Diversifying Canadian trade: Canadian free trade agreements and investor protection

Chris Kinnear Hunter (00:00:07)

The Carney government is actively seeking to diversify Canadian trade to balance trade with the United States. Investment agreements, like free trade agreements, are the treaty infrastructure through which the government is facilitating that diversification. These agreements come in a variety of shapes and forms: sometimes it's a chapter in a broader partnership or free trade agreement; other times, the entirety of the agreement is focused on investor protection. Regardless of the form they take, these treaties deepen Canada's economic ties with other countries and regions, promote freer trade, and offer stability and predictability to investors.

Thus far, the Carney government has concluded trade agreements with several countries, with many more agreements expected to follow. These agreements build on an extensive network of treaties Canada already has. And while every investment treaty is unique since they're individually negotiated, these treaties tend to contain many of the same or similar core provisions, particularly recent treaties which Canada has negotiated based on its model Foreign Investment Promotion and Protection Agreement: commonly referred to as a “FIPA”.

A key aspect of these treaties are investor protection provisions, which Canadian businesses should be aware of when making investments abroad, and foreign businesses should consider when investing in Canada. That makes it important for businesses to understand the scope of these treaties, including who they protect and what those protections consist of.

Emily Sherkey (01:25:38)

Starting first with who gets these protections. Investment protections are intended to facilitate foreign investment by promoting investor confidence. They do this by ensuring foreign governments treat qualifying investments in accordance with certain standards. If the government doesn't, an investor will then be able to seek recourse directly against that government in a neutral forum.

So the first question then for businesses is to understand who qualifies for protection. And this often turns on the definition in the treaties of “investor” and “investment”. Starting with investor, under the FIPA, an investor entitled to treaty protection must be a national or enterprise of a party that seeks to make, is making, or has made an investment.

What is an enterprise of a party? Think of it as the subsidiary corporation created under the laws of the foreign jurisdiction. The FIPA also requires that this enterprise have substantial business activities in the jurisdiction. I note that this requirement for substantial business activities doesn't exist in all treaties, underscoring the importance of understanding the particular treaty that may apply to you and your business.

So this qualifying investor also needs to have made an investment. Investment for the purposes of a treaty requires more than just a commercial transaction or a claim for money. It needs to meet certain requirements, including the assumption of risk. Every treaty has its own definition of investment that has to be carefully considered.

The FIPA and many treaties have standard language around the types of things that are well understood to qualify as investment: shares in an enterprise, a loan, property rights, and things of those nature. It also—the FIPA and other treaties—exclude certain types of claims to money. As a result, it's crucial for businesses to consider this issue when structuring their investments to ensure that in the event of a dispute with the foreign government, they can advance a claim under the treaty. To the extent an investment would not qualify under the FIPA, it may still be possible to structure your investment in a way that makes protections available under other treaties.

Chris Kinnear Hunter (03:57:17)

So what Emily's just described are important considerations relating to who can bring claims in the first place. Likewise, it's important to understand what the substantive protections that are available are. And like the definitions of investor and investment that Emily just spoke about, the specific protections available vary from treaty to treaty.

They tend, however, to contain a number of similar core provisions. These include things like prohibiting discrimination based on an investor's nationality, prohibiting a government from expropriating an investment, and requiring the government to treat an investment in accordance with certain standards. For example, it's generally accepted that a state can't take actions against an investor that are manifestly arbitrary.

Another important part of the modern treaties Canada's negotiating based off of its FIPA concerns small and medium enterprises. Fairly or unfairly, investor-state dispute settlement has historically been viewed as a tool primarily for major corporations. As a result, the FIPA, and the treaties negotiated by the Carney government based on the FIPA, contain important provisions intended to make it a meaningful tool for SMEs. In particular, they include expedited arbitration regimes for claims under $10 million. Disputes falling within this category are subject to simplified procedures and shortened timelines intended to limit the legal costs associated with pursuing a treaty claim.

Emily Sherkey (05:23:57)

The bottom line is that as Canada pursues new trade relationships around the world, the model FIPA and the treaties based on it provide a consistent framework that Canadian businesses should understand when expanding internationally, and when foreign businesses invest in Canada. Whether you're a large corporation, an SME, these treaties offer meaningful protections, but they also require careful structuring of your investments to ensure you can receive the benefits of these treaties.

We encourage you to reach out to our team at Torys to discuss how these treaties may apply to your business.