The two most common sources of investors’ rights are: (1) International Investment Agreements (IIAs), consisting of Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) containing investment provisions; and (2) individual investment contracts, which are international commercial contracts directly between a foreign investor and a state or state-owned entity, usually relating to a specific project. The basic features of these instruments are discussed in this part of the book, and summarised here. The national laws of the host state may also provide some protection, for example against expropriation without compensation. (See Chapter 2 on national laws and Chapter 8 on expropriation.)

Chapter 6: International Investment Agreements

IIA claims are usually brought by one or more investors that are nationals of a party to an agreement, against a state that is also a party to the agreement. Chapter 6 examines the nationality requirements for qualifying as an “investor” as defined under IIAs. This is a critical requirement for bringing a claim under modern BITs. Most BITs allow both individuals and companies to bring claims. In the case of individuals (natural persons), nationality is established by reference to the laws of the place where the investor is a citizen. Some IIAs do not allow an investor that is a national of both the home state and the host state to bring a claim against the host state.

In the case of companies (or other legal persons), nationality is generally determined by reference to the place of incorporation. In the modern world of multinationals with numerous subsidiaries in various jurisdictions, companies often ensure that one of the companies in the corporate hierarchy has access to IIA protection. However, a change in corporate structure designed to create jurisdiction for a foreseeable claim may not work. There are some surprises as tribunals sometimes ignore the realities of ownership and control. As discussed in Chapter 6, in one case, for example, a group of Ukrainian nationals used a company registered in Lithuania to sue Ukraine under a BIT.

Chapter 6 also delves into another important question, which is whether IIAs provide any protection during the process of making an investment (pre-establishment), or whether they only provide protection once an investment has been made (postestablishment). Under customary international law, states have a sovereign right to disallow entry of foreign capital into their territories. Some modern IIAs (mainly BITs signed with the United States, Canada and Japan) have modified this rule and made pre-establishment protection available in limited situations; that is, they have sought to grant national treatment and most-favoured nation treatment during the process of making investments, guaranteeing to would-be foreign investors that the host state would not discriminate against them in favour of local investors or investors from other states.. Most IIAs, however, reserve full control by a host state over the admission and establishment of investments in its territory, and do not grant any protection during the pre-establishment phase.

Chapter 6 also describes some of the exceptions and carve outs in IIAs. IIAs usually seek to balance investment protection with sovereign and public interests. To this effect, IIAs often contain exceptions to investment protections. An important carve out covers “essential security interests”, which could relieve a state of international responsibility in grave situations such as a military crisis. Other exceptions, more often found in modern IIAs, cover such areas as the protection of labour rights, public health and the environment.

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Chapter 7: Investment Contracts

Chapter 7 examines the important features of international investment contracts, which are commercial contracts entered into between a foreign investor and a state or a state-owned entity, usually relating to a particular project. When negotiating these contracts, parties normally include an appropriate dispute resolution mechanism, taking into account some of the unique aspects of contracting with states or state-owned entities, such as sovereignty, sovereign immunity and the effect of stabilisation clauses.

The dispute resolution mechanisms typically specify that disputes are to be resolved in a particular domestic court or through arbitration. It is important to choose a neutral forum and to unequivocally provide that the chosen jurisdiction is exclusive, to avoid facing parallel proceedings in courts that might otherwise have jurisdiction. If parties opt for arbitration, the arbitration clause should address all important legal considerations, such as the seat of the arbitration, the applicable law, the language of the proceedings, the number and mode of selection of the arbitrators, and the finality of any award.

Long-term contracts often include some form of contractual stabilisation provision in an attempt to either “freeze” the domestic legal framework, for example with respect to taxation at the time of investment, or negate any impact that future legislative or regulatory changes may have upon the foreign investment. Recently, investors have sought to include provisions that seek to re-balance the financial equilibrium that may change during the course of long-term agreements. They may also seek provisions specifically covering certain legislative areas in order to ensure the enforceability of such clauses. In any case, investors should be aware that modern stabilisation clauses tend to require renegotiation of relevant provisions of the contract when legislative changes materially and adversely affect either party’s economic position.

Another equally important issue concerns the fact that, even when a state consents to arbitration, this does not necessarily amount to waiving sovereign immunity in relation to execution of an arbitral award. Investors may therefore seek to include within the investment contract a separate waiver of sovereign immunity from execution of judgments or awards, and to assure that the waiver is unambiguous and given by the state itself. The waiver must be given in accordance with the state’s domestic laws and regulations.

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