The application of bilateral investment treaties to international joint ventures

What is a BIT?

Simply put, a BIT is an international agreement made between two countries containing reciprocal undertakings for the promotion and protection of private investments made by investors from one of those states into the territory of the other state.

Though many of the thousands of BITs that exist contain similar terms and substantive protections (summarised below), they are not homogenous. The terms of each individual BIT will govern the available protections in a particular context.

The protections afforded by the BIT also “have teeth” because typically, although not invariably, the BIT includes investor-state dispute settlement (ISDS) provisions. This normally means that an aggrieved investor has the right to commence international arbitration against the host state in the event that the state fails to honour any of its undertakings with respect to the protection of the investment.

When is a BIT relevant to a joint venture?

Whenever an investment is being made into a foreign state, the potential relevance of the substantive protections afforded under applicable BITs should be considered.

Properly structured, an investor might take advantage of treaty protections, including where the investment is made through a joint venture: whether in the form of an incorporated joint venture, a partnership or a contractual / unincorporated joint venture.

Additionally, in certain sectors, in particular natural resources and infrastructure projects (for example highways and ports), it is common for an investor to enter into a joint venture or investment agreement with the host government (or a government-controlled entity). These typically involve long-term commitments with significant investment on the part of the international investor into the host country.

On occasion, these types of long-term investment agreements may be re-opened for negotiation by the host government once resources are committed, under the threat of expropriation (or withdrawal of local licences or rights to operate or other measures having equivalent effect). This can particularly be the case where there has been a regime change in the host country, or shift in political priorities for a specific agreement or type of agreement.

Where a BIT applies (i.e. where the international investor is incorporated (or owned by an entity incorporated) in a country which is party to a BIT with the host country), it can provide important safeguards.

This is because the BIT operates in a different and distinct legal sphere from any contract and investment agreement, so that the foreign investor may be able to use the protections available under the BIT. This ordinarily includes the right to bring claims against the host government in an independent, international and public forum (or at least to use the threat of that as negotiating leverage with the host government).

Who benefits from the protection of a BIT?

The answer to this question depends on the precise terms of the BIT being considered. However, in essence, the beneficiary will be a qualifying “Investor” as defined in the BIT. This usually covers both nationals of the contracting states and certain entities incorporated in those contracting states. It can, but does not always, cover subsidiaries owned or controlled by entities incorporated in a contracting state.

For this reason, it is sensible to consider the use of an appropriate investment vehicle incorporated in a jurisdiction that has a favourable BIT with the host state, even if the ultimate investment is in a local joint venture.

What is protected under a BIT?

BITs are intended to promote and protect “investments” as defined in the relevant BIT. Although the definition of protected investments is usually extremely broad, with many BITs simply describing “any assets, directly or indirectly controlled by the investor”, advice should be taken in particular cases to ensure that a proposed investment has the necessary qualifying characteristics.

As above, in certain industries focused on a state’s natural resources or infrastructure, host states increasingly call for any joint venture company to be incorporated within their own jurisdiction. Since shares typically qualify as an “investment”, a shareholding in the joint venture company, appropriately structured to be routed through an entity that qualifies as an Investor, may bring the foreign party within the scope of the relevant BIT.

Whilst some BITs will cover indirect shareholdings in a locally incorporated company, this is not universally the case which may be particularly relevant in the context of a joint venture structure.

It will be important to consider these questions in the context of any joint venture structuring, including the local entity and its direct shareholders, as well as the corporate structure in place above the local entity.

What jurisdictional issues can arise?

Whilst confirming the existence of a qualifying “investor” and a qualifying “investment” may seem straightforward, the scope of what is covered by these terms varies significantly between BITs, and the choice of ISDS forum may also significantly affect whether or not a prospective claimant has standing to bring claims under the particular BIT in question.

In cases under the International Centre for Settlement of Investment Disputes (ICSID), for example, international investment jurisprudence establishes that to have standing to bring claims, the investor must additionally demonstrate:

• A contribution or commitment by the investor;
• Performance of the investment / project for a certain duration;
• Existence of a risk for the investor; and
• A significant contribution to the economic development of the host state.

The application and interpretation of these features by tribunals in the context of different BITs, however, again is not uniform. There is no binding system of precedent in investment arbitration, but awards are typically published and in the public domain. This means that non-binding (and sometimes contradictory) jurisprudence exists in relation to many different jurisdictional and substantive issues.

For this reason, arguments over jurisdiction and whether the subject matter qualifies as an investment benefiting from treaty protection can arise and are critical in almost every investment arbitration case. In all but the simplest treaty claims, the arbitral tribunal’s jurisdiction will be challenged by the host state. This may be even more likely where the claimant is a party to a joint venture, or otherwise holds its interest in the “investment” indirectly.

