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Cross-border Dispute Resolution 2005/06 Investment disputes: ten questions for in-house counsel Michael W Bhler and Jonathan Eades, Jones Day www.practicallaw.com/A47448 Many international transactions cause small and large companies (MIT).

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Dispute Resolution 2005/06

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Many international transactions cause small and large companies to invest in foreign countries worldwide. Given the sums that are

ften at stake, an investor must consider how well an investment

is protected in the foreign country. Once problems arise with an investment abroad, the investor must review the available dispute resolution options. Apart from customary remedies (such as domestic or foreign litigation, or contractual arbitration), in- house counsel today need to consider whether an investment dispute claim can be brought against the government of the host state (that is, the recipient of the investment) under an investment treaty (investment arbitration). Investment arbitration provides foreign investors with a potentially powerful right of recourse against a host country, when a host country's wrongdoing affects a foreigner's invest-

ment. Whether or not investment arbitration is ultimately

pursued and compensation claimed from the host state, consideration of this option should now be standard practice for counsel faced with a troubled investment abroad. This chapter poses ten primary questions to help counsel assess the extent of investment treaty rights and the possibility of pursuing an investment arbitration:

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Does an applicable investment treaty exist?

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Can the international transaction be considered an investment under the terms of the investment treaty?

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Where can an investment treaty claim be made?

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Who is the potential investment treaty claimant/investor?

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Who is the investment treaty defendant?

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Do the alleged acts violate any treatment guarantees under the investment treaty?

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What limitations does the investment treaty contain?

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Are there limitations to bringing investment claims not expressly covered in investment treaties?

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How long does investment arbitration last?

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How much does investment arbitration cost?

DOES AN APPLICABLE INVESTMENT TREATY EXIST?

The starting point is to determine whether there is an applicable bilateral investment treaty (BIT) or multilateral investment treaty (MIT). Treaties between nations offering protection to foreign investors have been in force for decades. However, in the last fifteen years the number of BITs has increased dramatically and there are now more than 2,000 in existence. In addition, there are a number of MITs and multilateral free trade agreements including:

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The North American Free Trade Agreement (NAFTA).

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The Energy Charter Treaty.

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The Association of South East Asian Nations Agreement for the Promotion and Protection of Trade 1987. BITs are usually entered into between developed and developing nations, but there are numerous exceptions such as the treaty between Bangladesh and Uzbekistan. To be certain whether a treaty exists, proper inquiries must be made. A helpful list of many BITs can be found at www.unctadxi.org/templates/ DocSearch____779.aspx. Even if no obviously applicable treaty exists and it seems that investment arbitration is not possible, alternative treaties may apply if individual investors have dual nationality or corporate investors have foreign subsidiaries.

IS THE TRANSACTION AN INVESTMENT?

Many investment treaties contain a broad definition of invest-

ment. The international transaction must conform to a relevant

definition to be eligible for investment treaty protection and this definition must be considered in each case. Similarly, if investment arbitration is sought before the Interna- tional Centre for Settlement of Investment Disputes (ICSID), as

ften happens, the investment must also be separately justified

under the terms of the ICSID Convention. This is usually done by showing that the investment:

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Involves a contribution by the investor.

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Is for a specific period of time.

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Involves risk to the investor. As investment treaties are entered into with the objective of encouraging foreign investment, the definition of investment is

ften much broader than what might commonly be thought of as
investment. For example, loans and the purchase of bonds have

been considered investments. Therefore, counsel must consider

Investment disputes: ten questions for in-house counsel

Michael W Bühler and Jonathan Eades, Jones Day

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This article was first published in the PLC Cross-border Dispute Resolution Law Handbook 2005/06 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact jennifer.mangan@practicallaw.com,

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the investment treaty definition with care before concluding that a foreign transaction is not an investment.

WHERE CAN RELIEF BE SOUGHT?

Investment treaties often allow an investor to submit a dispute to a variety of different forums including, most frequently, ICSID and ad hoc arbitration under the UNCITRAL Arbitration Rules of 1976, as adopted by the United Nations General Assembly on 15 December 1976. Less common options are the International Chamber of Commerce and domestic tribunals. However, many investment treaties include a "fork in the road" clause, which prevents parties from seeking relief before domestic tribunals and then starting investment arbitration. For example, under the terms of the BIT between the US and Croatia, a US investor with a dispute in Croatia cannot use investment arbitration if it has already sought relief before a Croatian

