By Bajar Scharaw
On 8 September 2016, Canada and Mongolia signed an international Agreement for the Promotion and Protection of Investments (the Canada-Mongolia Investment Agreement). The Agreement entered into force on 24 February 2017 and created legally-binding obligations for both countries that can be enforced by investors of either country against the other country before an international arbitral tribunal. This blog post provides an overview of the nature and significance of the Canada-Mongolia Investment Agreement and briefly outlines some of its features compared with other international agreements of this kind.
Nature of international investment agreements
The Canada-Mongolia Investment Agreement forms part of a worldwide web of similar international investment agreements (IIAs) that have been entered into between two States (the parties) to promote and protect foreign investments. It is estimated that countries worldwide have concluded more than 2,900 of such bilateral IIAs. Currently, Germany is leading with a total of 133 concluded IIAs, followed by China which created 129 IIAs. While Canada is a party to 32 IIAs, Mongolia entered into no less than 43 IIAs with countries from all over the world. In East Asia and the Pacific, Mongolia is a frontrunner with respect to the conclusion of IIAs. According to a survey, Mongolia took the seventh place among 24 economies in that region in 2015: only China (129), South Korea (90), Malaysia (68), Vietnam (60), Indonesia (51), and Singapore (45) had more bilateral IIAs than Mongolia.
Countries conclude IIAs such as the Canada-Mongolia Investment Agreement to attract foreign investments into the country or to protect foreign investments of their nationals abroad. IIAs seek to promote in- and outbound foreign investments by providing international rules that protect investments (property and other assets) made by investors of one party to the IIA within the territory of the other party (the host State). For example, IIAs require that expropriations of investors from the other party may only occur in the public interest, under due process of law, on a non-discriminatory basis and against compensation. IIAs stipulate that investors from the other party may freely transfer their funds and capital out of the host State. Furthermore, they require the host State to treat investors from the other party “fairly and equitably” and often to accord such investors a treatment no less favourable than that accorded to own nationals in the same situation (principle of national treatment). The rules in IIAs are of international nature, which means that they cannot be modified unilaterally by one party or through national legislation.
In the case of a dispute, IIAs allow investors from one party to file a suit against the other party (the host State) if the latter has treated such an investor in its territory in a way that violates the above mentioned IIA protection rules. To this end, the IIA entitles an investor to initiate an international arbitration outside the host State. IIAs provide a (State-independent) international arbitral tribunal with seat in Washington D.C., Geneva or elsewhere with the legal power to render a binding decision on whether the host State has indeed violated rules in the IIA and to award compensation to the investor for any damages suffered.
Significance of the Canada-Mongolia Investment Agreement
Traditionally, Mongolia’s extractive industries receive the lion share of foreign investments in the country. According to the UN’s Investment Policy Review on Mongolia, Canada (with Vancouver as the world’s “mining capital”) held an 8% share in Mongolia’s total foreign-investment inflows in 1990-2012. While China was by far the largest source of such inflows with a 32% share during the same period, Canada represented thus one of the most significant sources for foreign investments in Mongolia.
Despite this fact, Canada (and its investors) lacked an IIA with Mongolia for a long time (both countries started to conclude IIAs in the 1990s). Furthermore, unlike Mongolia, Canada is no party to the Energy Charter Treaty as a multilateral international agreement with IIA-similar protection rules. In view of the foregoing, the Canada-Mongolia Investment Agreement is of high relevance as it fills a protection gap. With the Agreement’s ratification in February 2017, Canadian investors are entitled to rely on special international rules for the protection of their investments in Mongolia.
Features of the Canada-Mongolia Investment Agreement
The Canada-Mongolia Investment Agreement provides those protection rules that are characteristic for virtually all IIAs (see above). In addition, the two countries (the Parties) agreed on various further rules that let the Agreement clearly stand out against the vast majority of current IIAs. Particularly noteworthy are the following additional rules:
Article 12 (entitled “Transparency”) requires the Parties to promptly publish investment-relevant laws and regulations, to publish in advance such proposed measures and to provide “interested persons” a “reasonable opportunity” to comment. Importantly, Article 14 (“Corporate Social Responsibility”) requires the Parties to encourage investors to voluntarily incorporate internationally recognized social standards in their practices and internal policies, and to address human rights, labour issues, the environment, community relations and anti-corruption (see also the UN Guiding Principles on Business and Human Rights). According to Article 15 (“Health, Safety and Environmental Measures”), the Parties recognize that it is inappropriate to encourage investment inflows by relaxing domestic health, safety or environmental measures.
The Agreement seeks to secure the Parties’ regulatory leeway in areas that are of particular concern to them, including cultural aspects. For this purpose, Article 16 provides special “reservations and exceptions” relating to the application of certain investment protection rules of the Agreement. For example, Mongolia’s obligation to treat Canadian investors no less favourably than own citizens (Article 4) does not apply with respect to nationality requirements for the ownership of land. This reflects Mongolia’s strong commitment to the traditional nomadic way of life. Furthermore, Article 17 provides “general exceptions” and states, for instance, that nothing in the Agreement shall prevent a Party from adopting measures necessary for (i) the protection of human, animal or plant life or health and (ii) the conservation of living or non-living exhaustible natural resources.
Lastly, the procedural rules (see above) for the enforcement of the Agreement by international arbitration are strikingly detailed to increase legal certainty. For example, Article 25 requires the disputing parties (i.e. an investor from one Party and the other Party) to select arbitrators with expertise and/or experience in public international law, international investment or trade law, or in resolving disputes arising under IIAs. It is especially worth mentioning that Article 30 requires the Parties to publish an arbitral tribunal’s decision and that oral hearings are open to the public. This is exceptional for IIAs and in line with the UN’s recent general initiative to increase transparency in international arbitrations between investors and States (see here). So far, no dispute has arisen under the Canada-Mongolia Investment Agreement.
About the Author
Dr. iur. Bajar Scharaw, LL.M. (UQ) is the author of the book The Protection of Foreign Investments in Mongolia: Treaties, Domestic Law, and Contracts on Investments in International Comparison and Arbitral Practice (Springer 2017). He is a German lawyer admitted to the bar in Frankfurt am Main and practicing in the public international law/ international arbitration group of a US law firm. This contribution is written in the author’s private capacity and does not express the views of his law firm or its clients.
Very nice review of provisions in this IIA including some that are relatively novel.
Canada has concluded dozens of stand-alone IIAs (which Ottawa refers to as ‘FIPAs’) as well as 10+ investment chapters in free trade agreements. Until recently, experts divided Canada’s IIAs in to Three Generations. The Mongolia FIPA suggests that the Three Generation schema may need to be reconsidered.
As readers might know, Canada and the European Union have recently agreed to pursue a ‘Multilateral Investment Court’ instead of investor-state arbitration. However, although the Canada-Mongolia FIPA was finalized after the Canada-EU deal, it includes consent to investor-state arbitration.
Another more practical question arises in light of the settlement of Khan Resources’ arbitration and the inclusion of consent to arbitration in this Canada-Mongolia IIA. Given the significant flows of Canada-domiciled mining FDI into Mongolia (as acknowledged by the author) should we expect more arbitrations to be brought by Canadian mining companies?
I would suggest that it CETA that may lead to another generation of FIPAs, not Canada -Mongolia agreement.