Structuring Foreign Investments to Attract Treaty Protection

Structuring Foreign Investments to Attract Treaty Protection


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

over which the project is to be implemented; (iii) an element of risk; and (iv) a contribution to the host state’s economy. Although the question of whether an investment will qualify for the treaty protections is one that will have to be determined on the facts in each case, the application of the requirements of BITs and MITs or the ICSID Convention will normally exclude from the protections those investments which have a short term or are merely sales or supply contracts. Most energy project will qualify because of their long term nature, the significant capital contributed and the risks assumed by the investors. Structuring Investments When structuring an investment with the goal of attracting treaty protection, the starting point is to identify the BITs and MITs to which the host state of the investment is a party, checking that those treaties have been ratified and are in force. If the host state is a party to a number of treaties, the terms can be compared to determine whether the investment is one that qualifies for protection and which treaty offers the best protections. Once appropriate treaties have been identified, the next step is to consider whether the ownership of the investment can be structured so that it is either directly or indirectly owned by an entity which is a national of another state party to one of those treaties. If one of the treaties is with the home state of the investor, that will be the most straightforward. If not, it may be possible to introduce an entity into the chain of ownership that is a national of a state party to the relevant treaty. Care is required when doing this to ensure that the treaty affords protection to investments held in this way. It is also important to check whether other factors, such as tax or exposure to other risks, should be taken into account in introducing an entity in another state into the chain of ownership. The best time for structuring to be undertaken is when the investment is first made. Nevertheless, it is possible for restructuring to be done subsequently in order for an investment to attract treaty protection, provided that it is done in good faith and not merely to permit a claim to be made once a dispute has arisen. Protections for Energy Projects As noted, BITs and MITs may assist investors in energy projects to protect their investments and to achieve effective redress in a neutral forum where host states act or fail to act in a way which damages the investments or deprives the investors of their value. There are a number of well-known examples where it has been necessary for investors in energy projects to rely on treaty protections, such as: • Recent claims against a number of European countries under the Energy Charter Treaty (including against Spain, Italy and the Czech Republic) in relation to the subsidies offered to renewable power projects. • Cairn Energy’s claim against India under the UK/India BIT over the tax treatment of its merger with Vedanta. • Various claims against Argentina for steps taken in the late 1990s and early 2000s, such as CMS Gas Transmission’s claim against Argentina under the US/Argentina BIT regarding the tariff adjustment formula for gas transmission and other measures. • Expropriation claims against Iran by various oil companies following the Iranian revolution, including Phillips Petroleum’s claim under the US/Iran 1955 Treaty of Amity for compensation in relation to the expropriation of its interests in hydrocarbon reserves. Conclusion Investment treaties can provide valuable additional protection to foreign investments, particularly for energy projects. This is especially the case where it is not possible to obtain adequate protection through an investment agreement with the host state. Together with political risk insurance, they can be used to protect investors against the risk of investments being damaged or lost through state action or inaction. The protections that are available should be considered at an early stage when structuring the investment and kept under review throughout the life of an investment.


John Gilbert Partner

Damian Watkin Partner

T +44.(0).207.448.4246 F +44.(0).207.657.3124

T +44.(0).207.448.4296 F +44.(0).207.657.3124


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