Crowell Moring | 19 May 2021
Canada releases updated FIPA model: a step forward for the ISDS system
On May 13, the Government of Canada released its “modernized and inclusive” Foreign Investment Promotion and Protection Agreement Model (“FIPA Model”), sending a message that it intends to continue to provide international dispute resolution protections to foreign investors. The original iteration of the FIPA Model dates to 2004, which Canada had stated built on its experiences with NAFTA. It subsequently released an updated iteration in 2014. The current FIPA Model reflects further updates based on stakeholder consultations in 2018-2019.
The current FIPA Model also comes on the heels of recent investment-related developments, including the United States-Mexico-Canada Agreement (USMCA), which went in effect in July 2020, and signing of the Canada-UK Trade Continuity Agreement. Canada has not entered into an investment treaty since its agreement with the Republic of Moldova in 2018.
As with any model agreement, the FIPA Model does not immediately impact foreign investors. However, it signals how Canada may approach future investment treaty negotiations. As such, its provisions will be relevant for both States seeking to enter into future investment treaty negotiations with Canada, and foreign investors with interests in Canada, not least during a period of significant change within investment treaty arbitration generally.
Investment Protections in the FIPA Model
The FIPA Model contains several notable updates to investment protections, compared with prior iterations.
While investment treaties more commonly reference the right to regulate in preambular text, if at all, the FIPA Model contains an operative provision that reaffirms the parties’ right to regulate (Article 3). Notably, its scope extends to the “rights of Indigenous peoples, gender equality, and cultural diversity.” A broadly-worded provision like this may be useful for defending against claims and may shape how arbitral tribunals view States’ conduct, not least because Article 3 does not require compliance with obligations elsewhere in the FIPA Model.
Both investment treaties and model agreements increasingly include provisions on responsible business conduct (“RBC”). Previously, Article 16 in the 2014 FIPA Model addressed corporate social responsibility, although without reference to specific internationally recognized standards. Article 31 in the updated FIPA Model relabels the prior Article 16 under the heading of RBC, as well as broadens its scope and includes specific references to, among others, the OECD Guidelines for Multinational Enterprises. However, as is common for RBC provisions, it only contains aspirational language and applies directly to States, not investors.
The National Treatment (“NT”) and Most-Favoured-Nation Treatment (“MFN”) provisions were also revised (Articles 5 and 6, respectively). For example, Articles 5(3) and 6(3), respectively, remove previous explicit reference in the 2014 FIPA Model to treatment by provincial, territorial, or local governments (formerly defined as “sub-national government”). Further, the two provisions formalize the three-prong NT–MFN test rational connection standard discussed in Pope & Talbot, particularly by requiring tribunals to consider States’ legitimate public policy objectives when applying the “like circumstances” exception. Article 6 also rules out the known Maffezini-style use of the MFN clause, which previously enabled claimants to invoke other treaties—to which Canada is a party—that provide more favorable treaty interpretations. This move echoes recent US–MFN provisions that expressly exclude procedural or dispute settlement obligations and limit the MFN scope to matters related to disposition of investment.
Lastly, the Fair and Equitable Treatment (“FET”) provision has also set out an exclusive list of conduct that is covered, such as “manifest arbitrariness” and “targeted discrimination” (Article 8), which departs significantly from the more traditional approach to FET under Article 6 of the 2014 FIPA Model. As such, the new FET provision appears to preclude arguments based on the legitimate expectations of the foreign investor—historically, a frequently invoked investor argument in the case law on FET. The full protection and security standard is also limited to only “physical security of an investor and their covered investment” (Article 8). Traditionally, arbitral tribunals had expanded this police protection to commercial, legal, and regulatory security, in addition to physical security of investments.
The Investor-State Dispute Settlement Mechanism in the FIPA Model
In contrast with the USMCA, the FIPA Model contains a robust mechanism for investor-State dispute settlement (ISDS). Several provisions relate to ISDS reforms also under discussion at both ICSID and UNCITRAL’s Working Group III (“WGIII”).
Several provisions are intended to provide alternatives to resolving disputes, without recourse to ISDS, such as mandatory consultants prior to submission of a claim (Article 25), the availability of mediation at any time before or during the proceedings (Article 26), and extended time-limits for submitting a claim, if the claimants is actively pursuing domestic remedies (Article 27). Moreover, if a “first instance” investment tribunal or an appellate mechanism—which have also been discussed at WGIII—were to be developed, the parties would be required to consider its applicability to any ongoing disputes (Article 46).
A number of provisions also address the appointment of arbitrators. Notably, the FIPA Model encourages greater diversity in arbitrator appointments and specifically mentions the appointment of women (Article 30) in keeping with the Trudeau Government’s approach to gender in trade agreements. It also requires arbitrators to abide by the Arbitrator Code of Conduct for Dispute Settlement, which is appended to the text. For example, Article 3(4) of the Code precludes arbitrators, for the duration of the proceedings, from acting as counsel or party-appointed expert or witness in any pending or new disputes under any investment treaty.
Finally, the FIPA Model includes various provisions encouraging transparency of the proceedings. For example, hearings and various documents must be open and available to the public (Article 36). Moreover, third-party funding arrangements must be disclosed when a claim is submitted (Article 42). In 2017, Canada became the second State to ratify the UN Mauritius Convention on Transparency in Treaty-based Investor-State Arbitration.
An Emphasis on the Rights of Indigenous Peoples in the FIPA Model
The FIPA Model reflects an emphasis on the rights of indigenous peoples, where relevant to protected investments. This focus underlines the priority of such rights for Canada when negotiating future investment treaties.
As an example of this emphasis, and unique among model agreements, the general exceptions from treaty protections specifically include, among other measures, any measures necessary to fulfill the constitutional rights of indigenous peoples (Article 22). As another example, the non-lowering of standards provision specifically includes the rights of indigenous peoples (Article 3).
Other provisions seek to encourage transparency for investors into domestic laws relating to the rights of indigenous peoples (Article 15), and dialogue between investors and indigenous peoples and communities (Article 16). Moreover, in the context of investment disputes, the tribunal may, either at the request of a party or on its own initiative, appoint experts on the rights of indigenous peoples (Article 38).
Despite some open questions around the new FIPA Model, it can be viewed as a step forward for the ISDS system and future Canadian investment treaties. By releasing this new model, Canada is giving a vote of confidence to a modernized ISDS system coming at a time when ISDS has faced criticisms from certain government officials and political leaders.
Notably, this position contrasts with the US’ move away from ISDS within the USMCA.
The inclusion of an ISDS mechanism in the FIPA Model also contrasts with the trend in the EU away from ISDS and in favor of a world investment court. This also contrasts with two recent model agreements from EU member states— the 2019 Netherlands Model BIT and the 2019 Belgium-Luxembourg Economic Union Model BIT—which both contain ISDS mechanisms. It remains unclear how the Canada FIPA Model may impact trade and investment discussions with EU member states.