Investment Treaty Arbitration

Investment treaties are international agreements between two or more states which provide the terms and conditions under which private investors from one country invest in the other. The agreements provide private investors with certain rights and protections. In particular, under these agreements, each state offers private investors of the other contracting state specific guarantees of protection for investments they make in the territory of the receiving state.

The purpose of investment treaties is to stimulate foreign investments by reducing political risk.

What are BITs and MITs?

 Bilateral investment treaties (BITs) are agreements between two states.

Multilateral investment treaties (MITs) are agreements between more than two states (for example, the Energy Charter Treaty (ECT) and the North American Free Trade Agreement (NAFTA)).

Investment treaties are negotiated between the signatory parties and so particular protections vary, however, investment treaties generally include the following protections:

1. No expropriation without adequate compensation. The host state cannot expropriate foreign investors’ investments without providing prompt, adequate and effective compensation. To be lawful, the expropriation must also be carried out (i) in the public interest, (ii) in a legally established manner, and (iii) be non-discriminatory. ‘Expropriation’ has a very general definition, with slight variations across different treaties, but broadly it means deprivation because of a state’s action. The particular treaty wording and circumstances will need to be considered to ascertain whether the particular situation is covered by the protection.
2. Fair and equitable treatment. This broadly requires states to maintain predictable investment environments which are consistent with reasonable investor expectations. Whether or not this protection has been breached will depend on the facts of a particular case. However, the protection will generally apply where there has been a denial of justice or a breach of the foreign investor’s legitimate expectations.
3. Free transfer of funds. The host state must allow all transfers related to an investment to be made freely and without delay into and out of its territory.
4. No worse treatment than domestic investors. The host state must not favour domestic investors’ interests over, or at the expense of, foreign investors’ interests.
5. No worse treatment than foreign investors from a third state. The host state must not offer better protections to other foreign investors under other investment treaties.
6. Investor-state dispute settlement. Foreign investors can refer a dispute with the host state to an independent arbitration tribunal whose decisions are binding upon the state. This provides aggrieved foreign investors with a direct route for redress if a wrong has been committed by the host state, including breach of any of the protections listed above

As mentioned above, investment treaties provide a route for a foreign investor to challenge a breach by the host state of their obligations under the particular investment treaty and to claim damages. The dispute settlement process is a protection within the treaty itself and will be in the form of an international arbitration. For example, a foreign investor may wish to bring arbitration proceedings against a host state for expropriating their investment through nationalisation.

Investment treaty arbitrations are similar to typical commercial arbitrations in many ways. However, some specific characteristics of investment treaty arbitrations include: (i) the applicability of international law (not domestic / national law); (ii) the greater likelihood that the arbitration and any award becomes public, and (iii) the influence of political factors over the arbitration.

Foreign investors have access to these protections by virtue of being a national of a state which is a signatory to an investment treaty with the state where the investment was made.

Therefore, foreign investors should conduct ‘treaty planning’ before making an investment in a foreign state to check that there is such an investment treaty in place. If not, these protections will not be available to the foreign investor. In addition to any arbitration and dispute resolution needs you have, we can assist with treaty planning. Please do not hesitate to contact us if you require any assistance.

These materials are written and provided for general information purposes only. They are not intended and should not be used as a substitute for taking legal advice. Specific legal advice should be taken before acting on any of the topics covered.

Osborne Clarke is the business name for an international legal practice and its associated businesses. Full details here: osborneclarke.com/verein/