Our firm is currently handling a high stakes investment arbitration claim against a former Soviet republic.
In a nutshell, our client’s investment was unlawfully taken in the days after revolutionary forces took control of the government and established a new regime.
The arbitration is currently underway pursuant to the investment treaty in force between the U.S. and the host country.
For any investor, making an investment in a foreign country poses a host of risks. What happens if, for example, one’s investment is expropriated? Fortunately, many countries offer investor protection through investment treaties.
Since the world’s first investment treaty was signed between Pakistan and Germany in 1959, more than 2500 treaties have come into force involving most countries in the world.
Bilateral and Multilateral Investment Treaties
Given the ubiquity of investment treaties throughout the world, the first step any investor should take before making an investment in a foreign country is to determine whether the investment is covered by an investor protection treaty that has been signed to assist and to encourage international investment.
Investor protection treaties are multilateral or bilateral. An example of a Multilateral Investment Treaty (MIT) is the North American Free Trade Agreement (NAFTA). Bilateral Investment Treaties (BITs) are those between two nations. An example of a BIT is the U.S. – Czech Republic Bilateral Investment Treaty. In the U.S., there are currently 42 Bilateral Investment treaties in force.
These investment treaties allow an investor to take direct legal action against the host country 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 (widely referred to 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 behaviors including:
- Expropriation or nationalization without compensation
- Unfair and inequitable treatment
- 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.
Must Qualify as an “Investment.”
The threshold issue to determine is whether the investment at issue qualifies 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.
In the U.S. – Czech Republic BIT, for example, an “investment” means:
every kind of investment in the territory of one Party owned or controlled directly or indirectly by nationals or companies of the other Party, such as equity, debt, and service and investment contracts; and includes:
(i) tangible and intangible property, including movable and immovable property, as well as rights, such as mortgages, liens and pledges;
(ii) a company or shares of stock or other interests in a company or interests in the assets thereof;
(iii) a claim to money or a claim to performance having economic value, and associated with an investment;
(iv) intellectual property which includes, inter alia, rights relating to: literary and artistic works, including sound recordings, inventions in all fields of human endeavor, industrial designs, semiconductor mask works, trade secrets, know-how, and confidential business information, and trademarks, service marks, and trade names;
and
(v) any right conferred by law or contract, and any licenses and permits pursuant to law
As you can see, the definition of ”investment” in this example is broad and geared towards affording investors with the maximum amount of protection. Nevertheless it is important that one verifies that an investment qualifies under the BIT to be afforded protection under the BIT.
ICSID vs. Ad Hoc Arbitration
A crucial determination under a BIT is to determine the applicable arbitration rules. Most BITs offers a choice between the International Centre for Settlement of Investment Disputes (ICSID) and ad hoc arbitration under the UNCITRAL rules.
If the BIT offers arbitration under the ICSID Rules, the definition of investment needs to be carefully considered. If ICSID arbitration is permitted, the relative advantages and disadvantages must be weighed.
Signatories to ICSID 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: Of the recent cases registered at ICSID, 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.
Practice Tip
In light of these issues, it is important for investors to 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.
Additional References
The following resources are the primary “go to” sources in the area of investment treaty arbitration:
The United Nations Conference on Trade and Development (UNCTAD) provides an exhaustive list of all the BITs in force throughout the world.
The United Nations Commission of International Trade Law (UNCITRAL) provides the full text of the 1976 UNCITRAL Arbitration Rules and the 2010 Revised Rules.
The World Bank’s International Centre for Settlement of Investment Disputes (ICSID) is the primary organization for the arbitration of international investment disputes. Information on how to file a claim and the schedule of fees are located on the site.