1. Introduction
Canada and Canadians have been active participants in investor-state dispute settlement (ISDS) for several decades. Canada has contributed to international law in the ISDS sphere, both through the negotiation of bilateral investment treaties (BITs) and multilateral agreements with ISDS provisions as well as through the development of an international arbitral jurisprudence informed by Canada’s engagement in ISDS cases.
Canada’s approach to ISDS, however, has evolved over time to reflect its experience in defending investment claims, and the early protections offered to foreign investors and their investments, including ISDS provisions, have been progressively rebalanced in later BITs and multilateral agreements with ISDS provisions to take into account a broader constellation of interests that are engaged by foreign investment.Footnote 1
2. Canada’s role as treaty negotiator
Before we can consider Canada’s role as a disputant in ISDS, it is important to understand the context in which Canada has given its consent to participate in such dispute settlement. A review of Canada’s role in the negotiation of bilateral and multilateral treaties containing ISDS mechanisms is, thus, a necessary predicate to considering its role as a disputant.
A. Early foreign investment protection agreements
Our starting point is 1989, the beginning of the end of the Soviet Union and the negotiation of Canada’s first Foreign Promotion and Reciprocal Protection of Investments Agreement (FIPA), with the Soviet Union, which was soon to become the Russian Federation (Canada-Russia FIPA).Footnote 2 The Canada-Russia FIPA was quickly followed by Canada’s next few FIPAs — this time, with Poland,Footnote 3 Hungary,Footnote 4 and UkraineFootnote 5 — Canada’s focus on opening up investment and investor protection in the wake of the Soviet Union’s disintegration was interrupted only by its negotiation and signature of a FIPA with Argentina on 5 November 1991.Footnote 6
These FIPAs form Canada’s first generation of investment treaties. They are characterized by broad protections for investors, and their investments are anchored in obligations requiring, among others, full protection and security for, and the fair and equitable treatment (FET) of, investments and investors’ returns in accordance with principles of international law as well as national and most-favoured-nation (MFN) treatment. Expropriation is prohibited save where it is carried out for a public purpose, under due process of law and in a non-discriminatory manner, and provided that it is accompanied by prompt (defined in some first generation FIPAs as occurring within two months), adequate, and effective compensation, measured by reference to the real or market or genuine value of the investment at the time of the expropriation.Footnote 7
The ISDS provision in these early FIPAs contemplated that, if a dispute under the FIPA was not resolved within six months from the date the dispute was initiated, the dispute could be submitted to arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL).Footnote 8 For example, the Canada-Russia FIPA provides at Article IX for the amicable settlement of a dispute between a contracting party and an investor of the other contracting party, to the extent possible, within six months of initiation of the dispute and, if such a dispute has not been amicably settled within that period, for the dispute’s settlement in conformity with the UNCITRAL Arbitration Rules. Footnote 9 The ISDS provision in these early generation FIPAs is notable for its austerity by comparison to later ISDS provisions in later FIPAs. As discussed below, subsequent-generation FIPAs not only made available ISDS in an institutional context by incorporating reference to the International Centre for Settlement of Investment Disputes (ICSID) among the dispute pathways available to investors but also layered on conditions for investors to access ISDS, such as through consent and waiver provisions and restrictions on the scope of relief available to investors under the FIPA.Footnote 10 The most recent model FIPA contains twenty-five provisions in its ISDS clause addressing a broad range of issues, ranging from detailed guidance concerning the initial request for consultation prior to the submission of any claims to arbitration, to the mechanism for the appointment and qualification of arbitrators, to the third-party funding of arbitrations, thereby prescribing to a much greater degree how ISDS cases are to be conducted under FIPAs negotiated pursuant to the new model.
B. Second-generation FIPAs and the North American Free Trade Agreement
Canada proceeded during the remainder of the 1990s to negotiate and sign another dozen FIPAs, mainly with Central and South American states as well as with Egypt, Lebanon, the Philippines, and Thailand. These are often referred to as Canada’s “second-generation” FIPAs. However, the most significant of the treaties negotiated and signed by Canada during this period from an ISDS perspective was not a BIT but, rather, the North American Free Trade Agreement (NAFTA), which contained an ISDS mechanism in its chapter on investment — Chapter 11.Footnote 11 As discussed below, NAFTA Chapter 11 became the test environment for ISDS globally and shaped much of Canada’s approach to ISDS today.
