A landmark decision by an international tribunal will mean investors must consider the possibility of having to write off the upfront costs they sink into development projects.
This followed the successful defence of the Government of Georgia against a potential investor which tried to recover more than $26m (£16.6m) incurred during negotiations for the rehabilitation of a hydro-electric plant in Georgia.
The case was heard by an International Centre for Settlement of Investment Disputes (ICSID) tribunal in Washington. The tri-bunal, which has close links with the World Bank, ruled that development costs did not count as an investment and could not be claimed back under the ICSID jurisdiction. This left investors with limited recourse for claiming back such costs.
The case has made significant case law, which will have far-reaching practical ramifications for both potential investors and the governments of emerging market countries. Until this decision there had been no clear analysis of what constituted an investment for the purposes of an investment treaty, such as the ICSID Convention. Because of this award, the definition of 'investment' has been clarified.
All parties must realise that unless the allocation of pre-contractual expenses is clear, they could be in line for a dispute.
Potential investors will have to be tougher about their negotiations with a state. They will need to request a contractual commitment that the state will treat any expenses incurred as an investment and that they will be recoverable, so that they can then reclaim these under ICSID if necessary.
However, in practice, this may not be possible if investors come under pressure to submit the most cost-effective and competitive tenders. In such a case, investors may have to consider the possibility of writing off their up-front costs.
On the other hand, it would obviously be in the interests of a government wishing to attract investors to ensure that all pre-contractual correspondence relating to a project clearly stated that no contractual obligations were being created. If negotiations proceed to final contract stage, a government should anticipate that an investing company may seek to allocate responsibility for development/tender expenses to them retrospectively.
Juliet Blanch is head of international arbitration at Norton Rose and led the team advising the Georgian government
|•The International Centre for Settlement of Investment Disputes (ICSID) provides a neutral forum to hear investment disputes that arise directly out of an investment between member countries and investors who qualify as nationals of other member countries
• It is growing in importance as an investment dispute forum and the number of cases submitted to the centre has increased significantly in the last few years
• ICSID may be used as a dispute forum if the parties agree or if it falls within the terms of a Bilateral Investment Treaty
• ICSID is an autonomous international organisation. However, it has close links with the World Bank. All of ICSID's members are also members of the bank
• Under the ICSID Convention, ICSID proceedings need not be held at its headquarters in Washington DC. The parties to an ICSID proceeding are free to agree to conduct their proceedings at any other place
• There is very limited opportunity to appeal an ICSID award and it must be recognised as binding and enforced by a member state as if it were a final judgment of a court in that state