Legal considerations regarding the Renewed Canada–China Relationship for Cross Border Investors

Mark Carney’s recent visit to China, the first by a Canadian Prime Minister since 2017, continues to generate interest regarding its long term implications for both relations between the two countries and Canada’s approach to foreign engagement. The latter has become especially significant in the wake of the Prime Minister’s subsequent speech at Davos.

On one hand, the broader consequences on Canada-China relations will take years to play out. On the other hand, some of the agreements apparently reached during the trip may have more immediate effects in certain sectors, perhaps most notably with respect to electric vehicles and agrifood, but also clean energy and technology.

The reinvigorated dialogue on economic cooperation between Canada and China after a period of trade friction underscores the importance of stable and predictable investment frameworks and highlights the continuing significance of the Canada-China Foreign Investment Promotion and Protection Agreement (also known as the Canada-China BIT). It also highlights the importance of proactively addressing the risk and complexities that arise when doing business across borders, particularly when geopolitical sands seem to shift daily.

We set out below some key considerations for investors between Canada and China looking at opportunities arising from the recent development in Canada-China relations.

The Canada-China BIT – substantive protections and procedural recourse for investors

The Canada-China BIT aims to foster mutual confidence through substantive and procedural protections to investors between the two countries. It provides for an array of substantive protections to Chinese investors in Canada and vice-versa. An investor from one country who believe that the other has breached its obligations under the treaty may seek recourse through binding arbitration.

At first glance the Canada-China BIT appears to contain an expansive spectrum of investor protections, including:

• Fair and Equitable Treatment and Full Protection and Security: The treaty requires both Canada and China to treat investments from the other country fairly and equitably and to grant them full protection and security. These protections are not expressly constrained to the customary international law minimum standard of treatment, which is sometimes regarded as requiring host States to do no more than treat investments with due process and to avoid outrageous or bad faith conduct. 
• Most-Favoured-Nation (MFN) Treatment: Canada and China have agreed that any advantages that they have granted to investors and investments from third countries with respect to the establishment, acquisition, expansion, management, conduct, operation and sale or other disposition of investments must be granted to each other’s investors.
• National Treatment: With respect to the expansion, management, conduct, operation and sale or other disposition of investments, Canadian and Chinese investors are guaranteed treatment no less favourable than that which each country accords to its investors. While the national treatment obligation is somewhat more limited than the MFN obligation, as it does not extend to treatment related to the initial making of an investment – ie “establishment” or “acquisition” – it nonetheless signals agreement by Canada and China to not change the rules post-investment with a view to favouring domestic investors over foreign investors operating in the same space.
• Protection from Unlawful Expropriation: Investments by Canadian and Chinese investors cannot be expropriated or nationalized by the other state except for a public purpose, under domestic due process of law, in a non-discriminatory manner and against compensation that is based on fair market value. The Canada-China BIT also expressly prohibits indirect expropriation, which means that both countries have undertaken not to engage in conduct that would effectively destroy the value of an investor’s investments, without formal transfer of title or outright seizure.
• Free Transfer of Funds: Investors from both countries have the right to freely transfer funds out of the other related to their investments, including capital, profits, dividends, and proceeds from the sale or liquidation of an investment.

While many of the protections in the Canada-China BIT echo the language of broad protections granted in other bilateral investment treaties, it has also built in some notable limitations on those protections. For example, the fair and equitable treatment, full protection and security and MFN and national treatment obligations all do not apply to any existing non-conforming measures; nor do they apply in the procurement context or with respect to the provision of subsidies or grants. Various modifications of the protections or recourse available to investors have also been made with respect to specific sectors – for example, intellectual property or financial institutions. Additionally, disputes arising from certain decisions by Canada under the Investment Canada Act or by China under the laws, regulations and rules relating to foreign investment have been excluded from the investor-state dispute settlement provisions of the treaty. And, while the BIT provides for ICSID arbitration or ad hoc arbitration under the UNCITRAL Rules, it also specifies particular pre-conditions to arbitration.

That is to say, while investors between Canada and China can take comfort from the stability arising from the very fact of the Canada-China BIT, they should also take care understand the scope of the protections and remedies that may be available to them under it, given its many peculiarities. This is especially so since the Canada-China BIT has not been robustly tested in practice. Publicly available sources indicate that only one dispute has been formally notified under it, which is in very early stages. 

Given the relative complexity and novelty of the Canada-China BIT, investors between Canada and China may also wish to consider how to allocate and mitigate risk in the agreements through which they pursue their cross-border business. Certain kinds of provisions can be more important than others in addressing geopolitical risk. For example:

• Force Majeure Clauses: Investors should consider whether and how to include geopolitical issues in the trigger, the impact, and the consequence language of force majeure clauses.
• Termination Clauses: As with force majeure provisions, cross-border investors between Canada and China should consider what kinds of geopolitical developments may materially affect their investments and call for predictable termination scenarios. Similar considerations should also be taken into account with respect to material adverse change, price impact and change of law provisions.
• Procurement Issues: Investors who conclude procurement contracts with foreign governments are aware that geopolitical issues can trigger contractual uncertainty related to issues such as national security or economic priorities. Should the recent developments lead procurement opportunities for foreign investors between Canada and China, key issues to consider are the enforceability of obligations and applicable sovereign immunities.

Canadian or Chinese investors seeking to pursue opportunities in light of the recent developments in the countries’ trade relationship would benefit from tailored guidance on risk mitigation strategies. For more information, please contact the author.