Getting in a state
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14 November 2013
Investment dispute arbitrations (arbitrations between a foreign investor and the state within which it has invested) are becoming increasingly common against Eastern European and former CIS states. Aggrieved investors are now more likely to assert their rights when they feel they have been infringed by a state. However, it is not always easy for those advising investors to find out all of the rights the investor may enjoy.
Many of the legal developments within this relatively new field are taking place at the level of public international law. There is no single authoritative source of public international law, and even its basic principles, as applied in this field, can be difficult to ascertain and are thus subject to uncertainty. The development of public international law in the field of investment arbitrations is somewhat chaotic. An investor can find itself with an overlapping array of rights and possible international forums within which those rights can be enforced.
This multitude of options can, however, work to the investor's advantage. Unlike commercial arbitrations, which must be based on the specific agreement of the parties, investment arbitrations are not limited to cases where the parties to the arbitration have entered into a contract. Investment arbitrations can often be brought under a number of different legal instruments. An investor may be able to select which company within its group should be the claimant and the specific legal instrument under which the claim is to be brought. This is an important advantage, as the particular nature of the dispute may make it more suited to one arbitration regime than to another.
The four principal types of legal instruments on which investment arbitrations are based are:
1. Contractual agreement between the investor and a state or state entity
This remains a common basis, but not the only basis, for investment arbitrations. However, a multinational group of companies is not necessarily limited to the remedies available to the particular subsidiary that is the contracting party under the agreement. Nor is the group necessarily limited to bringing the claim in the name of the contracting subsidiary.
2. Bilateral investment treaties.
These are treaties entered into between states. They are designed to promote and protect investments by nationals of the contracting states in each other's territory. They usually provide that: each contracting state shall observe any obligations into which it has entered; it shall not violate the rights of the other's nationals; it shall not expropriate investments without providing fair compensation; and it shall not carry out discriminatory acts.
Disputes between a contracting state and a national of the other contracting state may often be resolved by means of international arbitration, without requiring the express agreement of the state to refer any particular dispute to arbitration. There are now hundreds of these treaties between various European and former CIS states.
3. Multilateral investment treaties
These are treaties that are entered into between groups of states, usually for a particular purpose. For example, the Energy Charter Treaty establishes a legal framework between states in order to promote long term cooperation in the energy field. Contracting parties are usually obliged to provide the same sort of investment protection afforded by bilateral investment treaties. Similarly, disputes between states and nationals of other states can be referred to international arbitration. Most European and former CIS states are party to the Energy Charter Treaty.
4. Foreign investment laws
Many capital-importing countries have enacted foreign investment laws. These set out standards that will be applied to protect investors, and the substantive rights protected are similar to those protected under bilateral investment treaties. Aggrieved investors are often permitted to take disputes to international arbitration.
From the above description of the individual legal regimes, it is apparent that investors may possess overlapping rights. For example, a local subsidiary may have rights under a concession contract, while the subsidiary's foreign holding company may have rights arising under an investment treaty or a foreign investment law. Other companies in the ownership chain incorporated in different jurisdictions may have rights under other investment treaties.
The parent company's management has the advantage of being able to select the rights most beneficial to it from all the rights contained in these different legal instruments. Additionally, there is no reason why the investor cannot bring more than one claim each from a different company. Although the investor will not be awarded the same damages on behalf of each separate claimant, it may be successful on the merits in only one out of a number of arbitrations. Should this occur, the investor can use its successful merits award to bring a claim for full compensation despite having lost on the merits in other arbitrations. This happened in a recent case in which a US investor operating through a Netherlands holding company brought two separate arbitrations against the Czech Republic arising out of the same facts. The investor was successful on one and lost on the other, but is now able to pursue the full compensation claim.
To the investor making the selection, one legal regime may be more attractive than another on the basis of the substantive rights afforded. For example, one regime may provide a guarantee against expropriation, while another may provide a guarantee against a change in the legislative framework within which an investment was made. Should an investor be harmed as a result of legislation that affects the commercial viability of the investment, both claims may exist. In such a situation, the investor may prefer to assert a claim on the basis of a breach of the legislative stabilisation guarantee, as this will be easier to prove. Alternatively, higher compensation may be payable if the investor can demonstrate that its property has been subject to expropriatory measures.
By referring its dispute to arbitration under an international treaty or a foreign investment law, an investor can escalate its dispute to the highest governmental levels. An investor's dispute will typically arise out of the actions of a municipal authority, such as a local regulator. However, the claim will be brought against the state itself because, as a matter of public international law, a state is responsible for all acts of its internal organs.
The arbitration documents will typically need to be served on the state's minister for foreign affairs, and often on its president as well. In this way, a dispute that began as a dispute over municipal regulations can be escalated, to the investor's advantage, to the highest government levels.
Matthew Weiniger is a senior assistant in Herbert Smith's international arbitration group