Canada Ratifies World Bank’s Treaty on Investment Disputes

On December 1, 2013, Canada became the 150^th country to join the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (“ICSID Convention”). Canada’s ratification of the Convention will reduce the risks to Canadian companies investing abroad and promote greater stability and predictability for their investments.

Canadian investors abroad will have access to impartial binding arbitration through the International Centre for Settlement of Investment Disputes (ICSID), a part of the World Bank Group, to resolve their investment claims against foreign host countries. ICSID is the leading international institution for investor-state disputes.

GROWTH OF INVESTMENT PROTECTION TREATIES.  Prior to the advent of bilateral and multilateral treaties that give foreign investors standing to bring claims against the host state of their investment if they are expropriated or otherwise discriminated against, foreign investors had to rely on their home state to take up their cause with the host state.

As foreign investment became increasing important to the global economy, and in particular to developing countries, this approach was seen as neither predictable nor efficient.  From the late 1950s, countries began negotiating treaties that provide for direct claims by investors against host states. The dispute resolution mechanism chosen in the treaties is international arbitration.

ICSID CONVENTION.  The ICSID Convention was developed in the 1960s through the World Bank to de-politicize the resolution of foreign investment disputes. The Convention, which came into force in 1966, enables investment claims to be brought in arbitration that is largely independent of state courts. Investment claims arbitrated through other arbitral institutions or under ad hoc rules are subject to greater recourse to state courts.

With the proliferation of investment treaties – now in excess of 2,500 – and the growth of claims against both developing and developed countries, ICSID has become the primary method of arbitrating claims.

As its preamble states, the ICSID Convention focuses on “the need for international cooperation for economic development, and the role of private international investment” and “the possibility that from time to time disputes may arise in connection with such investment between” a foreign investor and the state in which the foreign investor has invested.

The Convention provides a system for investor-state dispute settlement by offering standard clauses, detailed procedural rules and institutional support.  The Convention states that “[t]he jurisdiction of the Centre shall extend to any legal dispute arising directly out of an investment, between a Contracting State (or any constituent subdivision or agency of a Contracting State designated to the Centre by that State) and a national of another Contracting State, which the parties to the dispute consent in writing to submit to the Centre.”

The key benefit of ICSID is that each member state is committed to recognize as binding and enforce an ICSID arbitral award as if it were a final judgment of that state’s courts. ICSID awards are not open to appeal and are subject to limited review only by a second ICSID tribunal, known as an ICSID annulment committee, rather than by any state’s courts.

WHAT IT MEANS FOR CANADIAN FOREIGN INVESTORS.  Canada’s membership complements most of Canada’s international investment treaties. Canada currently has 24 bilateral investment treaties – known as Foreign Investment Promotion and Protection Agreements (“FIPAs”) – and five Free Trade Agreements, most notably Chapter Eleven of the North American Free Trade Agreement (“NAFTA”), that provide substantive investor protections and make available arbitration for investors’ claims against host states.

Canada’s FIPAs provide standards of protection for Canadian investors in treaty partner countries. They provide mechanisms to settle investment disputes including the Arbitration Rules of the United Nations Commission on International Trade Law (“UNCITRAL”) and ICSID arbitration.  However, absent Canada’s membership in ICSID, Canadian investors could only utilize ICSID arbitration in a limited way, using the ICSID Additional Facility Rules. These Rules apply where only one of the parties is a Convention member or a member state’s national and have a significant disadvantage: the award is subject to court review at the seat of arbitration.

WHAT TOOK SO LONG?  Canada’s ratification of ICSID has been a long time coming, to much puzzlement inside and outside Canada.

While Canada and Canadian companies stood to benefit, and despite calls for Canada to join (including by the Canadian Bar Association and Canadian Chamber of Commerce), Canada waited 40 years to sign the Convention in 2006, and another seven years before ratifying the Convention.

The delay has largely been attributed to a troubling inability of Canada to ‘get its act together’ in its self-interest. Many attribute the delay in large part to Canada’s constitutional regime, particularly how powers are divided and the lack of coordination between the two levels of government on issues of fundamental common interest. Second, many saw an inexplicable lack of political will to sign and then to ratify the Convention and a puzzling absence of a strong or consistent voice from Canadian companies that would benefit. Happily, our two levels of government now seem to be functioning more effectively together on trade and investment matters.

TAKING ADVANTAGE OF ICSID. Canada’s ratification of the ICSID Convention –  at a time when Canada is expanding its number of trade and investment treaties, and more Canadian companies of all sizes, from a wide range of industries, increasingly are investing abroad – makes it increasingly important for Canadian companies to recognize the importance of investment protections and effective international dispute resolution mechanisms. Inherent in the risk management roles of directors, officers and corporate counsel is ensuring that their companies obtain specialized advice on ways to reduce risk by taking advantage of investment treaty protections – and by utilizing international arbitration effectively for commercial disputes.

Barry Leon is a Partner and Head of the firm’s International Arbitration Group. He can be reached at 613.566.2843 or [email protected].

John Siwiec is an Association in the firm’s International Arbitration Group. He can be reached at 613.566.2843 or [email protected].