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Michael R. L. Hooton
Taylor & Co LLC

A bilateral investment treaty or “BIT” is a treaty between two countries designed to promote and protect investments between the two countries.  There are currently over 2600 BITs in the world.  Over 177 countries have entered into 1 or more BITs.  Despite the proliferation of BITs, many multinational corporations making investments in other countries are not aware of the important legal protections available to them under these BITs.  BITs may offer broad legal protections that may not be available under the local law of the host country where the investment may be made.  BITs may also supplement the investor’s rights under any contracts governing the investment.

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 that breaches its treaty obligations.  These treaties give investors the right to force the host government into arbitration of the investors’ claims in an international forum (such as The World Bank’s International Centre for Settlement of Investment Disputes, known as “ICSID” or the UN Commission for International Trade Law (“UNCITRAL”)) under international law. Thus BITs provide not only legal protections for foreign investors but also a way to enforce those rights without having to proceed in sometimes cumbersome, unpredictable and potentially biased host government domestic courts.

As of 27 December 2010 there were 157 countries that had signed the Convention on the Settlement of Investment Disputes (the “Convention”), of which 146 countries have ratified the Convention making it binding upon them. Thus such 146 countries, whether or not parties to an ICSID administered arbitration, are required by the Convention to recognize and enforce duly issued ICSID arbitration awards. Canada signed the convention in 2006 but has not yet ratified it, while the United States and China have both signed and ratified the Convention in 1965 and 1993 respectively.

A.    SUBSTANTIVE PROTECTIONS

Robust BITs offer numerous protections to foreign investors.  Six of the more powerful protections are set forth below (and may be easily remembered with the acronym “T-E-N-F-O-R” which is composed from the first letter of the six protections):

1. Treatment in Accordance with International Law. Many BITs provide that the foreign investor must be treated in accordance with international law.
2. Expropriation. BITs establish clear limits on governmental interference with or expropriation of an investor’s property and entitle foreign investors to seek compensation.  While host countries have an unequivocal right to expropriate property, countries subject to a robust BIT expropriation clause, may only do so if the following four international law requirements are satisfied.  The expropriation is done (i) “for a public purpose”, (ii) in a “nondiscriminatory manner”, (iii) under “due process of law”, and (iv) accompanied by “payment of prompt, adequate, and effective compensation.”  It is important to note that although “expropriation” often involves the physical taking of property, it may also include a wide range of measures that deprive a foreign investor of the economic value of its investment.
3. Non-Discriminatory Treatment: National Treatment and MFN Treatment. Robust BITs provide that foreign investors are entitled to be treated by the host government as favorably as it treats similarly situated local competitors (known as the “national treatment” protection) and similarly situated other foreign companies (known as the “most-favoured-nation treatment” protection or “MFN”).  Under such BITs, foreign investors are entitled to the better of “national treatment” or “MFN”.  In some BITs, these obligations are subject to certain limited and specifically described exceptions listed in annexes or protocols to the treaties.  National treatment and MFN are relative standards of treatment, meaning that they are defined by the way the host government treats its own investors and investors from other foreign countries.  An action by the host government that adversely affects a foreign investor does not violate national treatment or MFN treatment unless it treats the investor less favorably than the country’s own investors or investors of any third country.
4. Fair and Equitable Treatment & Full Protection and Security. Robust BITs also include objective standards of protection that provide minimum guarantees of treatment in accordance with international law. These minimum standards supplement the “national treatment” and “MFN” protections. Host countries typically promise “fair and equitable treatment” and “full protection and security” for investments, and promise not to interfere with the management, use, or enjoyment of an investment through actions that are “arbitrary,” “unreasonable,” or “discriminatory.”  Unlike national treatment and MFN treatment, these obligations are absolute standards under international law. A foreign investor need not show that it was treated worse than domestic investors or other foreign investors. Rather, the investor need only show that it was subjected to treatment that fell below these international standards.
5. Observance of Undertakings. BITs provide foreign investors who contract with a host government, protection in the event of a breach by the host government of any of its obligations contained in the contract.  BITs may also offer similar protections in respect of investors who contract with a company owned by the host government, such as a state owned utilities company.
6. Right to Transfer Funds. BITs typically include provisions which 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.

B.    BASIC CONSIDERATIONS

In making any foreign investment it is important to consider the following:  (i) structure the investment in a manner that insures that the foreign investor is able to benefit from a robust BIT, and (ii) determine in any dispute situation early on whether BIT protections are available. In this regard we note that BITs typically include a broad definition of the term “investments” that includes almost any property that a foreign investor owns in the host state, such as real property, personal property, intangible property, contractual rights, and intellectual property rights.

1. Investigate Applicable BITs Before Investment. Prior to making any foreign investment it is important to review the relevant BIT to understand the protections available under such BIT.  If robust BIT protections are not available under the BIT between the home jurisdiction of the investor and the jurisdiction of the target investment (or indeed if no BIT exists), it may be possible to structure the transaction by interposing a subsidiary or special purpose investment vehicle in a jurisdiction that does have a robust BIT with the jurisdiction of the target investment.  Thus a corporate investor incorporated in country A (that has no BIT or a weak BIT with country B where the investor wishes to invest) may set up a subsidiary in country C that has a strong or robust BIT with country B.  With this simple structure, the investor from country A may be able to indirectly benefit from or “piggyback” on to the strong protections afforded under the BIT between country B and C. 
   
