse its claim, if it had a forum in which to do so. But doing so was entirely discretionary. The home state could choose not to take up the claim, could settle it and could discontinue it at any time.
Most treaties dispense with “diplomatic protection.” In almost all cases, an investor can directly enforce the treaty, without exhausting its foreign remedies. The contracting states generally agree in the treaties to submit any disputes that may arise to arbitration. There is no requirement that a contract with the host state contain an agreement to arbitrate.
Treaties vary in how they define standing to make claims under them, but all are concerned with a link of nationality between the investor and one of the states that is a party to the treaty. Most are liberal in terms of how they establish that link. A “national” of a contracting state is generally defined as a natural person holding citizenship or permanent residency, or a legal person, of that state. In the latter case, the ultimate shareholders need not hold the same nationality. So, even if Canada does not have a treaty with the host state, a Canadian investor may be able to obtain investment treaty protection by operating through a subsidiary incorporated in a country which does.
Investment treaties vary substantially in terms of their applicable law. NAFTA, for example, contains a “pure international law” governing law clause. Under such a provision it is not a defence that the measure complained of was lawful under the host state’s law. It will be tested against the treaty’s standards.
The NAFTA, and most foreign investment protection agreements and bilateral investment treaties available to Canadian investors, offer a choice of three different sets of arbitral rules: the ICSID Convention Arbitration Rules, the ICSID (Additional Facility) Arbitration Rules and the UNCITRAL Arbitration Rules.
ICSID Convention arbitration is available if the foreign state is a party to the Convention and the investor is from a state that is a party. Canada has signed but not yet ratified the Convention, so this kind of arbitration is not available to Canadian investors.
ICSID Additional Facility arbitration is available if either the foreign state or the investor’s home state is a party to the Convention. UNCITRAL arbitration does not rely on ICSID membership. It is ad hoc, but can be (and occasionally is) administered by the ICSID by agreement of the disputing parties. So, both the ICSID Additional Facility Rules and the UNCITRAL Arbitration Rules can be used by Canadian investors. The choice of arbitral rules should be considered carefully as there are procedural differences that could be important in the circumstances of a particular case.
Arbitral tribunals are normally established by the investor appointing one arbitrator, the host state appointing another and the parties agreeing on a presiding arbitrator or one being appointed by an appointing authority, such as ICSID. Thus, two of three arbitrators will likely be non-nationals of the host state.
Arbitral tribunals can award monetary damages and legal costs. Awards are widely respected and, in any event, enforceable under international treaties. Tribunals cannot enjoin governmental measures, but can issue “interim measures of protection” to preserve the parties’ rights. Some treaties, such as the NAFTA, permit parties to seek injunctive or other forms of declaratory relief in the courts while the arbitration continues.
Generally, the parties share equally in the costs of the arbitration, subject to any other determination in the award. If the foreign state refuses to appear, the arbitration can proceed if the investor funds it.
Investor-state arbitration is of significant benefit to Canadian investors doing business abroad in today’s turbulent global economy. The growing body of arbitral jurisprudence is making the outcome of such arbitrations much more predictable than a decade ago. What was once a rare form of dispute settlement has entered the mainstream of commercial dispute resolution. Its availability should be a standard part of corporate due diligence when planning international investments.