International business carries with it inherent risks, not the least of which is the risk of harmful measures taken by foreign governments.
What options are available to foreign investors in these circumstances?
Traditionally, when their operations were subject to discriminatory measures, unfair treatment, or expropriation, foreign investors had only two means of addressing the problem: seek a diplomatic resolution of the issue between the investor's government and the host state government, or take action in the domestic court systems of the host state.
Over the last decade or so, bilateral investment treaties or BITs have quickly emerged as a third option for businesses seeking protection of their investments in foreign jurisdictions.
These BITs are an attractive alternative since they enable an investor to seek damages from the foreign government by bringing a claim before an independent arbitral tribunal. At the end of 2002 there were approximately 2,200 BITs in force worldwide, over seven times the number of BITs that existed in 1990.
Industrialized countries negotiated these BITs with a view to providing their investors with protection and stability in foreign jurisdictions, while developing countries signed on to these agreements with the expectation of attracting much needed foreign investment.
That being said, the governments of industrialized countries can also be targets of investor claims, as is evident from the number of cases filed against Canada and the U.S. under NAFTA Chapter 11 (effectively, a trilateral investment agreement among the three NAFTA countries).
In Canada, these BITs are referred to as foreign investment protection and promotion agreements or FIPAs. Canada has concluded 22 such agreements with countries in Latin America, Eastern Europe, Asia, and Africa.
Although the substantive investment obligations imposed on host governments may differ from one BIT to another, they typically include the following:
. non-discriminatory treatment the foreign investor must be accorded treatment no less favourable than that accorded in like circumstances to domestic investors (national treatment) and investors from any other country (most-favoured-nation treatment);
. standard of treatment the foreign investor must be accorded fair and equitable treatment in accordance with international law, including full protection and security;
. expropriation expropriation or measures equivalent to expropriation must be for a public purpose, non-discriminatory, in accordance with due process of law, and accompanied by payment of prompt, adequate and effective compensation.
A BIT may include other obligations relating to transfers of profits and other amounts out of the host territory, performance requirements, and measures concerning the nationality of senior management and boards of directors. Certain BITs also contain so-called "umbrella clauses" which provide that a host government must observe any contractual obligation it has entered into with respect to investments in its territory.
Some BITs have specific provisions for certain types of measures or sectors, including taxation, subsidies, national security, financial services, and cultural activities.
The primary attraction of a BIT is its dispute resolution mechanism. In addition to government-to-government procedures, BITs also contain a private investor-state dispute mechanism enabling private foreign entities to sue host governments for damages arising out of their failure to comply with the investment obligations set out above.
This mechanism is available regardless of whether the investor already has a contractual or arbitration arrangement with the host state or one of its governmental entities.
Under most BITs, the foreign investor has the option of proceeding with an ad hoc arbitral panel under the United Nations Commission on International Trade Law (UNCITRAL) Rules or proceeding with an institutional alternative, such as an arbitral panel established under the auspices of the World Bank's International Centre for the Settlement of Investment Disputes (ICSID).
Most BITs provide that the governments consent to the submission of a claim to arbitration under the BIT in accordance with the requirements of international conventions for the recognition and enforcement of arbitral awards, including the 1958 New York Convention.
Generally, BITs require that the arbitral proceedings be brought in a state that is party to the New York Convention. Under the New York Convention, contracting parties are required to enforce arbitral awards made in the territory of other state parties. The procedure for obtaining the enforcement of an arbitral award under the New York Convention is relatively straightforward.
The arbitral award does not have to be confirmed by the courts in the jurisdiction of the seat of arbitration. The investor seeking enforcement is only required to supply the court in the enforcing jurisdiction with a duly authenticated original award and the relevant BIT.
Key procedural or jurisdictional issues to consider when determining whether a BIT will be an effective means of addressing harmful government measures include the following:
Investment: the investor's interest must be considered an "investment" under the BIT. Some BITs have a more narrow definition of investment than others.
Nationality: the investor must qualify as a "national" of a party to the BIT (other than the country being sued). Standing may be denied to a "national" depending on the nationality of those who own or control it.
In addition, opportunities may exist for an investor to change its nationality to rely upon the provisions of BITs between other countries.
Seat: the place or seat of arbitration selected by the investor may impact the procedural rules of the arbitration and the law governing the challenge of any award issued by the arbitral tribunal.
Timing: limitation periods may apply to the filing of a BIT claim. Furthermore, certain obligations may not apply to non-conforming measures in existence before the BIT came into force.
Exhaustion: some BITs provide that an investor cannot bring a claim until it has exhausted its remedies in the local court system. Others may require that the investor waive its right to initiate or continue related domestic proceedings before submitting its claim.
Governing law: some BITs may provide that the governing law is the law of the jurisdiction in which the investment was made, while others are more general and refer to the BIT and "applicable rules of international law."
Arbitral tribunals continue to struggle in distinguishing legitimate regulatory measures from compensable expropriation.
The new U.S. Model BIT (February 2004) and the Canadian Model FIPA (May 2004), both of which seek to limit the scope of the expropriation provisions as well as other elements of BITs, may give rise to additional uncertainties.
As decisions are issued on the growing number of claims submitted under BITs, one expects that further clarity will be brought to the analysis of these evolving issues.
John W. Boscariol and Orlando E. Silva are members of McCarthy Tetrault LLP's International Trade and Investment Law group.THE LAWYERS WEEKLY: