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Investment Treaties - An Important (But Neglected) Weapon For Contractors

Introduction

There has been a major upsurge of interest in investment treaties as a means of protecting investments overseas, particularly in developing countries. In particular, the economic turmoil in Argentina has resulted in many highprofile cases being pursued by major companies. However, contractors generally (and particularly those in Asia) have been slow to realise the valuable rights granted to them by such treaties.

Investment treaties are international agreements entered into between countries for the promotion and protection of investments made by each other's nationals (including companies). Such treaties are an offshoot of public international law - the law governing state to state relations. However, the important innovation of investment treaties is that they grant direct rights to investors against governments. In other words, if there is a relevant investment treaty in place, a foreign investor can complain directly to the host government rather than having to rely on the investor's own government making diplomatic complaints regarding the issue. Furthermore, most investment treaties also give an investor the right to take any dispute arising out of the terms of the treaty to international arbitration at the International Centre for Investment Disputes ("ICSID") in Washington DC. ICSID was created by a multilateral convention known as the Washington Convention and its arbitration awards are almost always honoured by governments.

The most common form of investment treaties are bilateral investment treaties (BITs). As the name suggests, these are treaties concluded between two states. There are now over 2000 of these in effect worldwide with the vast majority of states party to at least one. In addition to BITs, certain multilateral treaties have similar investment protections - of particular interest in Asia are the Energy Charter Treaty and the various investment treaties concluded between the ASEAN countries. Finally, a number of countries have "foreign investment laws" designed to encourage foreign direct investment. Such laws contain similar provisions to investment treaties.

Common protections contained in investment treaties

Each investment treaty is different but there are a number of protections which are frequently encountered.

• Protection against expropriation: this may also include measures which substantially deprive an investor of the benefits of its investment (e.g. the withdrawal of a licence).


• Fair and equitable treatment: this has proved a very important provision for investors objecting to arbitrary governmental intervention. ICSID tribunals have often been prepared to find a breach of this provision even when the measures concerned did not amount to an "expropriation" .


• Full protection and security: the host state agrees to provisions, the host state will have to compensate the investor if, for example, they unreasonably fail to take protective action against threats to the investment.


• "Most favoured nation" clauses: these grant investors the same level of protection as the best given to investor of any other state. Sometimes, there is also a provision guaranteeing the same level of protection as the host states grants to its own nationals.


• Right to repatriation of investment and returns: particularly important at a time of an economic crisis when governments often try to stop funds leaving the country.


• "Umbrella" clauses: such clauses provide that governments will observe any obligation that they have entered into in relation to an investment. This means that if the government breaches a contract with an investor, this is also a breach of the investment treaty. The practical effect is that the investor can take a contractual dispute to ICSID arbitration (if this is provided for in the investment treatment) rather than using the dispute provisions in the contract. This can be a major advantage for the investor.

Frequently asked questions (FAQs)

1. Is a construction contract an investment? Yes, in most cases. Investment treaties usually include a very wide definition of an "investment", including wording such as "claims to money or to any performance under a contract having a financial value". This would clearly cover a construction contract. Likewise, ICSID tribunals have previously decided that a construction contract is an investment for the purpose of the Washington Convention.
2. My contract is with a state-owned company not the government. Does that mean investment treaties are irrelevant? No. First, a state-owned company may be regarded as an arm of government depending on the extent of government control. There have been a number of cases in which ICSID and other tribunals have found that the actions of a stateowned company should be regarded as actions of the state. It will be a question of fact in each case. Secondly, it is important to note that protections of an investment treaty are by no means limited to issues arising under a contract. For example, if the government passed a discriminatory piece of legislation requiring that companies from a particular country had to purchase an additional permit at great cost, that might well give rise to a claim under an investment treaty even if there is nothing concerning this in the contract.
3. If I have agreed in my contract with the government that local courts have jurisdiction over any dispute can I still take the dispute to ICSID arbitration? This depends on the investment treaty but often, the answer is yes. One point to be careful of is that many treaties contain a "fork in the road" provision. This means that if an investor refers a dispute to resolution in accordance with the contract, the investor will then be prevented from taking the same dispute to ICSID arbitration. This should always be considered before commencing any dispute resolution procedure against a government or state entity.
4. Are investment treaties and ICSID arbitration only something to consider after problems have arisen? Definitely not. It is important to consider investment treaties when concluding any major contract where you have concerns about the stability of the country concerned. The reason for this is that it is often possible to structure an investment to take advantage of greater investment protection. For example, if contracting in Indonesia, a contractor could gain additional protection if it used a Dutch subsidiary because Holland has a BIT with Indonesia. This is a complex area and contractors would be well advised to take specialist legal advice before commencing major projects in developing countries.