INTERNATIONAL INVESTMENT ARBITRATION HANDBOOK

Many investors around the globe choose to invest in a foreign country at some point. According to the United Nations Conference in Trade and Development (“UNCTAD”), the global foreign direct investment flows in 2021 alone totalled USD 1.58 trillion.

Investments in the host state (“Host State”) are especially important for the development and growth of that state. The influx of cashflows boost among other things economic growth, which includes creating jobs, competition, exchange stability, and expertise.

Investors look to assist the Host State in its mission of growth and development and are willing to take commercial risks to receive a profit on the other side for their own benefit as well. Therefore, investors look for stability. Stability, in a wider sense, refers in this case to a legislative, political, economic, and social variety.

The risks investors encounter when investing in the Host State are therefore the main impediment in terms of investing in a foreign country and, unsurprisingly, are the main reason for damage suffered by investors regarding their investment. The injury suffered may be severe, especially if the investor provided a considerable amount of money and resources in the Host State.

Host States are expected to protect foreign investors in the same manner that they protect their own nationals. Historically, the property of the investor was considered part of the home state asset and this, simply put, means that any negative impact on the asset of the investor, is an injury to the home state, which in return would exercise its own protection over that asset. This understanding in international public law was supported by the International Court of Justice. The diplomatic protection which still applies (as will be briefly detailed below), went beyond political and economic means, but was also applied to military actions.

This was resolved during the previous decades when nations entered arrangements as remedies for when the Host State was in breach of any obligation towards the investor. The points listed below are some major developments in international investment law:

Furthermore, to attract investments, Host States frequently implement measures such as passing new laws, incentives, unilateral statements, and entering private arrangements with the investors themselves.

Regarding the BITs, given their importance, as of October 2022, more than 2,860 treaties were signed between states. The UAE, for example, has signed 110 BITs so far. Almost 10% of which were signed since 2021 onwards².

Broadly speaking, BITs include different provisions and means, allowing both the Investor and the Host State to settle their disputes on an international level by using one of the means available or, a combination thereof. This includes, without limitation reconciliation, ICSID Arbitration, United Nations Conference on International Trade Law (UNCITRAL) ad-hoc rules of arbitration, the International Court of Justice arbitration rules. Also, some BITs refer to national courts of the Host State before giving the option to the injured party to settle the matter on an international level.

As far as the Arab states are concerned, many initiatives and agreements were concluded under the umbrella of the Arab League’s³.

While most of those initiatives have special remedies to settle investment disputes, they do not have the same mechanism to settle investment disputes as other MITs and BITs do. Also, the Arab contracting states vary from one agreement to another and, as such, the investor of a Contracting State may not offer protection, not to mention the many overlapping provisions between several repetitive terms in those agreements.

Furthermore, the investment court established as a medium to settle disputes has a limited number of resources and is not as sophisticated as other international investment arbitration alternatives. For this reason, the version of this handbook does not cover what is mentioned in the preceding paragraph. This handbook will therefore briefly touch base on the key benefits of international arbitration, international investment arbitration, and referring disputes to the ICSID.

Moreover, this is a general handbook that discusses major points, as concise as possible, for inhouse counsel to consider before, during, and after a dispute arises. Also, considering that >>>>>>>>> is currently considering investing in Egypt and Saudi Arabia, this brief handbook will concentrate on terms that may be related to cover the key-elements from a cross-border perspective and for the purpose of investing in either Egypt or Saudi Arabia, respectively.

Regarding investments on a multilateral level, Egypt is a party of the ICSID Convention and to the Agreement on the Promotion, Protection and Guarantee of Investments Among Member States of the Organisation of the Islamic Conference⁴ (the “OIC MIT”). Egypt is also part of the well-known New York Convention, which allows the winning party in arbitration proceedings to enforce the award in a contracting state based on the provisions of that convention.

On a bilateral level, currently, in addition to around 100 other BITs entered by Egypt and other states⁵, there is a BIT in place between Egypt and the UAE known as the Agreement Between the Government of the United Arab Emirates and the Republic of Egypt for the Promotion, Protection, and Guarantee of the Investments of 1997 (the “Egypt BIT”).

