Powerful Protection — and Dispute Settlement Options — for International Investors
Foreign direct investment continues to grow worldwide at a dramatic pace. Yet many of the multinational enterprises making those investments may not be aware of key legal protections afforded by a web of more than 2800 international agreements known as bilateral investment treaties, or BITs. Over 150 countries have entered into one or more investment treaties. BITs not only obligate host countries to provide certain protections for foreign investments, but also create a powerful private right of action for investors against a host government if it falls short of those obligations.
The basic features of BITs are described below. The key lessons, however, are that:
- When investing abroad—directly or through subsidiaries—it is important to investigate whether the investment will benefit from BIT protections. BITs offer broad legal protections that may not be available under the local law of the host country, and that can supplement the investor’s rights under any contracts governing the investment.
- When disputes arise over government action or inaction relating to an investment (a term that is defined very broadly), it is important to investigate early on the possibility of advancing claims under a BIT. BIT arbitration may be available even if contracts related to the investment (such as concession contracts) specify adjudication in domestic courts. Sometimes, however, this option is only available before the dispute has been referred to courts or contractual dispute settlement mechanisms, so early legal advice is critical.
In the past two decades, governments aggressively negotiated hundreds upon hundreds of BITs. Capital exporting countries see BITs as a way to protect their companies’ investment abroad, and to encourage the adoption in foreign countries of market-oriented domestic policies that treat private investment fairly. Capital importing countries expect that agreeing to offer BIT protections will reassure and encourage foreign investors.
BITs typically provide foreign investors with the following benefits:
- BITs provide that foreign companies are entitled to be treated as favorably as their local competitors and other foreign companies. Foreign investors are entitled to the better of national treatment or most favored nation (MFN) treatment, subject only to certain limited and specifically described exceptions listed in annexes or protocols to the treaties. In U.S. BITs, this guarantee of nondiscrimination applies both to making the investment initially (“establishment”) and throughout the lifetime of the investment. Many non-U.S. BITs only guarantee national and MFN treatment after an investment is made (“post-establishment”).
- BITs establish clear limits on the expropriation of investments and entitle foreign investors to seek compensation. Expropriation can occur only in accordance with international law standards—that is, for a public purpose, in a nondiscriminatory manner, under due process of law, and accompanied by payment of prompt, adequate, and effective compensation. “Expropriation” is not limited to physical takings, and can include a wide range of measures that deprive the investor of the economic value of its investment.
- BITs include additional broad guarantees of treatment for investors in accordance with international law. Host countries typically promise “fair and equitable treatment” and “full protection and security” for investments, and promise not to engage in “arbitrary” or “discriminatory” decisionmaking.
- BITs give foreign investors the right to transfer funds into and out of the host country without delay using a market rate of exchange. This covers all transfers related to an investment, including interest, proceeds from liquidation, repatriated profits and infusions of additional financial resources after the initial investment has been made. Ensuring the right to transfer funds creates a predictable environment guided by market forces.
- BITs limit the ability of host governments to require foreign investors to adopt inefficient and trade distorting practices. For example, performance requirements, such as local content or export quotas, are often prohibited. Investors protected by such BITs can purchase competitive foreign-produced components without undue restriction on inputs in their production of various products, and can also import other foreign-produced products for distribution and sale in the local market. They cannot be forced, as a condition of establishment or operation, to export locally produced goods.
- BITs often give foreign investors the right to engage the top managerial personnel of their choice, regardless of nationality.
- As noted above, BITs give investors a private right of action—that is, the right to submit an investment dispute with the host government directly to international arbitration.
- Disputes under BITs will be governed by the terms of the relevant treaty and international law, and not necessarily by the law specified in contracts related to the investment.
- The track record of government compliance with BIT awards is very good. If necessary, awards issued by investor-state arbitration tribunals can be enforced in any of the 144 countries that are signatories to the New York Convention on the recognition and enforcement of foreign arbitral awards.