24 February 2011
Foreign investments may be subject to unfair or illegal measures taken by the host state. This may happen in a variety of situations. For example, states may expropriate a foreign investment or treat it unfairly. They may also deny justice to investors before national agencies or national courts and renege on promises of tax exemptions or implement discriminatory schemes. States may also issue legislation or regulations that affect a foreign investor’s legitimate expectations when the latter decided to invest.
Indeed, there is no shortage of circumstances in which states may harm a foreign investment, whether or not the investor had a contractual relation with the host state or one of its agencies. This is particularly true of the hospitality and leisure business where local or national bodies are often involved in the process of granting permits for the construction and operation of hotels and resorts, where environmental regulations and policies are at stake, and where the management and operation of hotels involve local tourism agencies.
When such situations arise, foreign investors generally consider that they have no choice but to initiate judicial or administrative proceedings in the host state to oppose such measures, usually with little hope of success. Bilateral Investment Treaties (“BITs”) provide an alternative and efficient means to oppose harmful measures taken by a state against investments made by foreign investors and allow the latter to increase the level of protection of their investments abroad.
Today, there are approximately 3,000 BITs signed by states all over the world. For example, as of June 1, 2009, France had signed 101 BITs, the Netherlands 98, Belgium and Luxemburg 90 and Switzerland 116. China has recently been negotiating a new generation of BITs and currently has 98 BITs in force. Vietnam signed 55 BITs, Singapore 40 and Thailand 39. In the Americas, the United States have signed 47 BITs (in addition to several Foreign Trade Agreements including a chapter on the protection of investments) and the United Kingdom 104. The network of BITs signed around the world is, to say the least, very dense.
Generally, investors covered by BITs are either physical persons having the nationality of one of the contracting states, or legal persons constituted under the law of that contracting state. However, certain treaties provide for more restrictive conditions. BITs are often applicable to a wide scope of activities, such as large investment projects in the oil and gas, construction, telecommunications and mining industries, but also to mere shareholdings in local companies, licenses and exploitation permits, intellectual and industrial property rights.
Substantive protection granted by BITs to foreign investments is also extensive. Typically, BITs provide for the contracting states’ undertaking to treat investors and their investments in a “fair and equitable“ manner (a broad notion favourable to investors) and also to refrain from any discriminatory treatment. Most BITs also guarantee the unrestricted transfer of investment returns outside of the host state without undue delay, as well as the indemnification of covered investors in case of an expropriation, whether or not lawful, by way of the payment of a “prompt, adequate and effective compensation".
These provisions must be readily available to investors, who must also be able to rely on effective dispute resolution clauses. Most BITs share these characteristics. Covered investors may resort to BITs without any prior authorisation or procedure within their own state. In addition, BITs generally apply regardless of the dispute resolution provisions contained in investment contracts.
Investor/state dispute resolution clauses are crucial in that they allow foreign investors to access neutral and specialised arbitral tribunals. This is a significant improvement over national proceedings for foreign investors, all the more so when the arbitration is carried out under the rules of the International Centre for Settlement of Investment Disputes (the “ICSID”) established by the Washington Convention of March 18, 1965. ICSID arbitration has several characteristics that are appealing to foreign investors, including the contracting state’s undertaking to recognise an award “as if it were a final judgment of a court in that State” (art. 54). In practice, the enforcement by contracting states of ICSID arbitral awards is also generally much less contentious given that ICSID is an organ of the World Bank. Indeed, states have voluntarily complied with a vast majority of ICSID awards until now.
There has been an important increase of investor/state arbitrations on the basis of BITs in recent years. Almost 200 cases have already been decided since ICSID was instituted and there are currently more than 120 arbitration proceedings pending before ICSID tribunals. There are a substantial number of cases involving the hospitality and leisure industry, including four known cases pending before ICSID against Costa Rica, Ukraine, and Egypt. In the past, many awards have been rendered in this domain, including in the highly publicised cases of Southern Pacific Properties (Middle East) Limited v. Arab Republic of Egypt and Amco Asia Corporation and others v. Republic of Indonesia. The jurisdiction of the Arbitral Tribunal in the Southern Pacific Properties case was based on the local Egyptian law on investments and involved a dispute over the legality of the construction of a resort on the Pyramids plateau. The foreign investor argued that the Egyptian State had expropriated its investments when it annulled a decree authorising it to build a hotel in a protected area.
Several recent awards have involved disputes in hospitality and leisure, including Wena Hotels Limited v. Arab Republic of Egypt (expropriation of the Nile hotel in Cairo), Helnan International Hotels A/S v. Arab Republic of Egypt (unfair treatment of the Danish company managing the Shepheard hotel in Cairo), Waguih Elie George Siag and Clorinda Vecchi v. Arab Republic of Egypt (expropriation of a resort in the Sinai Peninsula). The pending cases of Marion Unglaube v. Republic of Costa Rica and Reinhard Hans Unglaube v. Republic of Costa Rica are particularly interesting and demonstrate the protection and indemnification possibilities of BITs. In these cases, German investors allege that Costa Rica expropriated their investments—which consisted of the construction of a seafront resort—when the local authorities revoked the licence to build the hotel in an environmentally sensitive area, after the discovery of a nesting area for protected sea turtles. The cases are still pending and no award is expected before 2012.
In short, BIT protection has become one of the most important tools to secure investments abroad, particularly in the hospitality and leisure business. Foreign investors should be mindful of BIT provisions, not only when a dispute arises with the host state, but also as early as the planning stage of the investment, in order to identify and rely on the rights they have under such treaties.