On a national level:

In addition to the above, in some instances the investor may invest in the Host State and enter into special agreement with that state, including any of its subdivisions, or any instrumentality thereof.

The investor indeed has several options in relation to remedies available for protection.

Regarding investments on a multilateral level, Saudi Arabia is a party to the ICSID Convention and to the Agreement on the Promotion, Protection and Guarantee of Investments Among Member States of the Organisation of the Islamic Conference (the “OIC MIT”). Saudi Arabia is also party to the New York Convention.

Unlike Egypt, although there are some agreements in place between Saudi Arabia and the UAE, yet none are regarding investments. In fact, Saudi Arabia signed only a handful of treaties with other stats, the first signed only in 1994. Since 2010, Saudi Arabi only signed 4 BITs, half of which are not yet enforced.

On a regional level among the GCC states, albeit there are some agreements among the nations of the GCC, none is specifically related to investment.

On a local level there is an investment law in the year 2000. Said investment law only accepts juristic persons as investors if none of the shareholders are non-Saudi nationals. Further, no international remedies are available for the private investors to settle the disputes.

When disputes arose between investors of Qatar and Saudi Arabia, to be able to find a non-biased mechanism to settle its disputes on an international level, it referred to ad-hoc arbitration based on the OIC MIT.

Although each BIT signed by Saudi Arabia requires further analysis⁶, the OIC MIT is an important instrument for protection of investments, absent BIT between the UAE and Saudi Arabia, and while taking into consideration the local Saudi laws, which may not provide the minimum level of protection the investor is seeking.

Arbitration is the preferred method of dispute resolution because the parties have both the freedom and flexibility with regards to the choice of arbitrators, the location of the arbitration, procedural rules of the arbitration, and the substantive law that will govern the relationship and the rights of the parties.

Other privileges that the contracting parties may also have if they resort to arbitration include:

International investment law is orchestrated to broadly promote investments abroad and to protect the activities of the foreign investor. This can be seen in the title of many BITs and MITs.

For example, the Egypt BIT is an agreement based on ‘promotion’, ‘protection’ and ‘guarantee’ of investments. Likewise, the OIC MIT is an agreement on ‘promotion’, ‘protection’ and ‘guarantee’ of Investments’.

In addition to most of the benefits of arbitration, investment arbitration has additional distinct features that may be different from other arbitrations. Some are briefly listed, as follows:

Costly: the legal representation requires a tremendous amount of work in similar proceedings. From our experience, it does take between 2000 to 5000 hours of legal work. This number may vary depending on the complexity of the case. In some instances, the parties may reach a settlement. Depending on which stage the settlement was reached, the number of working hours may be less.

Generally speaking, there are 5 elements in foreign direct investment that distinguish it from portfolio investment. Foreign direct investment involves: (i) the transfer of funds; (ii) a longer-term project; (iii) the aim of regular income; (iv) the participation of the person transferring the funds in the management of the project; and (v) business risk. Portfolio investment however lacks the element of the personal management.

In any case, both types of investment are different from ordinary transactions for the purpose of sales of goods or services, and short-term financial transactions.

The investor may benefit from more than one source. For example, an investor from the UAE who invests in Egypt, may rely on the local laws of Egypt, any BIT entered between the UAE and Egypt or any MIT, in which both the UAE and Egypt are parties to.

Although the local laws of the Host State may contain provisions to protect investments, in practice, many provisions are added that are not in line with the 2,800+ BITs. Further, most investors who file international claims against the Host State rely on a BIT or MIT as the basis of that claim.

To invoke any protection, the claimant/investor must show that:

Further, if the investor wishes to rely on the ICSID convention, they must also show that:

The definition of an ‘investor’ is of particular importance. If the investor is qualified as an investor for the purpose of the BIT or the MIT, then (while considering other elements) they will be entitled to extensive protection against the Host State’s interference or actions. This is of particular importance, as many investors beforehand examine this risk to decide whether or not to invest in the Host State.

Who is considered an investor varies from one agreement to another. The test that must be applied to conclude who qualifies to be an investor is subjective, which means that the tribunal must examine the definition of an ‘investor’ under the BIT/MIT. The interstates are usually free to define who is considered an investor and who does not qualify as an investor and thus, the definition varies from one treaty to another.