Canada’s second-generation FIPAs and NAFTA Chapter 11 include additional substantive protections for foreign investors and their investments to those included in the early-generation FIPAs, some of the most important relating to host state imposition of performance requirements tied to investment, such as local content requirements.Footnote 12 At the same time, greater restrictions on the scope of potential claims also began to appear in this second generation of FIPAs, such as a taxation measures clause that, among other things, limited claims under the FIPA with respect to purported taxation measures to expropriation claims.Footnote 13
These FIPAs also included a much more robust and detailed ISDS clause, establishing consent and waiver conditions for investors seeking to initiate a claim,Footnote 14 expanding the arbitration rules under which such claims may be made to include the Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention),Footnote 15 where both contracting parties are also parties to the ICSID Convention, and the ICSID Additional Facility Rules, where only one contracting party to the FIPA is a party to the ICSID Convention,Footnote 16 and stipulating the scope of a tribunal’s authority regarding the law to be applied to disputes resolved under the FIPAs and the relief that may be granted.Footnote 17
C. Third-generation FIPAs, Trans-Pacific Partnership / Comprehensive and Progressive Agreement for Trans-Pacific Partnership, and the Comprehensive Economic and Trade Agreement
In 2004, Canada developed its first formal model FIPA.Footnote 18 The 2004 model launched Canada’s third generation of BITs and ISDS commitments. The majority of Canada’s FIPAs in force today were negotiated on the basis of this model. In some cases, Canada succeeded in securing most, if not all, of the model provisions in its FIPAs negotiated after 2004. In other cases, such as with respect to the Canada-China FIPA, many of the more progressive provisions, such as those introducing corporate social responsibility concepts, were omitted.Footnote 19
The 2004 model FIPA unquestionably reflects Canada’s experience from disputes under NAFTA Chapter 11 and a rebalancing of interests between foreign investors, host states, and civil society. The model expressly ties and constrains the FET standard to the customary international law minimum standard of treatment (MST) and stipulates the factors that are relevant to considering whether a measure or suite of measures constitute an indirect expropriation. It contains express and detailed exceptions that ensure the contracting parties’ ability to adopt measures that may adversely impact foreign investment, including, for example, measures to protect human, animal, or plant life or health, to ensure compliance with laws and regulations (that are not inconsistent with the FIPAs’ provisions), or for the conservation of living or non-living exhaustible natural resources, so long as the measures are not a disguised restriction on trade and investment or otherwise arbitrary or unjustifiably discriminatory.
The model also contains provisions aimed at ensuring that host countries do not relax domestic health, safety, or environmental measures to incent investment and that they do provide transparency over measures that may impact foreign investment. It provides a much more detailed and prescriptive framework for ISDS, stipulating comprehensive criteria relating to the appointment of arbitrators to hear and decide disputes under the FIPA and requiring transparency over the ISDS proceedings and enabling third party participation. Finally, the model contemplates the establishment of a joint commission with the authorization to interpret the FIPA — a feature that proved useful to the NAFTA parties in reining in Chapter 11 tribunal interpretations of the treaty so as to preserve a wider margin of flexibility for themselves to address thorny regulatory problems.
During this same period, Canada signed and ratified two multilateral treaties with ISDS chapters — the Comprehensive and Progressive Trans-Pacific Partnership (CPTPP)Footnote 20 and the Canada-European Union Comprehensive Economic and Trade Agreement (CETA).Footnote 21 The CPTPP, including its ISDS chapter, is now fully in forceFootnote 22 and largely aligns with Canada’s modern approach to ISDS. CETA, with the exception of its investment chapter, is provisionally in force. CETA marks a hard pivot away from ISDS in the form of ad hoc dispute resolution and towards the creation of a permanent standing tribunal to resolve disputes, along with a permanent standing appellate body, similar to the World Trade Organization’s Dispute Settlement Body. This shift has occurred in parallel to ISDS reform discussions, in which Canada has taken an active role, under the umbrella of UNCITRAL — in particular, its Working Group III.Footnote 23 Among other reforms to ISDS, those discussions have explored the development of a multilateral investment convention that would include a standing mechanism for the resolution of international investment disputes as well as an appeal mechanism.Footnote 24 As can be seen below, these developments are increasingly shaping Canadian policy towards ISDS.