   We note in this regard that Canada has entered into BITs (referred to as Foreign Investment Promotion and Protection Agreements or “FIPAs” in Canada) with 27 countries but unfortunately Canada has no BIT or FIPA with China. China has not entered into a BIT with the US either despite years of negotiations.  Consequently it would be prudent for any Chinese investor contemplating an investment into Canada or the US to analyze the BITs or FIPAs Canada or the US (as the case may be) have in place with other countries that contain robust protections and explore the practicality of structuring the investment through a subsidiary incorporated in one of such robust BIT countries.
2. Consider Early On if BIT Offers Relief in a Dispute Situation. It is critical to investigate early on when disputes arise between a foreign investor and a host country relating to an investment, in order to determine the possibility of advancing claims under a BIT.  BIT arbitration may be available even if contracts related to the investment (such as licenses or concession agreements) specify adjudication in domestic courts.  Often, however, this option is only available before the dispute has been referred to courts.  Thus it is critical that investors seek legal advice from practitioners familiar with BITs early on in the dispute process otherwise such investors risk inadvertently waiving important BIT rights.

C.    DISPUTE SETTLEMENT

1. Settlement Out of Court. The ability of aggrieved foreign investors to enforce BIT arbitration awards against host governments that have violated their treaty obligations, has encouraged governments to settle such claims out of court and often on favourable terms.  Increased press coverage creates an added incentive to settle especially for capital importing countries which are concerned about their image in the foreign investment community and the ability to attract foreign investment in the future.   An award by a reputable international body such as ICSID or UNCITRAL that a country has injured or treated a foreign investor unfairly and breached an international treaty has consequences far beyond that specific dispute. Such an award negatively impacts the reputation of the breaching country and its position in the international community.  As a result, settlement of investors’ claims prior to the completion of arbitration proceedings or even before arbitration proceedings formally begin is common.
   
   
2. Private Right of Action. One of the important rights conferred on a foreign investor is the private right of action.  This right entitles the foreign investor to submit an investment dispute with the host government directly to international arbitration. Typically if the parties are unable to resolve their dispute in an amicable manner, then the foreign investor may refer its claim to international arbitration.  The BIT may specify the rules governing the arbitration, which would generally be the Arbitration Rules of ICSID, or the UNCITRAL Arbitration Rules.  An important result of this private right of action is the ability for the foreign investor to avoid domestic judicial systems that may be cumbersome and in some cases corrupt and to avoid the application of what may be viewed as unpredictable domestic law.  Even where a contract between a foreign investor and a host government (such as a concession arrangement) contains jurisdiction and governing law clauses specifying resolving disputes by the relevant domestic court under domestic law, the BIT may supersede such clauses and entitle the foreign investor to resolve the dispute under international law before an international tribunal. 
   
   An important feature of the ICSID and UNCITRAL arbitration rules, is the inability of the host government to prevent the arbitration from proceeding once an investor has filed its claim.  The host government may choose not to participate in the arbitration, but they cannot stop the arbitration.  It would be unwise for a government to decide not to participate in the arbitration because: (i) the arbitration tribunal will nonetheless still issue its decision; (ii) such lack of participation may be viewed negatively by the tribunal and may harm the government’s position; and finally (iii) the ability of the foreign investor to enforce the BIT award against the host government is powerful.  As a result non-participation rarely if ever occurs.  The more common strategy is for host governments to challenge the jurisdiction of the arbitration tribunal over the particular dispute.  If the arbitration tribunal decides that it has jurisdiction to decide the dispute then the government usually actively defends its claim.
3. Enforcement. BIT awards are enforceable in any of the 145 or so countries that are signatories to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards (known as the 1958 New York Convention).  Canada, China and the US are all signatories to the 1958 New York Convention.  A winning investor can generally levy against assets of the losing government in any of those 145 countries, with certain exceptions.  This is important because with increased globalization, countries that participate in international commerce find that that may have a significant quantity of their assets located outside their country whether they be in the form of oil stocks, contractual rights, telephone receivables, etc.  All of these assets may be attached as part of the enforcement process if a host country refuses to settle any BIT award rendered against it.  The general practice seems to be that host governments do eventually pay up on any awards against them, although sometimes very reluctantly after all legal avenues have been exhausted to annul or repeal the award.
   
   
4. Current BIT Trends. While BITs have been in existence for many years, the use of the BIT dispute resolution process through international arbitration has only become popular in the last few years. The reasons for this are due to (i) an increased awareness on the part of foreign investors of the array of protections available to them under BITs, (ii) an increase awareness of the enforceability of BIT awards against host governments, (iii) the huge number of BITs in existence currently, and (iv) at a very practical and mundane level, more international lawyers becoming aware of and advising their clients of the benefits of BITs.  We expect that more and more disputes between foreign investors and host governments will be settled through the BIT international arbitration process in the future.

D.    CONCLUSION

Any prudent foreign investor contemplating making an investment into Canada (or any other country for that matter) would be wise to consider the matrix of BITs available and consult with an advisor familiar with BITs and the structuring of investments in order to maximize the protections available under such treaties.

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Michael R. L. Hooton is a partner in the Singapore office of Taylor & Co LLC.  His principal areas of practice are mergers and acquisitions, foreign direct investment, general finance, project finance, debt and equity restructuring, enforcement of creditors rights and private equity.

Dislcaimer: Nothing in this article constitutes any legal advice. Prior to any investor contemplating an investment into a foreign country, we recommend strongly that such investor consults with duly qualified legal counsel.