What are the key substantive protections under a BIT?

As BITs are negotiated agreements between their signatories, their terms vary. However, they generally include the following rights and protections:

• A right to prompt and adequate compensation in the event of expropriation. Generally, expropriation / nationalisation itself is not prevented (so long as it occurs in accordance with international law standards, i.e. for a public purpose, in a non-discriminatory manner, under due process of law, and is accompanied by payment of prompt, adequate, and effective compensation).
• Some BITs will offer protection not only against “actual” or “direct” expropriation (i.e. to a physical seizure of property or interests) but additionally where there is “indirect” expropriation, i.e. government actions that stop short of a physical acquisition but nevertheless have the effect of depriving the investor of substantially the economic value of its investment.
• National treatment – BITs often provide that companies are entitled to be treated no less favourably than their local domestic competitors and other foreign companies.
• Most-favoured-nation (MFN) treatment - MFN clauses effectively link investment agreements by providing that parties to one treaty will receive treatment which is no less favourable to the treatment provided to investors under other treaties.
• Fair and equitable treatment – this is the typical catch-all provision in a BIT, and the foundation for numerous different claims in the investment arbitration context. There is no single definition of what fair and equitable means, however, it possible to suggest that it includes the following: procedural fairness; due process and transparency; freedom from coercion; and protection of the investor’s legitimate expectations.
• BITs may also contain an “umbrella clause” which is a treaty provision recognising (in the sphere of the treaty) that the host state will comply with private contractual obligations (and thus elevating claims in the event of breach to the level of an investment treaty claim).
• Some BITs also contain preferential investment terms, such as tax exemptions, which could be relevant to the economics of the joint venture (such as reduced withholding rates on dividend payments from the joint venture entity). However, these measures may be excluded from the scope of actionable claims under the BIT, particularly where a separate double taxation treaty applies (and is to provide appropriate fiscal protection to the investor).

What are the laws applicable to a claim under a BIT?

It is important to note that the protections afforded by BITs (and claims in respect of them) will be governed by the terms of the relevant treaty and international law, and not necessarily by the law specified in any contracts related to the investment.

These rules operate on an “international plane” (meaning those rules are binding on the host state as a matter of international law, separate to and independent from host state law or the law of any contract with the host state). This is the primary set of rules used to determine whether the state has met its obligations towards the investor.

This is particularly important where a host government changes the local law that directly affects the contractual obligations it had previously agreed with the international investor. The international investor may have limited recourse to pursue claims for contractual breach in the local courts in this instance and therefore any potential action pursuant to a BIT may be its only remedy.

The local law of the host state may also be relevant to whether the host state has complied with its obligations under international law. For example, the law of the host state will determine the nature of the investment in that state. However, it is important to note that although the local law in the host state might be relevant in some respects, it is not determinative of whether the actions of the state are lawful in the international context. It is not necessary to show that the conduct of the host state was illegal under local law for the state to have breached its international law obligations. Equally, the fact that the conduct of the state was illegal under local law is not sufficient to show a breach of international law.

Additionally, the local laws of the state of the investor and any intermediary companies between the investor and the investment may be significant, for example to prove the nationality of the investor.

How do the dispute resolution provisions work under a BIT?

The key advantage of structuring an investment to fall under a BIT where possible is that most BITs contain ISDS provisions, which allow an investor of one state party to bring an international arbitration against the host state before an international tribunal.

This affords investors a private right of action and allows investors to bypass local courts, and obtain an award of damages against a host state from an independent and international tribunal. If the state does not comply with an award ordering the state to pay damages, such an award can be enforced against the state in most jurisdictions.

Most BITs provide that the investor has the option of referring a dispute to arbitration:

• Under the International Centre for the Settlement of Investment Disputes (ICSID) Rules or ICSID Additional Facility Rules (if one of the parties is not party to the ICSID Convention). The principal requirements for ICSID arbitration are: (a) a party’s consent in writing; and (b) the existence of a legal dispute arising from an investment between an ICSID Contracting State and a national of another ICSID Contracting State.
• Ad hoc, most commonly conducted under the UNCITRAL Rules.
• Occasionally under the arbitration rules of the Arbitration Institute of the Stockholm Chamber of Commerce (SCC) or the International Chamber of Commerce (ICC).

Even the threat of this action can serve as an effective negotiating tool with foreign governments, including in the context described above, where a local state joint venture partner seeks to renegotiate the deal.