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Canadian companies and individuals are investing abroad more than ever before. These investors generally enjoy certain legal protections against State interference with their investments by virtue of the contracts they may enter into with States, State agencies or State corporations. However, a little known fact is that Canadian investors investing in certain countries may benefit from substantial "extra" protection against actions of the host State (i.e., the State in which the investment is made) that affect their investments adversely. Such protection is offered by investment treaties, including both bilateral investment treaties (BITs) and multilateral treaties.

Although this newsletter focuses on investment treaties that have been entered into by Canada, in many cases Canadian investors (depending on their corporate structure) may also benefit from investment treaties entered into by other countries. In other words, the "extra" protection offered to Canadian investors under investment treaties is not limited solely to investments made in countries with which Canada has signed an investment treaty.

Canada has entered into BITs with some 22 countries.[1] It is also a party to a multilateral treaty, the North American Free Trade Agreement (NAFTA), which establishes important protections for nationals and companies of Canada investing in the US and Mexico.

Investment treaties such as BITs and the NAFTA regulate the admission of foreign investors and their investments into the host State. They normally provide for equal treatment of domestic and foreign investors (the so-called "national treatment", "fair and equitable treatment" and the "most-favoured-nation treatment" clauses) and prohibit any form of expropriation of an investment by the host State without due compensation. These treaties provide Canadian companies investing abroad with a significant level of international legal protection over and above the contractual protections otherwise available to them.

To cite just one recent example, an international tribunal recently held that the refusal of the host State to renew a permit authorizing the operation of a hazardous waste landfill by a foreign investor constituted an "expropriation" of the investment and a violation of the "fair and equitable treatment" requirement of the relevant BIT since the investor's reasonable and legitimate expectations had been breached.[2]

Investment treaties also offer groundbreaking procedural benefits to Canadian foreign investors by providing them the means to resolve investment disputes by bringing claims directly against the States in which they invest.

Canada's BITs and the NAFTA (like most modern investment treaties) contain arbitration clauses under which the States in question consent to settle all disputes regarding investments made in their countries by each other's nationals before an independent international arbitral tribunal in proceedings between the foreign investor and the host State itself. For example, under the Canada-Venezuela BIT, the Government of Venezuela gives its consent to arbitration - that is, it consents to have arbitration claims brought against it for government conduct that affects a foreign investment - to all Canadian investors investing in Venezuela.[3]

Needless to say, this is a regime much more favourable to Canadian investors than the alternative traditionally available: suing the host State in its own courts. It is also far more advantageous than the traditional rule whereby an arbitration claim by a foreign investor first had to be "espoused" by the investor's own government, which could then file a claim against the State in which the investment was made, before an international arbitration tribunal, on behalf of the investor. Investment treaties do away with this anachronism, as mentioned, by providing foreign investors with a right to claim directly against the host State before an international arbitration tribunal. In this regard, the NAFTA and most BITs entered into by Canada[4] provide for disputes between Canadian investors and the host State to be resolved through arbitration under the UNCITRAL Arbitration Rules,[5] the ICSID Convention[6] or the ICSID Additional Facility Rules.[7]

In order to commence an arbitration claim under the NAFTA or a BIT, a Canadian investor must be recognized as "Canadian". Pursuant to all of the investment treaties entered into by Canada, a company is considered Canadian provided that it is "incorporated or duly constituted in accordance with applicable laws of Canada."[8] The actual nationality of the shareholders, directors or officers of the company is irrelevant.[9]

There are five typical scenarios in which Canadians invest abroad. In all of these scenarios, Canada's BITs and the NAFTA guarantee Canadian investors the right to bring claims directly against the host State for conduct that is detrimental to the investment.

Canadian companies frequently invest in a foreign country through a wholly owned subsidiary that is incorporated in the host State of the investment. (In many countries, foreign investments are legally required to be channelled through locally incorporated companies.) Where, for example, the locally incorporated subsidiary of a Canadian corporation enters into a joint venture with the host State or State agency or company (a common means of structuring foreign investment), the parent Canadian company may bring its own claim directly against the host State for the damage sustained by its subsidiary as a result of conduct by the host State.

The same benefit is enjoyed by a Canadian investor investing in a foreign country through a company incorporated in the host State in which it has a majority interest. Arbitration case law recognizes the right of a majority shareholder in a local company to bring its own claim against the host State and establishes that the majority shareholder's right to claim compensation from the host State is independent of any other claims which may be submitted by the locally incorporated company or any minority shareholders.