tribunal. In otherwise identical circumstances, a US investor in

Panama who has sought domestic relief in a dispute can go on to use investment arbitration, as the BIT between the US and Panama contains no fork in the road clause. If the investment treaty contains a fork in the road clause, counsel should query whether domestic dispute resolution has been initiated which would exclude investment arbitration. Although not all steps taken before domestic tribunals waive investment treaty rights, close attention must be paid to the terms of the applicable investment treaty to ensure that any steps that are taken do not prevent later investment arbitration. Some treaties, rather than providing for an election of remedies, require preliminary recourse to a domestic tribunal. For example, the BIT between Spain and Argentina requires that a dispute is first dealt with by a competent tribunal in the country where the investment is made. Under this BIT, investment arbitration can begin only if the competent tribunal cannot make a decision on the merits of the case within 18 months. However, an exception to this BIT provision was made in a recent controversial decision where an ICSID tribunal found that the preliminary recourse requirement in the BIT could be avoided entirely. In this case, the Argentine investor failed to bring a claim before a Spanish tribunal before starting investment arbitration. The BIT between Spain and Argentina contained a guarantee that investors would not be treated less favourably than investors from a third country. As a result, the Argentine investor was permitted to rely on more favourable terms in the BIT between Spain and Chile, which did not require that investors first make a claim before a Spanish tribunal.

WHO IS THE POTENTIAL INVESTMENT TREATY CLAIMANT/INVESTOR?

Both individuals and companies in each contracting party can be treated as investors (for example, this is provided for in the BIT between Denmark and Estonia). Dual nationals may have potential recourse to additional investment treaties. However, some BITs prevent the application of multiple investment treaties (such as the one between Australia and Indonesia). In any event, dual nationals need to exercise particular caution. For example, developing countries frequently seek investment from expatriates who often retain the citizenship

f their country of origin and therefore remain a citizen of the

country where the investment is made. Under the ICSID Conven- tion, investors can only bring a claim against countries of which they are not citizens. However, this restriction can be avoided (for example, by seeking recourse to a different arbitral institution that does not have this rule, if permitted by the relevant BIT). Depending on the facts of the particular investment, companies with foreign subsidiaries may also make a claim under other investment treaties. However, some treaties deny protection to companies controlled by nationals who are from a country that the host state does not maintain normal economic relations with (such as the BIT between Jamaica and the US). Careful consideration must be given to who the possible claimant is, particularly in complex transactions with multi-jurisdictional

connections. The identity of the claimant determines which

investment treaty, if any, applies.

WHO IS THE INVESTMENT TREATY DEFENDANT?

The defendant is a contracting party to the applicable investment treaty and the host state. Although it is straightforward to determine which country is the host state, there are many complex issues of investment treaty interpretation and international law which determine whether a host state can be held responsible for its acts or those of an agent. These issues are beyond the scope of this chapter.

DO THE ALLEGED ACTS VIOLATE ANY TREATMENT GUARANTEES?

Investment treaties provide investors with basic guarantees for the standard of treatment that their investments receive. Although the language varies between investment treaties, common treatment guarantees include the following:

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National treatment. A host state agrees to treat foreign investments at least as favourably as similar investments of its own nationals.

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Most favoured nation treatment. A host state agrees to treat foreign investments at least as favourably as similar investments of third country nationals.

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Fair and equitable treatment. A host state agrees to treat foreign investments fairly and equitably. This guarantee sometimes includes an assurance not to impair the operation, management, maintenance, use, enjoyment or disposal of those investments by using unreasonable or discriminatory measures.

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No expropriation without fair compensation. Investments by a contracting party must not be nationalised, expropriated or subjected to measures having a similar effect in the territory

f the host state, unless:

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the measures are taken in the public interest, on a non- discriminatory basis and under due process of law; and

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provisions have been made for effective, prompt and adequate compensation. In relation to these treatment guarantees, detailed analysis of potential claims under an investment treaty must be made in each case. For example:

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National treatment. Issues to consider are:

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whether there are investments of host state nationals comparable to the investment of the treaty claimant; and, if so

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what treatment these national investments received from the host state.

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Most favoured nation treatment. The treatment of comparable third country investments must be considered.

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Fair and equitable treatment. Counsel must consider how the objective standard of fair and equitable treatment com- pares to the actual treatment received by the investments of host state nationals and third country nationals.

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Expropriation. Counsel must consider whether the invest-

ment has been expropriated, either directly or indirectly, by creeping measures which may have reduced or destroyed its value. If comparable national or third party investments have received preferential treatment, treaty protection may be higher than what might ordinarily be considered to be fair and equitable. However, if comparable national or third party investments have received poor treatment, the highest standard of treaty protection available is likely to be fairness and equity. The same treatment could also violate several treatment guarantees. Detailed, and sometimes very difficult, factual investigation of actual treatment standards is necessary.

WHAT LIMITATIONS DOES THE INVESTMENT TREATY CONTAIN?

Investment treaties can restrict protection guarantees in one or more of the following ways:

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Time restrictions. Some investment treaties restrict treatment guarantees to events that occur after the investment treaty has entered into force. For example, the BIT between New Zealand and Chile protects investments that com- menced before the BIT, but only applies to disputes con- cerning subsequent host state measures. Other BITs extend the treatment guarantee to events that occurred before as well as after their entry into force (such as the BIT between Portugal and Pakistan). By contrast, the Ireland-Czech Republic and Egypt-Hungary BITs do not mention time limitations.

