Canada Modernizes its Model Bilateral Investment Treaty

In May 2021, the Government of Canada announced the introduction of a “modernized and inclusive” model Bilateral Investment Treaty known as the Foreign Investment Promotion and Protection Agreement Model[1] (“Model FIPA”), which will serve as the basis for Canada’s future investment treaty negotiations. Compared with prior iterations, the Model FIPA contains several notable procedural and substantive changes that will be relevant to foreign investors in Canada and parties bringing claims under new investment treaties reflecting these changes.

The amendments mark the first comprehensive revision to Canada’s model FIPA since 2003-2004. They come on the heels of extensive stakeholder consultations and recent debate surrounding the reform of the ISDS system as well as recent Canadian trade-related developments, including experience under the former NAFTA regime, its replacement the United States-Mexico-Canada Agreement (USMCA), which went in effect in July 2020, the Canada-EU Comprehensive Economic and Trade Agreement (“CETA”), the Comprehensive and Progressive Trans-Pacific Partnership (“CPTPP”) and the signing of the Canada-UK Trade Continuity Agreement.

The Model FIPA reflects an evolution in the policy of investment treaties towards the promotion of social responsibility, sustainable development and human rights as an integral element of achieving economic prosperity. In this regard, the Model FIPA contains notable provisions designed to promote responsible business conduct, as well as gender equality and diversity.[2]

Updates to the FIPA model dispute settlement mechanism
Key updates to the dispute settlement mechanism in the Model FIPA include:

• strengthened alternatives to resolve an investment dispute without having recourse to ISDS, such as:
• mandatory consultations prior to submitting a claim;
• enhanced mediation provisions, which suspend the ISDS process and deadlines at any point to allow the disputing parties to meaningfully engage without being pressed by competing ISDS timelines; and
• an extension of time-limits for submitting a claim to arbitration when the claimant is actively pursuing remedies under domestic laws;
• obligations for claimants to disclose third-party funding;
• enhanced transparency provisions;
• the explicit ability of tribunals to appoint their own experts on issues such as the rights of Indigenous peoples, scientific matters and other factual issues;
• an arbitrator code of conduct to prevent conflicts of interest and ensure that they have appropriate qualifications;
• a consent-based expedited arbitration mechanism for claims under $10 million;
• a commitment to consider using a permanent first instance investment tribunal or an appellate mechanism, should it be developed under other institutional arrangements; and
• From a gender equality and diversity perspective, an Article providing that “disputing parties are encouraged to consider greater diversity in arbitrator appointments, including through the appointment of women”.[3]

Clarifications to the Model FIPA substantive investment protections
The new Model FIPA makes notable clarifications to a number of substantive investment protection standards to codify well-established developments in arbitral jurisprudence, and make these standards more consistent with their counterparts in the CETA and CPTPP.

The National Treatment (“NT”), Most-Favoured Nation (“MFN”) and Minimum Standard of Treatment (“MST”) protections in investment treaties govern the standards by which a treaty state must treat an investor. Broadly, NT provides that a party state will treat a foreign investor under the treaty no less favourably than a national investor; MFN provides that a party state will accord a treaty-protected investor treatment no less favourable than it accords investors of a non-party state; and MST sets out certain minimum requirements, or a floor, for treatment of investors.

The Model FIPA revises the NT and MFN provisions to formalize a three-prong rational connection test that has been developed by arbitral tribunals, by requiring tribunals to consider states’ legitimate public policy objectives when applying the “like circumstances” exception.

The ability to use MFN to treaty shop has also been formally removed by codifying the established view that the “treatment” this right protects does not include the rights granted by that country in other bilateral treaties.  

Perhaps the most notable change is found in the MST provision. Rather than rely on the traditional (and less defined) “Fair and Equitable Treatment” approach, the MST now sets out a clearly enumerated and exhaustive list of MST violations which include denial of justice and failure to provide full protection and security (FPS). Notably, the FPS standard has been clarified to include only the physical security of an investment/investor, an issue that has been subject to considerable disagreement among arbitral tribunals.

Consistent with arbitral jurisprudence and recent developments in other investment treaties, the Model FIPA also expands on the definition of “indirect expropriation” compared to its 2004 predecessor in an attempt to more clearly delineate between an expropriation and a legitimate regulatory action. The new Model FIPA does this by providing that the determination of whether measure(s) have the effect of expropriation will require a case-by-case inquiry considering a number of factors, including the economic impact, duration, and character of the measures, and extent to which the measures interfere with distinct, reasonable investment-backed expectations. The Model FIPA specifies that a non-discriminatory measure that was adopted or maintained in good faith to protect legitimate public welfare objectives will not constitute indirect expropriation.

From a gender equality and diversity perspective, the new Model FIPA includes a number of provisions that “aim to help women and other groups benefit more from the agreements, and to ensure that investment protections do not impede policies promoting gender equality”.[4]

The right to regulate to achieve legitimate policy objectives codified in the Model FIPA now includes gender equality. In addition, the “Responsible Business Conduct” provisions reaffirm that investors and their investments shall comply with the domestic laws and regulations of the host State, including laws and regulations on gender equality amongst others, and reaffirms the importance of internationally recognized standards in this respect, such as the OECD Guidelines for Multinational Enterprises. Such specific reference to internationally recognized standards is a novelty in the updated Model FIPA. These provisions apply directly to the contracting states, not investors.

Conclusion  
Canada’s updated FIPA Model brings modernization, codification of important legal standards, and increased harmonization with recent major investment treaties. These provisions will be of interest to investors who may find themselves in a dispute over the treatment of investments under a BIT that adopts these model provisions. Omni Bridgeway’s team of arbitration experts understand the nuances of investment treaties and investor-state arbitration, and frequently work with parties under bilateral investment treaties to structure and manage financial solutions that allow claimants to vindicate their treaty rights through meritorious arbitration claims, as well as subsequent enforcement actions.