D. Fourth-generation FIPAs
In 2021, Canada released its new model FIPA, launching its fourth generation of BITs. Canada has signed a single FIPA pursuant to the 2021 model FIPA, the Canada-UAE FIPA.Footnote 25 The new model again builds on experience and provides further criteria in connection with the MST clause, national and MFN treatment clauses, and the performance requirement clause. It most significantly expands the dispute toolkit in FIPAs negotiated according to this model to include mediation, an expedited arbitration mechanism for claims under ten million dollars, extended timelines for submitting a claim to arbitration where a claimant is actively pursuing domestic remedies, enhanced transparency measures, an arbitrator code of conduct to prevent conflicts of interest and ensure that arbitrator nominees have appropriate qualifications, and a commitment among the contracting parties to consider using a permanent first instance investment tribunal or an appellate mechanism, should it be developed under other institutional arrangements, such as CETA.
Similar developments can be seen in institutional and arbitral rules frameworks outside of Canada, placing these changes and innovations in a broader international context. For example, ICSID and UNCITRAL have collaborated on the development of a draft Code of Conduct for arbitrators involved in investment disputes.Footnote 26 In 2022, ICSID established new mediation rules designed specifically for investment disputes.Footnote 27 In 2024, the Administrative Council of the Permanent Court of Arbitration (PCA) also adopted three separate protocols to its 2012 Arbitration Rules, available on an opt-in basis, which respectively provide for an emergency interim measures mechanism administered by the PCA, a scrutiny process for arbitral awards and an expedited arbitration procedure.Footnote 28
3. Canada’s role as a disputant
A. ISDS under NAFTA Chapter 11
Canada’s involvement in ISDS as a disputant began with NAFTA Chapter 11. Canada was the first NAFTA member state to be pursued by an investor under Chapter 11. The Ethyl Corporation case presented the first test of the treaty’s investment protection provisions — and the first test of Canada’s mettle as a disputant in ISDS. Ethyl Corporation, a US company headquartered in Virginia, exported a fuel additive to Canada that was designed to increase the octane level of unleaded gasoline. In 1997, Canada enacted legislation prohibiting the importation of the fuel additiveFootnote 29 as well as interprovincial trade in the additive, citing environmental concerns relating to vehicle emissions. In parallel to the NAFTA claim brought by Ethyl Corporation, three Canadian provinces successfully challenged the legislation under the (then) Agreement on Internal Trade. Footnote 30 Canada and Ethyl Corporation settled the latter’s investment claim shortly after the Canadian federal-provincial dispute settlement panel rendered its decision.Footnote 31
Although the Ethyl case did not reach a merits hearing, Canada raised jurisdictional objections that led to the first NAFTA Chapter 11 award on jurisdiction, which provided important guidance for investors, their counsel and NAFTA parties in respect of certain pre-arbitral conditions in Chapter 11. For example, the Ethyl tribunal drew a distinction between the jurisdictional requirements of the treaty, which if not satisfied would result in the tribunal being bereft of authority ab initio to decide the dispute, and the treaty’s procedural requirements, which if not satisfied may result in a delay to the proceedings but would not deprive the tribunal of jurisdiction over the dispute.Footnote 32
Canada tested the conditions to commence arbitration under Chapter 11 by arguing, among others, that the parties had not satisfied the requirement to engage in consultations prior to the initiation of arbitration and that the events giving rise to Ethyl’s claim did not yet exist, as the impugned measure had not been formally adopted by Parliament within the six-month period of time prior to the filing of Ethyl’s notice of arbitration. The tribunal adopted a pragmatic approach to these issues based on evidence that some effort had been made to consult on Ethyl’s part and its assessment that Ethyl’s claim, even if filed prematurely, would still have been within time had Ethyl refiled. Nevertheless, the tribunal awarded Canada its costs in connection with these and other similar issues.Footnote 33 This early decision, rendered by a well-reputed tribunal,Footnote 34 provided enduring guidance on several important threshold and gateway issues for disputants and their counsel not only under NAFTA Chapter 11 but also under BITs with similar conditions in their respective ISDS provisions.
