On 5 February 2015, Japan and Ukraine signed the Agreement for the Promotion and Protection of Investments (the “Bilateral Investment Treaty” or “BIT”). This agreement is expected to protect private investment, develop market-oriented policies and promote exports from both contracting parties. The BIT enters into force on the 30th day after the parties confirm that the necessary internal procedures (ratification, approvals etc.) have been completed.

The BIT consists of 28 Articles. In line with international investment protection standards, the BIT grants a number of guarantees to investments made by investors from one state in the territory of the other. The Agreement also provides for an alternative dispute resolution mechanism: an investor from either state may have recourse to international arbitration, in the event that the investor’s rights under the BIT have been violated by the host State.

Protected Investments and Investors

Article 1 of the BIT defines the term “investment” and “investor” broadly:

  • Investments” mean any kind of asset owned or controlled, directly or indirectly, by an investor. The BIT contains a broad nonexclusive, illustrative list of assets, including: (i) legal entities or enterprises; (ii) shares, stocks or other forms of equity; (iii) bonds, debentures, loans or other forms of debt; (iv) tangible and intangible property and related property rights; (v) intellectual property; (vi) claims to money or a performance related to an investment; and (vii) any right conferred by law or contract (e.g., licences or concessions). 
  • Investor” means either an individual  or an enterprise of the Contracting Party, covering any legal persons and entities, corporations and partnerships, joint ventures or associations, whether profit or non-profit, private or state-owned/controlled.

Investment Protection Guarantees

The BIT offers a number of standard investment protection guarantees, including:

1. National and Most Favoured Nation Treatment

Under the BIT, the host state is obliged to accord “national treatment” (NT) to the protected investment, i.e. the host state may not treat foreign investors differently to comparable domestic investors without reasonable justification.

Moreover, under the concept of “Most Favoured Nation Treatment” (MFNT), the host state’s treatment may be no less favourable than the treatment it accords in like circumstances to non-Contracting Party investors and to their investments with respect to investment activities.

2. Fair and Equitable Treatment and Full Protection and Security

This standard of investment protection is the most frequently and successfully invoked in investment arbitration. It generally protects investors’ legitimate and reasonable expectations, and defends them against arbitrary or capricious treatment, bad faith, coercion and harassment. The host state must not impair investment activities by arbitrary measures.

3. Protection against Expropriation and Performance Requirements

The BIT covers both direct expropriation and any measures equivalent to expropriation (i.e. indirect expropriation). The host state must refrain from expropriation except (a) for a public purpose; (b) on a non-discriminatory basis; (c) in accordance with due process of law; and (d) upon payment of prompt, adequate and effective compensation. The BIT also restricts the host state from undertaking trade-distorting practices. The host state may not impose any performance requirements (including export requirements, local procurement or local content requirements, technology transfer requirements, etc.).

4. Free Transfer of Funds

The BIT protects the investor’s right to transfer funds related to investment into and out of the host state in a freely convertible currency, at the market rate of exchange, without delay, subject to certain limitations (for example – in the event of bankruptcy, insolvency, in relation to criminal or penal offences etc.).

5. Umbrella Clause

The BIT also contains a so-called “umbrella clause” which  requires each party to the BIT to observe any obligations it may have entered into with regard to investments of investors of the other party.

Taxation Measures

The tax measures derive from the investment protection standards. The BIT provides that only certain standards of protection may be applicable with respect to the host state’s tax measures, namely – (i) FET, (ii) NT and MFNT with respect to access to courts of justice and administrative tribunals, and (iii) protection against expropriation.

Investor-State Arbitration

Investors can use the international arbitration mechanism against the host state in the event of the latter’s failure to perform its obligations under the BIT. The following arbitration options are provided:

  • ICSID arbitration (provided that both the host state and the investor’s state are parties to the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of Other States). The International Centre for Settlement of Investment Disputes (ICSID) headquartered in Washington, D.C. is one of the most popular arbitration forums;
  • arbitration under the ICSID Additional Facility Rules (if either the host state or the investor’s state are not a party to the Convention);
  • arbitration under the Arbitration Rules of the United Nations Commission on International Trade Law (UNCITRAL Rules). As opposed to institutional arbitration (for example – ICSID) this ad hoc arbitration option allows the parties to tailor the arbitration process to the specific circumstances of their dispute; and
  • any other arbitration options as agreed upon by the disputing parties.