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Introduction to Investment Treaties
John Reynolds
Of Counsel, Lovells, London
Background to investment treaty protection
• 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States (Washington/ICSID Convention)
• Intended to support and encourage the flow of foreign direct investment to states wishing to attract such investment
• Creation of a neutral and effective dispute resolution mechanism between investors and states
• ICSID – slow development followed by a period of rapid growth
Bilateral and Multilateral Investment Treaties
• “BITs” = Bilateral Investment Treaties containing provisions which guarantee that the treatment of foreign investors will meet certain standards
– No contractual relationship needed– Relevant to investor-state disputes ONLY– Over 2,200 bilateral investment treaties in existence
• “MITs” = Multilateral Investment Treaties, such as the Energy Charter Treaty and the NAFTA; containing similar provisions to BITs
Who is Covered? – A Foreign Investor
• BITS are concluded between States to provide investment protection to the Nationals of both States
• “Nationals” include natural persons and companies incorporated or registered in the State
• A National from one State investing in the other State – a foreign investor
• Non-exhaustive definition of “investment”
Typical definition of “investment”
“investment means every kind of asset and in particular, though not exclusively, includes:
• movable and immovable property and any other property rights such as mortgages, liens or pledges;
• shares in and stock and debentures of a company and any other form of participation in a company;
• claims to money or to any performance under contract having financial value;
• intellectual property rights, goodwill, technical processes and know-how;
• business concessions conferred by law or under contract, including concessions to search for, cultivate, extract or exploit natural resources.”
(UK Model BIT)
Who is covered? - a Host State
• What is a Host State?
• Executive, Judiciary, Legislature
• State Owned Corporations
Typical Investment Treaty protections (1)
• Fair and equitable treatment
– No precise definition
– Maintain a stable and predictable investment environment
– Maffezini v Spain
– CME v Czech Republic
Typical Investment Treaty protections (2)
• Protection against expropriation or nationalisation of the investment
– Without due process and fair compensation
– May be direct or indirect or even creeping expropriation
– CME v Czech Republic
– Santa Elena v Costa Rica
Typical Investment Treaty protections (3)
• Guarantee that the host state will observe any specific contractual obligations it may have entered into with regard to the investments (the “Umbrella Clause”).
– Controversial area
– Wider view
– SGS cases; Vivendi
– Narrower view
– El Paso v Argentina; Pan American v Argentina
Typical Investment Treaty protections (4)
• Treatment at least as favourable as that afforded to nationals of the host state
– No discrimination
– Exceptions
Typical Investment Treaty protections (5)
• “Most Favoured Nation” treatment
– Not treat any foreign investor more favourably
– Substantive rights
– Procedural
– Maffezini v Spain
Typical Investment Treaty protections (6)
• Full protection and security against unreasonable government actions or omissions
• Compensation for losses caused by war or riot
• Right to repatriate investments and returns in the convertible currency in which the investment was made
The Energy Charter Treaty (1)
• 51 states signatory to the ECT
• ECT covers, “Investments associated with economic activity in the energy sector concerning certain energy materials and products”
The Energy Charter Treaty (2)
• “Investments” widely defined in non-exhaustive asset-based list
• Economic activity in energy sector broadly defined
Key Messages
• Provision of Additional Rights
• Rapidly Developing Area
• Consider what treaties exist (www.unctad.org)
• Consider the wording of the treaties
• Remember the ECT
THE BALTIC STATES AND INVESTMENT TREATIES
Vilius Bernatonis22 March 2007
SutkienėSutkienė, Pilkauskas , Pilkauskas & Partners& Partners
Contents of the Presentation
1. Investment treaties applicable to Lithuania
2. Protection granted to investors3. Practical application of the
protection mechanisms4. Using the provisions of the
investment treaties
INVESTMENT TREATIES APPLICABLE TO LITHUANIA (I)
• Lithuania is a party to the 1965 Washington Convention on the Settlement of Investment Disputes between States and Nationals of Other States (since 5 August 1992)
• Lithuania is currently a party to 44 bilateral investment treaties (a list is presented on the next slide)
• Lithuania is a party to the Energy Charter Treaty