Further, if the claimant wishes to proceed with filing a claim before the ICSID, then generally the test will be subjective, as well as objective. Which means that the claimant must qualify to be an investor pursuant to the BIT/MIT (and sometimes the national laws), as well as the ICSID Convention.

If there is no definition of an investor under the BIT or the MIT, then the tribunal would investigate other sources to define who qualifies to be an investor. Some sources may include the relevant applicable laws, any specific agreement entered between the investor and the Host State and, in some instances, unilateral declarations issued by the Host State.

For example, the Egypt BIT is, by definition and as previously stated, to promote, protect and guarantee investments made by the nationals of the Contracting State that were made in the Host State.

Under the Egypt BIT, an investor can either be the government of the Contracting State, a natural person, or a juristic person who makes an investment in the territory of the Host State.

Likewise, the OIC MIT, which Egypt, the United Arab Emirates and the Kingdom of Saudi Arabia are all parties thereto, defines an investor as the government of one of the contracting states, a natural person, or a juristic person who owns a Capital (as defined thereunder) and invests in the territory of another contracting state.

While the ICSID Convention does extend its protection to individuals and to juristic persons, it does not provide, nor does it have the mechanism for, settling interstate (or state to state) disputes. Therefore, claimants acting as agents for a state have no recourse through the ICSID. The exception being if there is a distinct state-owned entity acting as a commercial party, it may be able to qualify as an investor¹³. This topic is outside the scope of this handbook so, it will not be discussed any further.

It is vital to know some principles regarding the natural person as they may play a role in specific circumstances for the juristic person. (See paragraph ‎11.3 below)

The Egypt BIT defines an individual investor as an individual enjoying the nationality of the Contracting States in accordance with the laws of the Contracting State. The OIC MIT corresponds to this definition.

A natural person, therefore, has a broad definition under both the Egypt BIT and the OIC MIT.

A certificate of nationality issued by the competent authority of the Contracting State is evidence of the existence of the nationality; however, it is not conclusive. In Soufraki v United Arab Emirates¹⁴, the Claimant relied on the Italy-UAE BIT and produced evidence that he had Italian nationality. The tribunal concluded that he lost said nationality after acquiring a Canadian one and therefore cannot rely on the Italy-UAE BIT.

If a person has a dual nationality, excluding the nationality of the Host State, then that should not be an issue if the claimant relies on one of the BITs, under which he is considered a holder of the nationality of the Contracting State. In broad definitions such as the Egypt BIT and the OIC MIT, the current residence of the national or a ‘genuine link,’ as developed in the context of diplomatic protection, is broadly not an element in determining whether the natural person is an investor for the purpose of that BIT/MIT¹⁵. Only in exceptional circumstances, such as if the nationality passed over generations without any link or ties in the relevant country, then tribunal may reconsider re-examining the matter¹⁶.

If one of the parties has the nationality of the Host State and lost it thereafter, then they can still file a claim and have a recourse pursuant to the other nationality. In Siag v Egypt¹⁷, the tribunal concluded that the claimants did lose their nationality as per the Egyptian law. Being a current resident in Egypt is not an element and is irrelevant.

In broad definitions such as the ones in Egypt BIT or the OIC BIT, the question that arises is whether a dual national, who also holds the nationality of the Host State, may have a recourse, or may be protected under an investment treaty:

The nationality is important in instances where there is an influence by those nationals over the decisions of the ‘corporate/juristic’ individual, as stated in the section below.

The nationality of the owner(s) of a company of a contracting state may play a key role in determining whether the relevant company is protected under a BIT, MIT or otherwise.

In general, unincorporated entities are not covered in BITs or MITs (although a BIT/MIT may provide otherwise). The most used criteria to determine the nationality is the place of incorporation or the main seat of business / registered office (siege social). Alternatively, the place of the central administration or effective seat may also be taken into consideration²⁰. In those cases, absent of specific provision, examining the nationality of the owners of the relevant company is irrelevant.