Not long after the Ethyl Corporation claim was settled, Canada faced another Chapter 11 investment claim, this time presented by S.D. Myers., an Ohio-based company that used to import polychlorinated biphenyl (PCB) waste from Canada to the United States for processing. S.D. Myers commenced arbitration following the issuance of an interim order by Canada’s minister of the environment prohibiting the export of PCB waste to the United States. S.D. Myers argued that the export ban was not environmentally driven but was a protectionist measure designed to protect Canadian PCB remediation companies against US competition in this market.
The S.D. Myers dispute went the distance to a merits hearing and award. It also gave rise to another important jurisdictional award, this one fleshing out key definitions of “investor” and “investment” as well as a partial award exploring the scope of the expropriation standard in NAFTA and the national treatment and FET standards in the treaty. The S.D. Myers tribunal determined that the FET standard in Article 1105 of NAFTA imported a requirement that investors be treated “in accordance with international law”Footnote 35 — that is, in accordance with the full scope of sources of international law, including general principles of international law, treaties, and customary international law. This approach effectively laid a path for foreign investors to anchor claims for breach of a host state’s obligations in the (then) ubiquitous FET provision available in many BITs that referred only to conduct consistent with international law or general principles of international law, which is widely viewed to present a lower standard than the customary international law MST.Footnote 36
Subsequent to the S.D. Myers dispute, the NAFTA parties, concerned about the potential scope of the FET provision in Chapter 11, issued a note of interpretation clarifying that Article 1105 is tethered to the customary international law MST.Footnote 37 Subsequent NAFTA Chapter 11 tribunals generally heeded the NAFTA parties’ note but observed that, insofar as this is the case, the standard in the NAFTA was not frozen in time but, rather, subject to evolution with customary international law itself, such that what may have given rise to a breach of the standard in one period of time may no longer give rise to a breach of the standard in a later period of time.Footnote 38 These cases gave way to further debate concerning the content of the MST, offering little certainty for either foreign investors or host states as to precisely what conduct in what period would give rise to a breach of the MST.Footnote 39
Canada ultimately faced more than thirty claims in total under NAFTA Chapter 11, most of which proceeded to a final settlement or adjudicated result. When NAFTA was replaced by the Canada-United States-Mexico Agreement (CUSMA), Canada withdrew entirely from the investment chapter of the new treaty.Footnote 40 This has ended the availability of ISDS as between Canada and US investors (for the time being). As discussed below, ISDS remains available to Canadian investors in Mexico and Mexican investors in Canada through the CPTPP.
B. ISDS under Canada’s FIPAs and the CPTPP
In regard to disputes under the multitude of FIPAs and other multilateral agreements with investment provisions to which Canada is a party, less than a handful of disputes have been pursued by investors. In 2016, Global Telecom Holdings S.A.E. filed a claim against Canada under the Canada-Egypt FIPA,Footnote 41 seeking US $1.8 billion in damages relating to Global Telecom’s entry into the Canadian mobile telecommunications market via its investment in Wind Mobile. Canada prevailed in the disputeFootnote 42 but, perhaps more significantly, lost the debate in that case regarding the scope of the FET provision in its second-generation FIPAs, which Canada had sought to align with (and limit) to the MST, as it had successfully done under NAFTA. It remains to be seen whether other tribunals will adopt the same interpretation of the FET provision in Canada’s dozen or so other second-generation FIPAs in force or whether they will accept to narrow it in line with NAFTA cases following the Free Trade Commission’s adoption of its 2001 note of interpretation.Footnote 43 While ISDS awards do not form precedent in the sense of binding authority, they do constitute persuasive authority in certain circumstances, such as where the same treaty is invoked in two or more arbitrations.Footnote 44 Even where such circumstances are not present, the approach to the interpretation of a treaty standard in an ISDS award or series of awards can clearly create “externalities” impacting on the approach to interpretation across treaties.Footnote 45