INVESTMENT TREATIES APPLICABLE TO LITHUANIA (II)
1. Argentina2. Australia3. Austria4. Belarus5. BeNeLux6. Bulgaria7. China8. Czech Republic9. Denmark10. Estonia11. Finland12. France13. Georgia14. Germany15. Great Britain & Ireland
16. Greece17. Hungary18. Iceland19. Israel20. Italy21. Jordan22. Kazakhstan23. Kuwait24. Latvia25. Moldova26. Mongolia27. Netherlands28. Norway29. Poland30. Portugal
31. Republic of Korea32. Romania33. Russia34. Serbia & Montenegro35. Slovenia36. Spain37. Sweden38. Switzerland39. Turkey40. Ukraine41. USA42. Uzbekistan43. Venezuela44. Vietnam
PROTECTION GRANTED TO INVESTORS (I)
Scope of Application
• Definition of “Investor”– Narrow approach– Coverage of related parties
• Definition of “Investment”– Different scopes– Limitations related to compliance with national law
• Coverage of contractual claims: “umbrella clause”
Svenska Petroleum Exploration AB vs. the Republic of Lithuania and AB “Geonafta”
PROTECTION GRANTED TO INVESTORS (II)
Principal Guarantees
• National Treatment
• Most Favoured Nation
• Equitable Treatment
• Prohibition of Expropriation
PROTECTION GRANTED TO INVESTORS (III)
State Responsibility
• Actions of the State– Government actions– Legislation– Courts
• Political subdivisions, municipal authoritiesParkerings Compagniet vs. the Republic of
Lithuania
• State enterprises, other state institutions
PROTECTION GRANTED TO INVESTORS (IV)
Available Remedies
• Compensation of damages– Damages caused to investment– Lost profit
• Compensation for expropriated property– Approach to the relevant definition of “value” of
investment in various BITs– Value of investment in relation to the treaty
definition of “investor” and “investment”
PRACTICAL APPLICATION (I)Local Remedies and Negotiations
• Right to apply for protection to national courts
– Lithuanian courts– Other competent courts
• Specific provisions related to local remedies– Principal of “exhaustion of local remedies”– Consequences of choice of local remedies: “fork in
the road”
• Mandatory negotiations period
PRACTICAL APPLICATION (II)
Arbitration• Available independent dispute resolution
mechanisms:– ICSID
– Ad hoc arbitration under the UNCITRAL Rules
– Other mechanisms: Stockholm Chamber of Commerce, ICC, LCIA
• Choice in case of several available options: main considerations
PRACTICAL APPLICATION (III)
Enforcement of an Arbitral Award• Good faith execution, ICSID Awards
• Place of enforcement– New York Convention on Recognition and
Enforcement of Foreign Arbitral Awards
– Location of Assets
– Other considerations
• Recognition and enforcement process
USING THE INVESTMENT PROTECTION MECHANISMS
Considerations prior to making of the investment– “Friendly” forum
Tokios Tokeles case– Maximum protection under the applicable
investment treaties
• Considerations following the investment– Reliance on the guarantees granted by the host state– Selection of the optimal negotiations strategy– Decisions of relevant protective actions and
application of local remedies (“fork in the road”)– Analysis of prospects of a possible dispute and
preparation for defence of rights
Sutkienė, Pilkauskas & Partners
Contact:
Vilius Bernatonis
Partner, Attorney-at-Law
E-mail: [email protected]
Didžioji g. 23, LT - 01128 Vilnius
Tel.: (+ 370 5) 251 4444
Fax: (+ 370 5) 251 4455
www.spp.lt
THANK YOU !
International investment protection treaties and the Baltic States
Michael DavisonMarch 2007
Remedies
1. What can I do if my investment is damaged?
2. How much will I get back?
3. What will the reaction of the host state be?
What can I do? (1)
• Consult the Treaty
• Is it necessary to attempt to settle through diplomatic channels?
• Does the Treaty identify ICSID (or UNCITRAL)?
• If ICSID, does the Treaty contain “consent in writing” to ICSID arbitration?
• Is a three-month/six-month “cooling-off period” required?
• Is there a requirement to exhaust local remedies?
What can I do? (2)• Commence Arbitration:
– (Conciliation)– Request sent to Secretary-General (to identify parties, whether
parties are “designated”, date of consent, describe the issues)– Secretary-General registers the Request “as soon as possible”,
“unless the dispute is manifestly outside the jurisdiction of the Centre”
– Appoint Tribunal: agreed by parties:• majority to be of “neither state”
• if no agreement: proposals exchanged for appointment
• if after 60 days no agreement: parties exchange names of party-appointed arbitrators and suggestions for a chairman
• fall-back: chairman appointed by Secretary-General
What can I do? (3)• Rule 39: Provisional measures
“At any time after the institution of the proceedings, a party may request that provisional measures for the preservation of its rights be recommended by the Tribunal.”