However, there are some instances where the nationality of the owners may be relevant. This would apply if there were a specific provision as such. For example, the United States-Egypt BIT requires both incorporation and control of nationals of the contracting state. Article I(b) of said BIT states that a ‘Company of a Party’ means a company duly incorporated, constituted, or otherwise duly organised under the applicable laws and regulations of the party or its subdivisions in which (i) natural persons who are nationals of such party … have a substantial interest.

In Champion Trading v Egypt²¹, the claimant was a company incorporated in the United States but was owned by a majority of dual nationality individuals who held an Egyptian nationality. The tribunal concluded that it does have jurisdiction, given that said individuals had controlling shares and that the BIT, does not exclude dual nationals from the definition of the BIT²².

Likewise, in Wena Hotels v Egypt²³, Egypt contended that although the claimant is an English company, it is owned by an Egyptian national and thus falls outside the scope of the ICSID Convention. The tribunal, after applying both the subjective text and the objective text, concluded that it does have authority and that the claimant is considered an investor for the purpose of the ICSID Convention.

Neither the Egypt BIT nor the OIC MIT have a provision like the one mentioned under the United States-Egypt BIT.

The OIC MIT, in Article 6(1) thereunder, defines an investor as “…any …corporate person who is a national of a contracting party who owns the capital and invests it in the territory of another contracting party”. The same Article further describes a corporate person as ‘[a]ny entity established in accordance with the laws in force in any contracting party and recognised by the law under which its legal personality is established.

Furthermore, the Egypt BIT classifies a person as juristic if they constituted pursuant to the laws of the Contracting State. Article 1(5) of the Egypt BIT states, in pertinent part:

Therefore, given that >>>>>>> is incorporated in the United Arab Emirates, then it does in fact meet the requirement of an investor for the purpose of the Egypt BIT.

The Egypt BIT further extends the definition of juristic persons to entities established pursuant outside the authority of the Contracting State, provided that:

The Egypt BIT states, in relevant part: “[a]lso the foregoing definition [investor] shall mean any entity established outside the jurisdiction of a Contracting State as a juridical person in which such State or any of its nationals or any juridical person established within its jurisdiction has a predominating interest²⁴ in accordance with the laws in force in the two Contracting States”. [Emphasis added]

The term ‘predominating interest’ is not defined in the Egypt BIT. Further, from UAE’s end, ‘predominating interest’ is used in another six (6) BITs entered between the United Arab Emirates and other contracting states²⁵. With exception to the Egypt BIT, none of those BITs include the sentence “in accordance with the laws in force in the two Contracting States”²⁶. [Emphasis added]

Although other BITs do include the term ‘predominating interest’²⁷, none that we have seen has a definition that corresponds to that given under the Egypt BIT.

Predominating interest does not solely refer to 50% or 50% + 1 ownership, it may also denote the power to name the majority of the directors or otherwise to legally direct its actions. It is likely that the test is subjective. Also, majority control is different from majority interest / predominant interest. For example, the Chile-Bolivia BIT²⁸ refers to shares ‘majority-owned by investors of the other Contracting Party’²⁹. Likewise, the US-Egypt BIT does refer to majority control and not predominant interest. Although majority share ownership may be sufficient to establish control³⁰, the criteria to establish the existence of a majority interest / predominant interest is less stringent than that given under majority control.

For example, the UAE Decree Law on Commercial Companies currently in force does state, in the limited liability companies’ section, that the majority control is 75%. On the face of it, we see that the majority interest is less than 75%. Further, it might be argued that, if a limited liability company is owned by three shareholders and the investor has more than one third of the shares, say 34%, and the remaining two shareholders have two equal shares of 33%, then that purported investor has the majority interest against the remaining shareholders and, therefore, is considered an investor pursuant to the BIT. Again, it is arguable that the test is subjective. A deep dive examination is further required.

As far as }}}}}}}}}}}}}}}}}}}}}}} International Investment LLC is concerned, establishing jointly or separately a vehicle in the Host State to invest in that Host State, would still likely be classified an investment. However, the investor for this purpose will likely be }}}}}}}}}}}}}}}}}}}}}}} International Investment LLC and not that entity established in the Host State. The definition of ‘predominant interest’ therefore is important to consider under both laws, should its entity intends to invest in Egypt.

