The “flat world” phenomenon is especially apparent in the chemical industry. Acquisitions, joint ventures and other investments take chemical companies all over the globe and into emerging markets. However, the playing field may not be flat in emerging markets. Changing governments may result in changing laws and regulations or discriminatory enforcement. For example, a government in a developing market may find it convenient to enforce an environmental regulation against you but not against your native competitor, thereby adversely affecting your investment.
One way to manage these risks is bilateral investment treaties (BITs): international agreements between sovereign states that require the signatory states to grant of substantive protections to investments made by nationals of one state in the other state. Although BITs are not as well known as double taxation treaties, their significance for optimization of international investments is comparable. An investor whose investment is protected under an efficient BIT enjoys a significant competitive advantage over its unprotected competitors because the BIT reduces its legal and political risk. While a project in a particular host state may seem risky because of changing regulatory frameworks, selective enforcement or political instability, it may not be so with a BIT that requires the host state to protect the investment from such risk. If the protection fails, the risk materializes and the investment is negatively affected, you will be able to enforce the BIT and claim compensation for its violation in an international arbitration against the host state.
Getting Protected Under the Right BIT
BITs, however, are not all the same. Some very efficient BITs offer a wide range of substantive protections enforceable in a full scope investor-state arbitration. Others are less efficient, or not efficient at all, because they offer fewer substantive protections or limit the scope of the investor-state arbitration.
Even an investor whose home state lacks an efficient BIT with the state of investment can obtain protection by channeling the investment through a special purpose vehicle (SPV) that can claim the benefits of an efficient BIT between the host state and a third state. The SPV can often claim such benefits if it is incorporated in the third state. If a dispute against the host state arises, the SPV can act as the owner of the investment, invoke the protections granted under the BIT and enforce them in an investor-state arbitration, if necessary.
Substantive Protections Under the BITs
A comprehensive set of substantive BIT protections includes:
- Prohibition of expropriation (and of measures equal to expropriation in their effects) without a prompt, adequate and effective compensation;
- Fair and equitable treatment – a requirement that the host country’s treatment of the investment be, under the circumstances, in accordance with an international minimum standard of fairness and equity;
- Protection and security for the investment – the host country’s commitment to protect the investment against interference by third persons;
- National treatment – the host state’s commitment not to treat the investors less well than its own nationals;
- Most-favored-nation clause – the host state’s commitment not to treat the investors less well than investors from third countries; and
- Umbrella clause – the host country’s commitment to comply with specific commitments to the investor. Such commitments may typically be found in investment agreements or concessions related to the investment.
Unexpected Additional Benefits
Two aspects of BITs are of particular interest because they offer benefits unavailable in a purely domestic setting. First, the host state’s commitments – and violations – are governed by international public law. This usually makes the investor’s claims more likely to succeed than under national law.
For example, an adverse conduct that is perfectly legal under the state’s domestic law may constitute a breach of international law, either because the state’s liability is broader under international law or simply because international arbitrators are not biased in favor of the host state as are the host state’s courts. Second, the standard of fair and equitable treatment is relatively stringent for the host country, having been interpreted to protect investors against such factors as all kinds of discrimination, unjustified or unpredictable adverse changes in regulatory rules, nontransparent or inconsistent decision making in administrative procedures, the government’s failure to negotiate in good faith, or gross deficiencies in the host country’s judicial system. In a nutshell, it gives the investor certain immunity from potential dysfunctions in the host state’s administration.
BITs can present their own risks. Companies sometimes hesitate to pursue investor-state arbitration because they doubt its predictability or believe the costs are prohibitive. However, in our experience, this arbitration process is developing to permit both increasing predictability and decreasing costs. While a BIT will not be appropriate for all investment in emerging markets, it should be routinely considered in connection with these investments as a potential tool for managing political and related risks