• Rule 41: Preliminary objections
“Any objection that the dispute or an ancillary claim is not within the jurisdiction of the Centre or for other reasons is not within the competence of the Tribunal shall be made as early as possible.”
“The tribunal may on its own initiative consider at any stage of the proceedings whether the dispute or any ancillary claim before it is within the jurisdiction of the Centre and within its own competence.”
What can I do? (4)The award• By majority vote• Deals with every question submitted to the Tribunal and gives
reasons• Parties may apply for interpretation of the award by Tribunal (effect
of award is, as a result, stayed)• Parties may apply for revision of the award (90 days)• Parties may apply for annulment of the award (120 days)
– the Tribunal was not properly constituted– the Tribunal manifestly exceeded the powers– there was corruption (120 days after discovery)– there was a serious departure from a fundamental rule of procedure– the award failed to give reasons
• Enforcement: Treaty obligation
How much will I get back? (1)
• Expropriation of fixed assets• Expropriation of contracts/intangible rights• “Fair and equitable” treatment• Sovereign immunity
How much will I get back? (2)“Standard” of value: fixed assets
Many BITs use the terms like “fair value”, “genuine value” or “fair market value” to give a fixed expropriated asset a value. They often fail to define these terms.
“Compensation shall be equivalent to the fair market value of the expropriated investment immediately before the expropriation took place (‘date of expropriation’), and shall not reflect any change in value occurring because the intended expropriation had become known earlier. Valuation criteria shall include going concern value, asset value, including declared tax value of tangible property, and other criteria, as appropriate, to determine fair market value”
NAFTA Chapter 11 – Article 1110
How much will I get back? (3)“Fair market” value: (1)
Fair market value is:“the amount at which property would change hands between a willing buyer and a willing seller when neither is acting under compulsion and when both have a reasonable knowledge of the relevant facts.”
As defined by the American Society of Appraisers
How much will I get back? (4)“Fair market” value (2)
• Fair market value is based upon a notional or hypothetical transaction
• Fair market value– Is not the “highest” price one could obtain in the
market. It is simply the price– Does not consider the special acquisition premiums
due to synergies
How much will I get back? (5)Other measures of value
• Strategic or “synergistic” value – the incremental amount paid above fair market value due to cost and revenue synergies– Enhance revenue from product offerings
– Cost savings due to economies of scale
– These premiums must be removed because they are generally paid to make the seller willing to transact
• Investment value – an individual’s perceived value of an asset– I will pay more than “fair market value” because …
How much will I get back? (6)Going concern or not a going concern
• A going concern– Discounted cash flow analysis– Comparable transactions– Comparable publicly traded companies
• Not a going concern– Book value (that is, accounting assets less accounting debts)– Appraised asset values less debts
• Other methods applied by Tribunals and Arbitration Panels– Amounts invested (price paid for investment + profits earned +
other cash invested)– Others?
How much will I get back? (7)Lost profits and discounted cash flows• Lost profits (in the past)
– Historical measurement period– Actual events that occurred during the measurement period must be considered– Measured as revenues lost due to the alleged action less “incremental expenses”
that would have been incurred to earn the lost revenue– Lost profits typically does not consider cash flow items– Profits are typically calculated pre-tax
• Discounted cash flows (in the future)– Future measurement period– Events unknown at the time of valuation are not considered (even if the valuation
date is historical date)– Measured as “free cash flow” which considers all costs and expenses– Cash flows are after-tax (unless the discount rate is pre-tax)
How much will I get back? (8)
“Fair and equitable treatment”
“open to Tribunals to determine a measure of compensation appropriate to the specific circumstances of the case”
“a sufficient causal link with the specific [Treaty] provision that has been breached: the economic losses claimed … must be proved to be those that have arisen from a breach of the NAFTA …”
Myers v Canada (NAFTA)
What will the reaction of the host state be? (1)
Jurisdiction issues• Umbrella clauses
“a provision in a treaty for the protection of investments under which the State parties undertake to observe any obligations they may have entered into with respect to investments. In other words, contractual obligations are put under the treaty’s protective umbrella”
“Schreuer”
• So when is breach of contract a breach of treaty?– SGS v Philippines– SGS v Pakistan
What will the reaction of the host state be? (2)
• “Fork in the road”
“an investor may submit the dispute either to the jurisdiction of the Contacting Party in whose territory the investment has been made or to international arbitration” (ICSID or UNCITRAL)
What will the reaction of the host state be? (3)
• Parallel proceedings: civil or criminal• Tax consequences
Tips for investment
• Is there a BIT?
