International investment arbitration
When engaging in international trade and foreign transactions, entrepreneurs are often faced with problems which are caused – or fail to be resolved in time – by a foreign government. For example, a permit that was about to be granted may not be issued after all, taxes or duties may all of a sudden be raised, concessions already granted may be withdrawn as a result of public protests or an investor’s items of property may be expropriated without payment of just compensation.
In many countries such conflicts with the authorities may be put before the local national court. However, in a number of countries this approach does not provide an attractive perspective, due to the absence of an efficiently operating, independent and/or unbiased judiciary. In such cases a solution may be provided by international investment arbitration. The investor’s chances of getting effective legal protection will increase if, prior to making the investment, he has considered the possibilities offered by international investment arbitration. However, the above is not always the subject of (sufficient) attention.
What is international investment arbitration?
International investment arbitration is based on treaties, particularly bilateral investment treaties (Bilateral Investment Treaties: “BITs”). BITs have been concluded by the Netherlands with more than 100 countries. Worldwide the network consists of more than 3,000 BITs. Generally speaking most BITs concern the same way of investment protection. The two countries that have concluded the BIT undertake that they will deal with investments from other countries fairly and equitably.
Most BITs contain a clause under which an investor from one contracting state may put a claim against the other contracting state before an arbitral tribunal. This means that the investor is in that case not obliged to approach the courts of the foreign state where the investment was made. Instead the investor can put the dispute before independent and impartial arbitrators. The award given by those arbitrators is binding and capable of being enforced (practically) worldwide, provided assets belonging to the state in question can be localized, thus preventing the host country from in any way stopping a dispute between the host country where the investment was made and the investor from being settled, or from being settled impartially. Particularly in states with a ‘questionable’ reputation this will provide major protection to investors, but international investment arbitration may also benefit an investor in countries with a sound reputation.
Below is a general outline of the type of investments for which protection is offered and of the way in which international investment arbitration operates, based on the protection provided by BITs in general. However, it is of great importance to make sure whether, in a specific situation, a BIT applies and if it does, what specific provisions are contained in the treaty concerned. Although by and large the 3,000 or so BITs contain similar provisions, textual differences may nevertheless be of great importance to the degree of protection provided to the investor.
Which types of investments are protected?
Most Dutch BITs apply to investments made in the form of ‘any kind of asset’. This means that a BIT often has a very wide scope. As a rule the following are in any case covered by the scope of protected investments: stocks, items of movable and immovable property, loans, IP rights, concessions and permits. This means that the form in which an investment has materialized is rarely an obstacle when it comes to providing protection to the investment under a BIT.
Which investors enjoy protection?
Protected are investors from the contracting state, who have made an investment in the other contracting state. Within the context of, for example, a BIT between the Netherlands and China, Chinese investors may enjoy protection against acts of the Dutch state, while Dutch investors may enjoy protection against acts of the Chinese state.
Indirect investments may also enjoy protection, depending on the way the relevant BIT has been phrased. This means that, in principle, an investment made in China by a Luxembourg subsidiary of a Dutch public company with limited liability (N.V.) will enjoy protection under the Dutch-Chinese BIT. In that respect it should be noted that protection on the basis of “smartly” structured investments is put into question these days; in some BITs protection is provided only, if the company actually performs business activities in the home country.
Against which acts is the investment protected?
Protected investments are protected against all acts and omissions on the part of any entity of the host country that are in breach of the protection clauses of the treaty. Again the scope is a very wide one. Examples of situations that might cause the host country to be liable are:
- After protests from residents a municipal council withdraws a permit it had earlier granted to an investor.
- A district or province refuses to perform a contract it had entered into with the investor.
- A minister refuses on improper grounds to grant a permit required for implementing an investment previously approved by the authorities.
- The central bank refuses to take action against the conduct of third parties which is causing unlawful damage to the investor’s investment.
- Parliament approves a bill that seeks to impose stricter conditions on investments in a specific sector, despite earlier promises to the contrary.
- An investor’s plant is looted by soldiers.
