Protection when investing offshore

As a growing number of UK companies invest in emerging markets, Nicole Smith explains the protections available under bilateral investment treaties.

UK nationals and companies investing offshore have the protection of a wide range of investment treaties that have been entered into between the UK and foreign states. These are commonly referred to as bilateral investment treaties. Many of these treaties contain arbitration clauses, which allow UK nationals to bring arbitration proceedings directly against foreign states, where the state takes actions that adversely affect the UK party’s investment.

The protections under bilateral investment treaties are being relied upon with increasing frequency to protect investments from the actions of foreign governments. The subject matter of the cases that have been brought is wide-ranging and often provides a fascinating insight into the internal workings of foreign governments. The outcome and progress of many of the cases is reported by the International Centre for Settlement of Investment Disputes (ICSID), a division of the World Bank.

Sometimes the conduct that is challenged is clearly contrary to the rule of law, such as the actions of Venezuela in seeking to nationalise petroleum projects. However, in other cases, investors are seeking to protect their investments where the foreign state is acting in what it considers to be the best interests of its citizens, such as the claims of Philip Morris against the Australian government for introducing plain cigarette packaging.

Although the content of bilateral investment treaties varies, most contain common provisions such as:

• the definition of an investment;
• substantive investment protections; and
• dispute resolution clauses.

The claimant must establish that there is an "investment" that has been affected. Not every contractual arrangement that involves another country qualifies for protection under the treaties. Some cases have stated that the transaction in question needs to be a significant commitment of substantial duration, with regular returns and an assumption of risk on both sides. Examples of investments from various cases include: real estate investment, construction projects, concessions, manufacturing, the provision of loans, mining and exploration.

The substantive investment protections vary in each treaty but most tend to contain commitments to:

• provide "fair and equitable treatment" to investors, particularly when compared with local investors;
• refrain from "expropriation" and provide that the state will give fair compensation if property is expropriated or affected by government actions;
• allow the free transfer of funds, so that profits can be repatriated;
• enforce the rule of law, ensuring physical security of the investment and foreign workers.

The dispute resolution clauses in bilateral investment treaties entered into by the UK often provide for arbitration under the ICSID Convention of 1965 (also known as the Washington Convention) which the UK signed in 1965. Many treaties also provide for arbitrations to be conducted under the auspices of the International Chamber of Commerce (ICC) or other institutions such as the London Court of International Arbitration (LCIA) or ad hoc under the UN Commission on International Trade Law (UNCITRAL) rules.

ICSID arbitrations are administered by a World Bank Organisation, based in Washington. ICSID maintains a panel of arbitrators that it looks to if the party appointment process fails. The ICSID Panel arbitrators tend to be legal academics or retired members of the judiciary and are designated by the State signatories to the ICSID Convention. The arbitration hearings are held in Washington, unless the parties agree otherwise. Parties frequently agree to hold the hearings at locations that are more convenient to them and to the tribunal.

ICSID arbitrations are governed by a self-contained set of rules dealing with all procedural issues. The national procedural law at the place of arbitration has no effect on the proceedings. An award issued in an ICSID arbitration is directly enforceable in the courts of all contracting states, as if it were a judgment issued by those courts. The awards are not subject to review by national courts. However, a party can apply for revision of an award where new evidence appears or annulment of an award, on limited grounds, by an ad hoc committee, to be appointed by the Secretary-General. A revision can be by the original tribunal or a new tribunal.

Where a UK investor considers that their offshore investment has been adversely affected by the actions of a foreign state, they should not be put off by the daunting prospect of pursuing a claim against a state before its own courts. In many cases it will be possible to seek redress in arbitration proceedings before an independent tribunal of international experts, applying principles of international law. UK investors may also wish to take into account the treaties that have been entered into by the state into which they are investing, when considering where to incorporate their investment vehicle.