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Admission requirements. Host states sometimes screen foreign investments before accepting them. Some BITs only provide treatment guarantees for investments that have first been accepted for admission under local law (for example, the BIT between Austria and Saudi Arabia). Other BITs provide additional protection to only one of the contracting par-

ties. For example, Australian investments in Indonesia only

receive BIT protection if they have been granted admission under domestic foreign investment legislation; Indonesian investments in Australia are protected however they are

made. Many BITs contain no admission requirement at all.

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Industry exceptions. Some investment treaties exempt entire industries from treaty protection (such as the BIT between the US and Jamaica, and NAFTA). As these provisions vary depending on the treaty, the applicable investment treaty must be checked carefully for each of these restrictions in each case.

ARE THERE LIMITATIONS TO BRINGING INVESTMENT CLAIMS NOT EXPRESSLY COVERED IN INVESTMENT TREATIES?

Recent investment dispute cases, where foreign investors entered into contracts with the host state or its agencies, have stressed that only treaty claims, not contract claims, are properly the subject of investment arbitration. However the distinction between a contract claim and a treaty claim obscures the basic point that an investor has a valid claim for breach of treaty. If the treaty has been breached, a valid claim cannot be defeated by the fact that the host state actions complained of may also constitute contractual breaches. To be safe, claims for breach of treaty must be framed carefully, and properly supported, to avoid objections from the host state that only contract claims have been raised. It should be noted that some investment treaties contain provisions allowing both contract and treaty claims to be made (such as the BIT between Morocco and Pakistan).

HOW LONG DOES INVESTMENT ARBITRATION LAST?

BITs often allow the investor to resolve an investment dispute before a variety of bodies (see above, Where can relief be sought?). ICSID is commonly used because of its institutional framework and administrative support, and because its awards are comparatively easy to enforce. The procedure for investment arbitration before ICSID is, broadly, as follows:

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Acceptance of arbitration. The process is initiated by the investor opting to use the host state's investment treaty provision for arbitration. The relevant provision may require:

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written notice; and/or

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a delay of three to six months for settlement discussions. Ideally, international counsel with investment dispute experi- ence should be appointed at this stage.

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Filing a request for arbitration. Counsel must make a detailed factual investigation and prepare the request for

arbitration. This usually takes between one and three

months, but can take longer if the case is particularly complex.

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Registration of request for arbitration. ICSID must assess, on a prima facie basis, whether it has jurisdiction over the

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dispute. The respondent country is entitled to submit to

ICSID written objections to the registration. Currently, ICSID takes four to six months to decide whether to register the request.

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Appointment of tribunal. Investment arbitration allows the parties to select three arbitrators. The recent increase in investment treaties has led to a corresponding increase in investment arbitration. As a result, selecting arbitrators experienced in investment disputes law has become more difficult and time consuming, as demand for qualified arbitrators is greater than supply. Although the tribunal itself can be constituted quickly, it is common for this step to take three to four months to complete.

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First session/procedural meeting. Once constituted, the tribunal arranges a formal first session meeting with the parties to discuss procedural rules and a timetable for the

arbitration. Depending on the availability of the tribunal

members and the parties, this can take up to two months to

arrange. It is common for the timetable produced at the first

session to be divided into jurisdictional and merit proceedings.

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Jurisdictional proceeding. Six to 12 months should be allowed for the parties to exchange detailed written briefs, with documentary evidence, and possible statements from witnesses for jurisdictional issues. A hearing, usually lasting for one to three days, is scheduled at the end of this period.

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Jurisdictional decision. After the hearing, the tribunal usually takes two to three months to prepare written reasons for affirming or denying jurisdiction.

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Merits proceeding. If the tribunal accepts jurisdiction, a sep- arate timetable is adopted for the merits proceeding in which the parties exchange detailed briefs with documentary evidence and statements from witnesses on the merits. This is followed by a merits hearing which lasts for several days. The merits phase could require ten to 12 months.

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Final award. The tribunal usually takes about three months to prepare a written final award, affirming or denying the claim. The times estimated above are conservative and the procedure

utlined does not allow for interim disputes or unexpected
delays. Annulment proceedings under the ICSID Convention are

rare but can cause delays of several years. In reality, investment arbitration takes at least three years.

HOW MUCH DOES INVESTMENT ARBITRATION COST?

Costs depend on the length of proceedings and complexity of the dispute but are typically substantial. Costs include:

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Arbitral institution costs. ICSID commonly requires that the parties make initial payments of US$50,000 (about EUR36,850), with additional payments to follow.

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Fees for the three arbitrators. These are charged on an hourly basis according to an ICSID fees schedule.

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Counsel fees. These are normally the most significant cost factor.

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