Securing International Law Protections Against Geopolitical Risks For Canadian Outbound Investments Through Investment Treaties

Executive Summary

• Canadian investors are investing significantly outside of Canada, particularly in the Americas and mineral-rich countries.
• Canada has ratified 36 bilateral investment treaties ("BITs") and seven free trade agreements ("FTAs") protecting foreign investments that are in force with other governments.
• BITs protect foreign investors from unlawful actions taken by the host State of the investment (the destination of the outbound FDI).
  1. Unlawful actions include discriminatory treatment; unfair and inequitable treatment of the foreign investor and/or its investments; and expropriation of the investment.
  2. Critically, most BITs allow the foreign investor to arbitrate any disputes arising under the BIT directly against the host State government, taking the dispute out of the local courts that likely would play favorites in favor of the host State government.
• Canadian investors face risks from host States changing laws or failing to uphold agreements, particularly in heavily regulated sectors such as energy and mining.
• Canadian investors have brought arbitration proceedings—often successfully—under investmen
• In addition to the bilateral investment treaties entered into by Canada, Canadian investors currently are able to resort to multilateral instruments such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) to bring claims against Mexico (among other countries). The CPTPP may prove especially helpful for Canadian investors in Canada given that the USMCA, which replaced NAFTA, does not allow for Canadian investors to arbitrate against Mexico for breaches of the USMCA.
• To the extent a Canadian investor makes an investment in a State that does not have a treaty in place with Canada, such investor should consider structuring the investment through an SPV incorporated in an intermediary State that has ratified a BIT with the host State of the target investment.
  1. Some SPVs that are under the control of Canadian investors have initiated arbitrations against host States that have enacted measures impacting their investments. For example, Alhambra Resources brought a claim against Kazakhstan through its Dutch subsidiary, Alhambra Cooperatief, under the 2002 bilateral investment treaty between Kazakhstan and the Netherlands—and won.¹
• Not all BITs are equal in terms of the protections and benefits they provide. Additionally, when structuring their investments, Canadian investors should consider both BIT protection as well as double-taxation tax treaties that provide favorable tax treatment. This alert explains the calculus.

Canadian Investors Should Protect Their Outbound Investments Through BITs and FTAs

Canada historically has made significant foreign direct investments ("FDI"), reportedly investing 4% of its GDP outside of Canada. Historically, these outflows have been directed primarily to the United States and Europe, with the remainder invested mainly in "middle income" countries such as Mexico, Peru, Brazil, China, India and Indonesia. Canada also has invested a larger share vis-à-vis other G7 countries of its FDI in Central and South America

To protect Canadian outflows of investment, Canada has signed 46 bilateral investment treaties ("BITs"), 36 of which are currently in force.² Canada also has ratified seven free trade agreements, each of which contains a chapter on investment protection.³

Canadian investors have successfully held foreign governments accountable through private arbitrations initiated under these investment treaties when those governments have breached their obligations under international law vis-à-vis those investments. High-profile examples include:

• Crystallex International Corporation v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/11/2): an arbitral tribunal constituted under the bilateral investment treaty between Canada and Venezuela found that Venezuela had unlawfully expropriated the mining company's investments to develop the Las Cristinas gold mine in Venezuela by denying a required environmental permit despite prior assurances that the permit would be granted. The investor was awarded over US$1.2 billion in damages.⁴
• Lion Mexico Consolidated L.P. v. United Mexican States (ICSID Case No. ARB(AF)/15/2): an arbitral tribunal constituted under the North American Free Trade Agreement ("NAFTA") found that Mexico committed a denial of justice and thus violated its obligation to ensure fair and equitable treatment to Canadian investors when the Mexican judiciary improperly confirmed the cancellation of promissory notes and related mortgages securing loans for the construction of a luxury resort and skyscrapers. The investor was awarded US$47 million in damages.⁵

That being said, Canada as a respondent State has also suffered some losses in arbitrations constituted under investment treaties in which arbitral tribunals have held that Canada breached its obligations under those agreements vis-à-vis foreign investors investing in Canada. High-profile examples include:

• Mobil Investments Canada Inc. and Murphy Oil Corporation v. Government of Canada (ICSID Case No. ARB(AF)/07/4): an arbitral tribunal constituted under NAFTA found that Canada violated NAFTA's prohibition on performance requirements due to the promulgation by the authorities of the Newfoundland province of certain guidelines mandating additional research and development expenditures in connection with the exploitation of two oil fields. Canada was found liable to pay CA$17.3 million to the claimant.
• Windstream Energy LLC v. The Government of Canada (PCA Case No. 2013-22): an arbitral tribunal constituted under NAFTA found that Canada violated its obligation to accord fair and equitable treatment ("FET") to Windstream's investments in Canada, following the passage of a moratorium on offshore wind farms which frustrated Windstream's agreement with the Ontario Power Authority to build an offshore wind power farm. Canada was found liable to pay CA$25.2 million to the claimant.