In all of the investment treaties entered into by Canada, participation in a locally incorporated company is deemed an investment in the country in which the company is incorporated and offers the investor the possibility of bringing an arbitration claim against the host State for conduct that impinges on the value of the investment.

Recent case law also establishes that a Canadian investor that is a minority shareholder in a locally incorporated company is entitled to bring a claim for compensation directly against the host State. As a matter of principle, the degree of participation in the local company is irrelevant. As noted above, the right of minority shareholders to claim compensation is independent of any other claims which may be made by the locally incorporated company or the majority shareholder.

In certain cases, the Canadian investor is not the immediate shareholder of the locally incorporated company; a Canadian corporation may own shares of the local company through the intermediary of another company. Here too, arbitral tribunals have recognized the right of the parent company to submit its own claim for damages sustained by the local company even if its investment in that company is made through one or a series of intermediary companies. In fact, under the NAFTA and all but one of Canada's BITs, the result is the same even if the parent Canadian company invests in the local company through one or several non-Canadian intermediaries, such as companies incorporated in the Cayman Islands, the Netherlands, etc.[10]

Case law also establishes that the right of the Canadian parent company to submit claims when the investment is made through one or more intermediary companies exists for both majority and minority shareholders. In other words, a Canadian company may have a claim even if it holds a minority stake in the local subsidiary through one or more intermediaries.

In the light of the most recent case law, a Canadian company that invests in a locally incorporated company would be entitled to submit its own claim for damages suffered by the company, even if the Canadian company is itself controlled by a non-Canadian company.

The NAFTA constitutes an exception to this rule, by allowing Canada, the United States and Mexico to refuse to arbitrate claims under Chapter 11 that are brought by corporations owned or controlled by companies which are not incorporated in a NAFTA State.[11] However most BITs entered into by Canada do not contain such an exception and would, therefore, allow claims by Canadian companies owned and controlled by non-Canadian corporations.[12]

Investment treaties provide Canadians investing abroad with unprecedented substantive and procedural legal protection against interference with their investments by the governments of the States in which they invest. These protections are recognized and enforced in the decisions of courts and international tribunals.

Although this newsletter focuses on the investment protections enjoyed by Canadian investors under investment treaties entered into by Canada, it is important to bear in mind that the extra protection offered to Canadians investing abroad is not limited to investments made in the 24 foreign States covered by Canada's investment treaties.

Depending on their corporate structure, Canadian companies may be in a position to take advantage of protections provided by investment treaties entered into by other States. For example, a Canadian company making an investment in Japan (a country with which Canada has no investment treaty) through an intermediary company incorporated in the Netherlands may be considered a Dutch company under the terms of the Netherlands-Japan BIT and entitled to submit a claim directly against Japan.

In all cases, a careful analysis of the circumstances surrounding an investment as well as the scope of potentially relevant BITs or other investment treaties is required in order to determine the nature and extent of the protections offered to the Canadian investor, including the right to bring a claim against the host State for interference with the investment.[13] The point is that there may exist many ways for Canadian investors who believe that they have suffered at the hands of foreign States to seek compensation from those States and to benefit from potentially countless possibilities afforded them not only by Canada's investment treaties but as well by the nearly 2,400 BITs currently in force between various other countries.[14]

[1].    BITs have been entered into with Poland (1990), Argentina (1993), Hungary (1993), Trinidad and Tobago (1995), Philippines (1995), Latvia (1995), Ukraine (1995), Romania (1996), Egypt (1996), Panama (1996), Ecuador (1996), Barbados (1996), Venezuela (1996), Armenia (1997), Thailand (1997), Uruguay (1997), Lebanon (1997), Croatia (1997) and Costa Rica (1998). BITs have also been entered into with the USSR (1991; following the dissolution of the USSR, the BIT binds Russia as the continuator State) and Czechoslovakia (1990; further to the dissolution of Czechoslovakia the BIT is considered as two separate treaties binding both the Czech Republic and the Slovak Republic). Canada has also signed BITs with El Salvador and South Africa, though these have not yet entered into force. Canada is currently negotiating BITs with India, China and Peru. The BITs to which Canada is a party and which have entered into force are available on-line at the website of the Minister of Foreign Affairs and Trade: http://www.dfait-maeci.gc.ca/tna-nac/fipa_list-en.asp.