More recently, a notice of arbitration is reported to have been served on Canada by Volga-Dnepr Airlines, a Russian airline company, in August 2024, under Canada’s very first BIT, the Canada-Russia FIPA. In February 2022, Canada banned Russian aircraft from using its airspace as part of a suite of measures enacted by the Canadian government in response to Russia’s invasion of Ukrainian territory. An aircraft in the Volga-Dnepr Airlines’ fleet was crossing Canadian territory when the airspace ban entered into effect and was grounded at Toronto’s Lester B. Pearson International Airport. The aircraft was subsequently seized by the Canadian government pursuant to an order-in-councilFootnote 46 issued under a special provision of the Special Economic Measures Act that permits the seizure and forfeiture of property owned by a foreign state in respect of which sanctions regulations have been enacted under the Act or a person sanctioned under such regulations.Footnote 47 The claim is estimated to be valued at US $100 million.Footnote 48 The arbitration is proceeding ad hoc under the UNCITRAL Arbitration Rules,Footnote 49 which is the only set of arbitration rules expressly provided for in the treaty’s ISDS clause, and largely out of the public eye.Footnote 50 This arbitration will test not only the scope and content of Canada’s oldest BIT but also whether its ‘first of its kind’ policy relating to the seizure and forfeiture of property owned by sanctioned persons is consistent with international law and, in particular, its obligations to foreign investors.Footnote 51
Another investor-state claim based on the alleged harm caused by Canada’s sanctions regimeFootnote 52 has also recently been notified to the Canadian government by a Moldovan citizen, Igor Makarov, under the foreign investment protection agreement between Canada and Moldova.Footnote 53 Unlike the Canada-Russia FIPA, the Canada-Moldova FIPA is a third-generation BIT with the procedural advancements and other developments described above. It is not yet known under what arbitration rules this dispute will proceed. This claim, together with the Volga Dnepr claim, will test the consistency of Canada’s sanctions regime with its treaty commitments, as they have evolved over time.
Finally, Canada has also this year been served with its first investment claim under Chapter 9 of the CPTPP. Footnote 54 The CPTPP’s ISDS provisions have already been activated though by Canadian investors in successive arbitrations commenced against Mexico in 2023 and 2024.Footnote 55 As noted above, the CPTPP effectively fills the ISDS void for Canadian investors in Mexico and Mexican investors in Canada that was created by Canada’s withdrawal from the investment chapter in the CUSMA.
4. Conclusion
Canada’s role in ISDS globally has been, and continues to be, that of both a system architect and a system participant. NAFTA’s investment chapter and the investor-state disputes that were resolved within its framework — and, in particular, as discussed above, those disputes involving Canada as a disputing party — have inspired and shaped other ISDS mechanisms.Footnote 56 While it has been observed that Canada’s recent experience in negotiating ISDS mechanisms has been as the weaker party, which likely explains the exclusion of a NAFTA Chapter 11-style ISDS mechanism from CETA’s investment chapter,Footnote 57 Canada nevertheless continues to both influence global discussions around an investment court and standing appellate body through the UNCITRAL Working Group III process and pursue in parallel the negotiation of ISDS provisions in BITs.
A recent review of Canada’s involvement in ISDS by the House of Commons Standing Committee on International Trade expressed concern that ISDS mechanisms may constrain governments’ ability to make decisions that are in the best interest of the public they serve, but it acknowledged that foreign investments can contribute to countries’ economic prosperity and that ISDS mechanisms can provide needed protections for such investments.Footnote 58 The committee ultimately recommended that the Government of Canada periodically review its trade and investment agreements and identify any needed reforms.Footnote 59 While clearly falling short of a ringing endorsement of ISDS and Canada’s role in ISDS historically and today, it reflects a pragmatic view of the benefits and risks of ISDS for Canada and Canadian investors abroad.
While changes to ISDS through the structural reforms currently being debated and the gradual evolution in treaty and customary standards of state conduct may present some uncertainty for both states and investors, they do not fundamentally alter the premise of ISDS in offering a neutral, rules-based, and peaceful process for the resolution of complex international investment disputes. Accordingly, looking towards the horizon, it is reasonable to expect that Canada will continue to engage in discussions and consultations with trading partners, as well as business entities and civil society organizations, regarding ISDS with a view to securing balanced protection for foreign investors, governments, and civil society. Where the balance will be struck remains to be seen, but it can be expected that Canada will continue to pursue rules-based dispute resolution processes that offer neutrality and predictability as well as substantive investment standards that preserve a wide margin of discretion for it to adopt measures that are, in its assessment, best suited to address emerging problems and threats.
