Better late than never

 MARKET VIEW – LITIGATION 

The Honourable Marc Lalonde on Canada’s accession to the ICSID Convention and why it took so long to ratify

Since the end of World War II, Canada has played a role in international affairs well above its relative economic or military power, whether at the United Nations or in other international institutions such as the World Trade Organisation (WTO) or the G5 (then G7, G10 and G20). It has also pursued the advancement of its economic interests through the signing of some 30 bilateral investment protection treaties (BITs or Foreign Investment Promotion and Protection Agreements (FIPAs) as they are called in Canada) as well as the North American Free Trade Agreement of 1994 (NAFTA). And although it may take a few more years before it is ratified, a preliminary agreement has also been reached recently with the European Union on the text of the Comprehensive Economic and Trade Agreement (CETA), well ahead of the US, which is just starting such negotiations. It is also actively participating in the current Trans-Pacific Partnership Free Trade Negotiations.

In such a context, it comes as a surprise that it took 47 years for Canada to ratify the International Centre for Settlement of Investment Disputes (ICSID) Convention (also known as the Washington Convention) which came into force on 10 April 1966. Some 40 years were required before Canada signed that Convention and another seven years before it ratified it. It entered into force on 1 December 2013. Canada thus became the 152nd state to ratify the ICSID Convention (159 having signed it).

Up to this point, Canada relied upon the inclusion of the United Nations Commission on International Trade Law (UNCITRAL) rules and of the ICSID additional facility rules in its international agreements on investment protection, NAFTA being a prime example of that situation. Canada also included in these agreements an option to resort to the ICSID rules if both contracting parties had ratified the ICSID Convention.

Such lackadaisical behaviour on the part of Canada deserves an explanation, even though it is not obvious.

One could be that Canada finally acted out of embarrassment after the election of a Canadian national, Meg Kinnear, as secretary-general of ICSID in 2009 (she was previously the general counsel and director general of the Trade Law Bureau of Canada).

While this event may have been speeded somewhat a decision by Canada to ratify the ICSID Convention, it does not explain the major delay in initiating action in that regard.

Canada’s long, benign neglect in that respect can be understood by the fact that, for the second half of the 20th century, Canadian trade and investment was mainly with the US; for instance, for most of that time, Canada’s international trade represented over 40% of its GDP and over 80% of that trade was with the US. The Canadian business community tended to rely on the federal government to protect its interests before the WTO in cases of trade disputes resulting from government action and on the Canadian and American court systems to settle other commercial disputes, including investment disputes, under the questionable assumption that the American courts were as reliable as the Canadian ones (as an example of how wrong this assumption could be, see the American court decision which led to the NAFTA case of Loewen Group Inc and Raymond L Loewen v United States of America (ICSID case no ARB(AF)/98/3).

Moreover, as Canadian foreign investment took place in an increasing number of countries other than the US, Canadian investors and their advisers came to realise that the enforcement method of arbitral award against foreign states constituted a major benefit of the ICSID Convention.

The Canadian legal community also shares responsibility for the procrastination of Canada in that respect.

Under the Canadian constitution, arbitration is a matter relating to civil law, which comes under provincial jurisdiction, except for strictly federal matters. Up to 1986, the legal provisions for arbitration in the common law provinces were based on old English law while the chapter on arbitration in the Québec Code of Civil Procedure had been enacted in the 19th century; no specific reference was made, in either system, to international dispute resolution through arbitration or conciliation. I can say that, in my 20 some years (1964-84) in Canadian public life, including a period as Minister of Justice, I never heard the word ICSID or Washington Convention mentioned.

However, with the expansion of Canadian trade and investment with countries other than the US and the related involvement of Canadian law firms in international transactions, there grew a gradual recognition that a traditional reliance on mutual court systems was inadequate and pressure began to grow upon the federal and provincial governments for an updating of Canadian legislation on domestic and international arbitration.

‘Some 40 years were required before Canada signed the ICSID Convention and another seven years before it ratified it. It entered into force on 1 December 2013.’

1986 became a watershed in that regard. This was the year when all Canadian legislatures adopted, some with minor modifications, the 1985 UNCITRAL model law on international commercial arbitration, Canada thus being the first country in the world to enact that model law.

This was also the time when the Canada-US Free Trade Agreement was negotiated, coming into effect in 1989 and being replaced in 1994 by NAFTA, which included Mexico.

To the surprise of many, Canada ended up being the most frequently sued party under NAFTA, mainly by American investors. And, according to a recent study (Zoe Phillips Williams, Investment Treaty News, 12 August 2014), Canada is also the third most frequent respondent, after Argentina and Venezuela, in investor-state disputes. Such factors may also have played a role in the decision of the Canadian government to put itself on an equal footing with the rest of the world in so far as the ICSID Convention was concerned.

Be that as it may, Canadian or foreign investors entitled to register a claim under one of the 27 BITs currently in force between Canada and other countries will, in the future, have the option of submitting a claim to arbitration under the ICSID Convention when both contracting parties have ratified that Convention. This is in addition to the options found in the existing BITs of using the additional facility rules when only one of the contracting parties has signed the Convention or the UNCITRAL rules. The same regime is included in the other three BITs (including one with China) signed by Canada but not yet ratified. Moreover, although the text has not yet been made public, it is fair to assume that the same options will be included in the forthcoming Comprehensive Economic and Trade Agreement between Canada and the European Union. The same can be said about the 11 other cases where negotiations with other countries have been concluded and the 12 others where they are ongoing.