Global Telecom Holding S.A.E. v Canada – Investment arbitration as a potential remedy against negative FDI screening decisions?

By Kilian Wagner, University of Vienna

FDI screening and international investment law

Bilateral investment treaties (BITs) and specific chapters in free trade agreements include substantive standards of investment protection. These comprise rules on expropriations, national and most-favoured-nation treatment, and the fair and equitable treatment (FET) of investments. Most BITs contain provisions on investor-state dispute settlement (ISDS) and allow investors to claim compensation for treaty breaches in arbitral proceedings. Investment screening mechanisms may significantly impact foreign investments, which inevitably raises the question of their compatibility with the obligations under international investment law. It comes as no surprise that foreign investors are considering ISDS claims in the context of FDI screening.

Nevertheless, a foreign investor may face significant obstacles in bringing a successful claim with respect to a negative screening decision. In particular, most investment treaties apply only to investments admitted in accordance with the law of a host state. These treaties do not contain obligations for the so-called pre-establishment phase and the admission process itself. Most treaties signed by European states follow this model. In contrast, treaties concluded by the United States or Canada as well as investment chapters in regional free trade agreements (such as the CETA or the USMCA) extend the national and most-favoured-nation treatment obligations to the establishment, acquisition and expansion of an investment. However, these states do not grant such rights unconditionally. Treaties including pre-establishment protection typically carve out certain sectors and industries or even explicitly exclude domestic screening frameworks from their scope of application.

The case Global Telecom v Canada[1] is the first publicly known ISDS arbitral proceeding that concerns a negative investment screening decision, making an analysis of it a worthwhile undertaking. While the case shows that such proceedings are possible, it also exemplifies the challenges disenchanted investors will face when pursing an ISDS claim to challenge a negative screening decision. Although the award is heavily redacted, it is possible to dissect the tribunal’s crucial findings on jurisdiction and the merits of the case.

Global Telecom v Canada: facts of the case

In 2008, Global Telecom, a company incorporated in Egypt, formed a joined venture (“Wind Mobile”) with Canadian telecommunication operators to participate in a wireless spectrum auction. By that time, ownership and control rules in Canada prevented Global Telecom from holding a controlling interest in the joint venture. However, Global Telecom had initially secured an option to convert non-voting shares into voting shares and to gain control in the joint venture if those rules were to be liberalized in the future. In 2011, the Netherlands based company VimpelCom became the largest shareholder in Global Telecom.[2] In 2012, Canada relaxed the ownership and control rules, and Global Telecom exercised its option to gain voting control in the joint venture. This share conversion constituted an ‘acquisition’ under the Investment Canada Act and was subject to a security review. The approval was eventually denied but these parts of the award are redacted and do not reproduce the reasons for that decision. However, media reports suggest that authorities were concerned over the use of Huawei’s equipment and VimpelCom’s ownership structure that ultimately involves a Russian national.

Global Telecom initiated arbitral proceedings against Canada under the Canada-Egypt BIT arguing that Canada violated investment protection standards including national treatment and the FET standard. Although the BIT contains pre-establishment rights, it was not contested that Global Telecom had a protected investment under the BIT. Canada submitted several jurisdictional objections, two of which concern the review under the Investment Canada Act.

Global Telecom v Canada: jurisdictional objections

Canadian BITs typically expand national treatment and most-favoured nation treatment to the acquisition, establishment, and expansion of an investment. Nevertheless, by a set of so-called carve-outs and reservations, certain economic sectors and industries as well as non-conforming domestic rules can be excluded from the scope of the treaty or individual provisions. Canada relied on such treaty provisions in its jurisdictional objections.[3]

Canada invoked a carve-out and argued that it prevented the tribunal from assessing the legality of a screening decision against the backdrop of investment protection standards. Article II(4)b of the Canada-Egypt BIT (1996) excludes domestic decisions on the establishment of an enterprise or the acquisition of shares from the ISDS mechanism of the treaty. Canada contended that this provision limits its consent to refer such investment disputes to arbitration. However, the majority of the arbitral tribunal found that the share conversion, in fact, did not concern such an acquisition of shares, since Global Telecom already held these shares. While the Investment Canada Act covers the acquisition of voting control, the tribunal concluded that the BIT’s carve-out only applies to the acquisition of ownership, not the acquisition of control. Accordingly, the tribunal had jurisdiction to assess the screening decision against Canada’s substantive treaty obligations.[4] Nevertheless, the tribunal also suggested that a state may be better off by explicitly excluding the domestic screening legislation from the scope of an investment treaty.[5] In more recent treaties, Canada expressly carves out decisions taken under the Investment Canada Act.[6]

Another jurisdictional objection concerned Global Telecom’s national treatment claim. Canada relied on Article IV(2)(d) of the BIT that allows states to make or maintain exceptions from the national treatment obligation in the sectors listed in the Annex. Canada argued that it had reserved the right to treat investments in “social services” and “services in any other sector” inconsistently. Following this line of argument, the treaty would not impose national treatment obligations to investments in the telecommunication sector. Global Telecom contended that the formulation would not cover the telecommunication sector and that Canada had failed to invoke the clause before the dispute had arisen. The tribunal’s majority agreed with Canada and found that the reservation indeed applied. Consequently, the tribunal had no jurisdiction to decide whether the screening requirement was incompatible with Canada’s national treatment obligation of the BIT.[7]One arbitrator dissented and held that the majority’s interpretation would not only be contrary to the BIT’s objective of establishing favourable investment conditions but also significantly limit Canada’s national treatment obligation.

