Structuring Foreign Investments to Attract Treaty Protection

Introduction

There are approximately 2,500 international investment treaties in force. These treaties are inter-state agreements which protect investments made into one state (the host state) by nationals of another state party. They aim to encourage foreign investment and trade between the participating states. The protections apply even where there is no direct contractual relationship between the investor and the host state or a state-owned entity. The protections tend to be broader in scope and more effective than the protections that an investor would be able to negotiate with a state by itself. In addition, under many of the treaties, the investor will have the significant benefit of being able to refer a dispute with the state to an arbitral tribunal constituted outside the country in question, rather than relying on the national courts of that country. However, the availability of these valuable protections is often not considered when investments are first made and, by the time things go wrong, it will be too late. This note briefly explains the nature of the protections offered by treaties and the steps that can be taken to give investors the best prospects of being able to rely on treaty protections should that become necessary. Protections Provided by Treaties Some investment treaties are made between two states and are described as Bilateral Investment Treaties (“BITs”). Others are made between a number of states, often focussing on a geographical area or a specific subject matter, such as the Energy Charter Treaty, and these are termed Multilateral Investment Treaties (“MITs”). The terms of the BITs and MITs that are in place vary and they offer differing protections to investors. However, BITs and MITs normally include some or all of the following key protections: • Investments will not be expropriated or nationalised without adequate compensation being provided. • The host state will take adequate steps to ensure that the investment is protected against intentional damage by state organs or private persons. • The investor will be entitled to move profits and property out of the host state. • The investor and investment will be given fair and equitable treatment. • The host state will treat the investor and investment in a manner which is no less favourable than nationals of the host state and/or investors from any other state. • Through an “umbrella clause”, the host state agrees that any breach of a contractual obligation owed by it (or a state-owned entity) to the investor can be determined in proceedings under the treaty. Treaties usually also provide a dispute resolution mechanism, which typically includes arbitration outside the host state. In many BITs and MITs, ICSID arbitration will be available. ICSID is an institution that administers conciliations and arbitrations between states and nationals of other states. It was established by the 1965 Washington Convention on Settlement of Investment Disputes (the “ICSID Convention”) under the auspices of the World Bank. There are many advantages to resolving disputes through ICSID arbitration but, as explained below, it can add further requirements in identifying qualifying investments. BITs and MITs set out requirements that investments and investors must meet in order to attract the protections that they offer. For the investor to qualify, it will need to be a national or company registered in one of the participant states that holds an investment in another state party. For the investment to qualify, it will need to fall within the category of investments stated to be covered by the BITs or MITs in question. Many include a list of the types of assets that are covered. Where a claim under a treaty is to be determined in an ICSID arbitration, the ICSID Convention imposes a number of additional criteria for investments to qualify, including: (i) a contribution of money or assets by the investor; (ii) a certain duration Qualifying Investors and Investments

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