These losses in arbitrations arising out of investment treaties prompted Canada to seek substantive changes in the investment treaties it is now signing and ratifying with other States.⁶ For example, the investment chapter in the United States-Mexico-Canada Agreement ("USMCA") no longer allows for the resolution of disputes arising under the investment chapter (Chapter 14) involving Canadian investors as claimants or Canada as a respondent State through private arbitration.⁷ This means that Canadian investors investing in Mexico and the United States do not have recourse to arbitration to address Chapter 14 violations by those governments.

This alert discusses how Canadian investors may still be able to use investment treaties to hold foreign governments accountable through private arbitration. For example, since they cannot use the USMCA to initiate private arbitration against Mexico, Canadian investors instead are relying on the Comprehensive and Progressive Agreement for Trans-Pacific Partnership ("CPTPP") to bring claims against Mexico. Additionally, Canadian investors may consider (re-) structuring their investments through special purpose vehicles ("SPVs") incorporated in jurisdictions that have executed investment treaties with the host States of the target investments where Canada does not have investment treaties in force directly with those specific States, including the United States.

Background: What Are Investment Treaties?

Investment treaties are legal instruments entered into by two or more States to protect foreign investors possessing the nationality of one of the States and their investments when investing in the territory of the other State (the "host State"). While the content and scope of each investment treaty will vary depending on its specific terms, generally, investment treaties protect:

• Foreign investors, which typically include natural persons holding citizenship in the State of outbound investment as well as companies incorporated or registered in accordance with the laws of that State.
• Investments made by those foreign investors, which often encompass "any kind of assets" held in the host State of the investment (the target of the investment) and, in particular, movable and immovable property, shares, bonds and claims to performance of economic value.

Investment treaties typically provide the following substantive protections to a foreign investor and/or its investments:

• National treatment: foreign investors should be treated no less favorably than domestic investors in like circumstances.
• Most-favored-nation treatment: foreign investors should be treated no less favorably than investors from third states. This protection may be helpful should the government treat third-country investors more favorably by granting their permits on an accelerated basis or by offering their investments better tax or other economic incentives.
• Fair and equitable treatment: the host State should respect the legitimate expectations of foreign investors at the time they made their investments, and should treat foreign investors and their investments transparently, consistently, in a stable manner, and in good faith.
• Protection from expropriation: the host State may not expropriate the investment or enact measures tantamount to expropriating the investment unless done for a public purpose, in a nondiscriminatory manner, in accordance with due process, and with the payment of prompt, adequate, and effective compensation.
• Free transfer of capital: foreign investors are entitled to freely transfer their investments and returns, including profits, dividends, and proceeds from the sale of investments.
• International arbitration: many investment treaties permit private arbitration of disputes between an investor and the host State, thereby taking the dispute out of the national courts, which may play favorites.

Footnotes

1. Alhambra Resources Ltd. and Alhambra Coӧperatief U.A. v. Republic of Kazakhstan (ICSID Case No. ARB/16/12), Award, Nov. 16, 2020 (not public).

2. Canada's bilateral investment treaties are listed in Annex A.

3. Canada's free trade agreements which contain a chapter on investment protection are enumerated in Annex A.

4. Crystallex International Corporation v. Bolivarian Republic of Venezuela (ICSID Case No. ARB(AF)/11/2), Award, 4 Apr. 2016, available at https://www.italaw.com/sites/default/files/case-documents/italaw7194.pdf

5. Lion Mexico Consolidated L.P. v. United Mexican States (ICSID Case No. ARB(AF)/15/2), Award, 20 Sept. 2021, available at https://www.italaw.com/sites/default/files/case-documents/italaw16302.pdf

6. See Jessica Vomiero, "Why some experts say scrapping part of NAFTA's Ch. 11 is Canada's biggest win with USMCA", Global News (5 October 2018), available at https://globalnews.ca/news/4519161/usmca-chapter-11-investor-state-dispute-settlement/.

7. See, e.g., Jerry L. Lai, "A Tale of Two Treaties: A Study of NAFTA and the USMCA's Investor-State Dispute Settlement Mechanisms," 35 Emory Int'l L. Rev. 259 (2021), available at https://scholarlycommons.law.emory.edu/eilr/vol35/iss2/3.

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