Global Telecom v Canada: observing due process rights during screening procedures

Since the carve-out of domestic decisions over the establishment and acquisition was inapplicable, the tribunal had jurisdiction to assess Global Telecom’s FET claim regarding the security review under the Investment Canada Act. Global Telecom inter alia claimed that Canada violated the FET standard by subjecting its investment to an arbitrary national security review process that lacked transparency and due process. Again, these parts are largely redacted and neither provide any information about the screening procedure nor on the reasons for the prohibition. Yet, it allows to conclude that the arbitral tribunal considered Canada’s security interests in applying the FET standard to the facts of the case.

The FET standard includes the state’s obligation to respect due process rights in administrative and judicial proceedings, to act in a consistent and transparent manner and to protect an investor’s legitimate expectations. Investment screening mechanisms may fall short of the level of transparency required under the FET standard. Moreover, the vague concepts of security and public order may invite discriminatory and arbitrary decision-making. In general, arbitral tribunals have not found a treaty violation based on the design of an administrative framework. However, a lack of transparency or political interventions may be susceptible to a violation of investment protection standards in the decision-making process.[8]

Even if a BIT does not contain a security exception clause, arbitral tribunals may consider legitimate public rationales when interpreting and applying investment protection standards. This is well accepted for the national treatment and FET standard as well as for the distinction between indirect expropriations and non-compensable regulatory measures. In the present case, the arbitral tribunal adjusted the threshold for a breach of the FET standard by considering the objective of the national security review. Accordingly, the tribunal deemed the due process and transparency requirements to be satisfied if the subject to an investigation still has a fair opportunity to make its case reasonably ahead of an administrative decision that is based on objectively verifiable factors. In particular, the tribunal has accepted that investigations may be necessary before informing the target and that information requests do not need to state reasons in full detail.[9] While the reasoning is redacted in the award, the tribunal was satisfied that Canada demonstrated genuine national security concerns and dismissed the claim.[10] Hence, it is well possible to consider the nature of an investment screening procedure even without a security exception in a treaty. Nevertheless, it may be more complicated if the review pursues a different objective, such as the exclusion of a competitor from a state considered to be a geopolitical rival. It is conceivable that an arbitral tribunal would at least conduct a good faith review whether a certain measure is directed towards the achievement of an alleged security objective.

Conclusion

Global Telecom v Canada is the first ISDS decision that arose out of a negative investment screening decision. The case does not concern the distinction between pre- and post-establishment protection in BITs that would be relevant in the context of market access screenings. Nevertheless, it shows how a complex set of carve-outs and reservations that delineate the exact scope of the treaty operates in the context of FDI screening. In the present case, the carve-out in the BIT for decisions on the establishment or acquisition of an investment did not correspond to the scope of the Investment Canada Act. However, it is likely that tribunals would come to a different conclusion when analysing more recent treaties that explicitly exclude the Investment Canada Act. Moreover, the decision shows that treaty violations will be unlikely where the state observes transparency and due process requirements when designing and applying investment screening mechanisms. Thus, states should take into account these obligations and also align their treaties with the domestic screening policies.

[1] Global Telecom v Canada, ICSID Case No. ARB/16/16, Award, 27 March 2020.

[2] Award, paras 31-43; Local competitors had challenged Global Telecom’s compliance with ownership and control rules, but the lawfulness of the joint venture was eventually confirmed in judicial proceedings, see the Award, paras 44-55.

[3] For a comprehensive analysis of these parts of the award see: Joshua Paine, ‘Global Telecom Holding v. Canada: Interpreting and Applying Reservations and Carve-Outs in Investment Treaties’ (2021) 38 Journal of International Arbitration 533-548.

[4] Award, paras 324-336.

[5] Award, para 326.

[6] See Annex 8-C of the Comprehensive Economic and Trade Agreement between Canada, of the one part, and the European Union and its Member States, of the other part, (CETA) (adopted 30. October 2016, provisionally applied as of 21. September 2017).

[7] Award, paras 363-380.

[8] See Joseph Charles Lemire v Ukraine, ICSID Case No. ARB/06/18, Decision on Jurisdiction and Liability, 14 January 2010, paras 315-317.

[9] Award, para 608.

[10] Award, para 616.