- A civil servant on improper grounds withdraws a temporary residence permit that had been granted to the director / sole shareholder of an investment vehicle.
Wat are the costs involved in international investment arbitration?
Arbitration proceedings on the basis of a BIT may be a very costly affair. The interests involved are often considerable, not only for the investor, but also for the host country. The host country not only stands to lose money, but its reputation is also at stake, and it will want to do all that is in its power to prevent an investor’s claim from being allowed.
On the other hand a considerable reduction in costs may be achieved by the choice of the law firm that will deal with the matter and the arbitrators who will hear the case. Moreover, it is not uncommon for a settlement to be reached with the host country as soon as the investor informs the host country of its intention to start investment arbitration proceedings.
What is the procedure?
The precise procedure depends (once again) on the text of the applicable BIT. Roughly speaking the procedure will be as follows:
The investor sends a letter to the host country, informing it that arbitration proceedings will be initiated and appointing the arbitrator of its choice. The host country subsequently has the right to appoint an arbitrator as well, after which the two appointed arbitrators will jointly choose a third arbitrator. If the host country fails to appoint an arbitrator, the BIT usually contains a provision allowing a third party to appoint the arbitrator in question, so that the host country cannot prevent the arbitration from going ahead.
The arbitral tribunal will provide the parties with the opportunity to give a brief outline of the dispute, after which the further procedure will be decided in joint consultation with the parties. Both parties have the right to submit pleadings, after which a hearing will be held. After the hearing, and the submission of additional pleadings, if any, an award will be given by the arbitral tribunal. On the basis of two treaties in particular (the New York convention and/or the ICSID Convention) the arbitral award may be duly enforced in the vast majority of countries, provided the investor is able to localize the host country’s assets in respect of which the award may be enforced. In certain countries, including the Netherlands, attaching by garnishment is an available option.
Investment arbitration within the EU has become more difficult
A large number of bilateral investment treaties have been concluded by the various Member States of the European Union. However, in 2018 it was ruled by the Court of Justice of the EU that those treaties (and in particular the possibility to put a dispute before an arbitral tribunal on the basis of those intra-EU treaties) are in breach of European law. This ruling has made it a lot more difficult and uncertain to invoke an investment treaty concluded between two EU Member States. For the consequences of the decision by the Court of Justice, see: article (in Dutch) Beschouwingen naar aanleiding van het Achmea-arrest van het Hof van Justitie EU. Further to this 2018 ruling intra-EU treaties have been terminated.
What to look out for when preparing international investments?
When planning to make cross-border investments, the most favourable tax regime is often considered first. However, attention should also be paid by the investor to the most favourable BIT regime, which means that the investor has to check if a BIT does at all apply to the relationship between his home country and the intended host country. An indicative source for an answer to that question may be http://investmentpolicyhub.unctad.org/IIA.
If no BIT has been concluded between the investor’s home county and the country where the proposed investment is to be made, the option of structuring the investment by way of a third country may be studied, as a result of which investment protection may be obtained after all, for, as stated earlier, indirect investments may under certain circumstances also be eligible for protection. For example, a Dutch investor wishing to start business activities in Italy (no BIT has been concluded between the Netherlands and Italy), may consider structuring the investment by way of a subsidiary in Hong Kong. In this way the investment of the Dutch may still enjoy (indirect) protection under the provisions of the BIT between Italy and Hong Kong, should a dispute arise with the Italian authorities about the investment in question.
Within this context it is important to point out that national investments fall outside the scope of BIT protection. Nevertheless the investor may still seek BIT protection when planning investments in his own country, for example by structuring the investment by way of a subsidiary abroad. Whether this will work inter alia depends on the text of the applicable BIT.
Finally: if the investor plans an investment abroad and within that context enters into an agreement with the host country, an exclusive jurisdiction clause (as is customary in such documents) to the effect that any disputes between the investor and the host country arising from the agreement shall be submitted to the exclusive jurisdiction of the national courts of the host country, does not rule out a BIT procedure.