• Is there a MIT?
• What are its provisions?– MFN?– Consent?– Cooling-off period?– Definition of “investment”
• Is there a local investment law?
International Investment Protection Treaties and the Baltic States
Panel Discussion
Jurisdiction (1)
Consider if the following would attract investmenttreaty protection:
• A Lithuanian company which has established a chain of retail stores in Ukraine
• A Lithuania company which owns 100% of the shares in a Ukrainian company which owns the chain of retail stores in Ukraine
• An Estonian Bank which has loans with a government-owned corporation in Spain
Jurisdiction (2)Consider if the following would attract investment treatyprotection:
• A Latvian person who provides finance and consultancy services to a Russian company
• Would it make any difference if the Russian company was involved in oil exploration?
• A Lithuanian company which owns 50% of the shares in a Kazakh construction company with a contract to build infrastructure for the Kazakhstan Government
• Would it make any difference if the 50% shares in the Kazakh company were owned by a Latvian Company?
Treaty Rights (1) - MoldovaA Lithuanian company, Power AB, bids for the concession to run the retail power business in Moldova for 25 years •Terrorists are active in the region and the retail power infrastructure is damaged. In resolving matters further damage is caused by the Government.•Under the Concession Agreement the Government is responsible for ensuring the power bills of Government entities are paid or it is required to pay compensation. There is a shortfall in payments by Government customers but the Government refuses to pay compensation
Treaty Rights (2) - Moldova• Concerned at developments in Moldova, Power AB attempts
to repatriate a substantial amount of its cash resources to Lithuania. The transfer is blocked by the Moldova government introducing exchange controls
• The Government introduces environmental legislation requiring private investors in the power sector in parts of Moldova to make a substantial annual investment in steps to reduce carbon emissions. Government-owned companies are exempted from the law. Power AB is the only foreign investors in the Moldova power sector
Treaty Rights (3) - Moldova
• There is an economic crisis and a change of Government in Moldova. A new populist government is elected and introduces legislation reducing electricity prices dramatically. This is in breach of the Concession Agreement signed by the previous government.
Treaty Rights (4) - BelarusA Latvian Bank owns 51% of shares in a Lithuanian company Gas AB. Gas AB is invited to tender for alicence to prospect for natural gas by the Government ofBelarus
•The licence is given to a competitor of Gas AB. Gas AB says it has evidence of bribes given to the Byelorussian Minister by its competitor
•In the above scenarios does the Latvian investor have any redress?
Treaty Rights (5) – Belarus• Gas AB begins to build a large gas storage facility in
Belarus. A local council passes onerous new planning laws meaning the facility must be reduced in size making it uneconomic
• Gas AB has also been providing consulting services under a contract with the Belarus’ Department of Energy. Following a corruption scandal the Minister for Energy resigns. Belarus then refuses to pay Gas AB saying the Minister had no authority to sign the contract
• Would it make any difference if the contract was made with a company owned by the Government? What would happen if the Government only had 50% of the shares?
Dispute Resolution (1) - MongoliaA Lithuanian Company, Sports AB, has a contract to develop and maintain for 20 years a sports complex for the Government of Mongolia. The contract provides for all disputes to be decided in the local courts.
• In breach of contract the Government terminates the agreement 15 years early and refuses to make the last 2 quarterly payments under the contract
• Negotiations have failed and Sports AB wants to know what options are available
• Sports AB sues in the Mongolian Courts but both the court process and the judge’s reasoning are subject to substantial criticism. The local lawyers say the decision cannot be appealed in the local courts
Dispute Resolution (2) - Mongolia
• Would the position be any different if the local lawyers advised that Sports AB could appeal in the local courts?
• Would it make any difference if the contract concerned equipment to be provided for the state-owned energy company?
