By Francis Chubb

If you are thinking of making an investment in another country, you will naturally want to know what can be done if something goes wrong. What happens if, for example, your investment is nationalised? Or, what remedies do you have if the tax structure changes in the country in which you are operating, making your investment uncommercial? It is possible in such circumstances that the redress available locally will not be sufficient, or even be able to consider the losses concerned. You should therefore look to see whether the investment is covered by any of a variety of investor protection treaties that have been signed to assist and to encourage international investment. Investor protection treaties are multilateral or bilateral. Multilateral Investment Treaties (MITs) include the Energy Charter Treaty (ECT), the North Atlantic Free Trade Agreement (NAFTA), the Association of Southeast Asian Nations or ASEAN Treaty and the Southern Common Market or MERCOSUR Treaty. Bilateral Investment Treaties (BITs) are those between two states, and some 2,500 of them have been signed since the first between Germany and Pakistan in 1959, with over 2,000 currently in force.

These investment treaties allow an investor to take direct legal action against the host state in circumstances covered by the treaty. The action permitted is normally binding arbitration and typically this will be either through an institution such as the World Bank’s International Centre for the Settlement of Investment Disputes (commonly known as “ICSID”) or through ad hoc arbitration under the UNCITRAL Rules.

The protection that is afforded by investor protection treaties is in addition to the normal rights that are present under the contracts which the investor already has in place. Commonly, these offer protection from a variety of potential host nation behaviours including:

Expropriation or nationalisation without compensation
Expropriation may not itself be prohibited, provided that it is performed in a non-discriminatory way, subject to due process, for the public good and subject to full and prompt compensation. ‘Indirect’ or ‘regulatory’ expropriation, without compensation, describes the situation where regulatory changes, for example, or taxation changes perhaps, mean that an investor’s investment is reduced in value, perhaps to the extent of being made valueless. The investor retains the actual investment vehicle, but the purpose cannot be achieved.

Unfair and inequitable treatment
The host state is expected to provide a transparent and predictable regulatory framework for the investment.

Failure to provide full protection and security for the investment
The host state is expected to provide a secure environment for the investment.

Failure to treat an inward foreign investment equally with local competitors
Protection may also involve ‘most favoured nation’ treatment as well as equal treatment with local competitors. In this, host nations promise not to treat investors of a third state better than the investors of the home state party to the treaty.

Additional protection may take the form of a protection against a breach of a legal obligation. These are so-called ‘umbrella clauses’, under which a breach of a legal obligation becomes a breach of a treaty obligation – allowing an investment treaty claim. However, these ‘umbrella clauses’ are controversial and are not always upheld.

Crucially however, the investment must qualify as an ‘investment’ in the terms of the investment treaty. In many BITs the definition of ‘investment’ is broad enough to include almost any asset or right that may be acquired by the investor. Nevertheless it is important that the investor ensures that his investment does indeed qualify under the BIT if he wishes to be protected by the BIT.

Furthermore, if the BIT offers arbitration at ICSID, under the Washington Convention, the definition of investment needs to be more carefully borne in mind. If the BIT offers a choice between ICSID and ad hoc arbitration, the advantage of selecting the ICSID route can be immense. Signatories to the Washington Convention are under an obligation to treat an ICSID award as a judgment of their own national court. This immediately reduces the enforcement risk of international arbitration. However, ICSID arbitration awards are published and this has led to a developing body of case law. A series of cases have established that there is a narrower definition of ‘investment’ under the ICSID convention than there is under most BITs. This clearly means that an investment which may qualify as an ‘investment’ under a relevant BIT, may not qualify as an ‘investment’ under the ICSID convention and therefore an arbitral tribunal formed by ICSID would not have jurisdiction. The risk of this is real: as of August 2010, of the cases registered at ICSID that had been decided, 21% have an award declining ICSID jurisdiction.

Additionally, an amendment to the original ICSID Arbitration Rules in 2006 permitted either party (although in practice this is only likely to be the respondent) to apply to the ICSID Tribunal at a very early stage in the arbitration proceedings to rule that ‘a claim that is manifestly without legal merit.’ This application can include the objection that the claim does not meet the criteria to qualify as an investment under the terms of the ICSID convention.

Therefore it is important that when investors are structuring their investments into a foreign host State, they consider the dispute resolution clauses in the applicable MIT or BIT as well as the dispute resolution clauses in the commercial contracts that they wish to sign and ensure that as far as possible if they wish at some future point to be able to rely on the investment treaty arbitration clauses that their investment qualifies appropriately.

For further details, please contact Francis Chubb LLM MCIArb.


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