It is important to note that direct ownership of shares in the company established in a state that is not a contracting state is a condition to be considered an investor under the Egypt BIT.

In practice, many private investors, when investing in a foreign company, establish a company in the Host State, a vehicle, or enter a consortium for the purpose of investing in the Host State.

As previously stated in paragraph ‎11.10.2, the Egypt BIT does recognize an entity that is incorporated in a state that is not a Contracting State as an investor, provided that, among other things, said entity is not incorporated in the Host State.

This, however, does not preclude }}}}}}}}}}}}}}}}}}}}}}} International Investment LLC from entering an agreement with the government of the Host State, or an instrumentality thereof and based on the agreement, }}}}}}}}}}}}}}}}}}}}}}} International Investment LLC establishes an entity in the Host State, or enters any other arrangement, such as a joint venture or a consortium.

It is advisable in any subsequent agreement to mention, whether in the Recital, AoA, MoA or otherwise, that such an agreement is based on the main agreement entered between the government of the Host State or any instrumentality thereof, and between }}}}}}}}}}}}}}}}}}}}}}} International Investment LLC.

What is considered an investment is of important interest to the investor. For example, if the ‘property, right, or interest’ is not considered an investment, then the right or interest-holder may not be able to refer the dispute under the consensus arbitration clause, nor may it have a recourse against the Host State for the guarantees it made pursuant to a BIT / MIT.

The ICSID Convention does not define what an investment is, unlike bilateral and multilateral investment treaties, which usually do.

To know what is considered an investment under BITs and MITs, a subjective test is required. In addition to the subjective test and as previously said, for the purpose of the ICSID Convention, an objective test is also required. As such, if there is a case before the ICSID, the tribunals will likely apply both the subjective test and the objective test to see whether the right or interest qualifies as an investment under the ICSID Convention. This was applied in Malicorp v Egypt³¹.

The ICSID Convention generally requires that a dispute arises directly out of an investment. The contracting state may however file notification to declare what disputes they would not consider submitting to the ICSID. In practise, given that an objective test is required, many tribunals relied on a test applied in Salini v Morocco³² to conclude whether the objective test is successful. The arbitral tribunal considered an investment which involves certain duration, a certain duration of operation, a substantial contribution, and a significance for the host state’s development. Many tribunals thereafter relied on this in order to conclude whether the case meets the objective test requirement³³.

As far as concerns the definition of an investment under a BIT/MIT and the application of the subjective test, the Egypt BIT does define an investment as follows:

No exclusions of the above wide definition are given under the Egypt BIT. The OIC MIT also contains a broad definition of any asset (including everything that can be evaluated in money). It is arguable however that the OIC MIT requires the inflow of the ‘money’ from outside the Host State to the Contracting State.

The definition of an investment under the Egypt-BIT does refer to any kind of asset invested in the Host State. It is therefore arguable that the asset sent to the Host State, but not yet an investment, may not be considered an ‘investment’ and thus falls outside the scope of the Egypt BIT. In contrast, the OIC MIT does consider the assets transferred for the purpose of an investment an investment, provided that other conditions are met.

Further, given that the term investment doers refer to any kind of asset invested in accordance with the laws, regulations, and administrative procedures of the Host State, then it worth considering a term in the agreement-to-be (if any) that the asset the investor wishes to transfer is considered an investment.

While taking the above into consideration, that the Egyptian law (No. 72 of 2017) requires the investment to be for the purpose of sustainable and comprehensive development. There are also references to specific sectors that do fall within the definition of an investment (industry, agriculture, trade, education, health and transportation, tourism, housing, construction, sports, electricity, energy, natural resources, water, communications, and technology).

The OIC does not require an investment pursuant to the national laws. Yet, it does require social and economic development in the preamble thereof.

The term ‘every kind of asset’ is used in some other BITs/MITs, such as the European Charter Treaty and the Comprehensive Economic and Trade Agreement between Canada, the European Union and its member states, the UAE-Kenya BIT (1996), UAE-Romania BIT (1993), UAE- Belorussia BIT (2001) and UAE-Tajikistan BIT (2000). Tribunals concluded in several cases that investors who owned assets under similar definition, simply put, qualify as an investor³⁴.

Generally speaking, the origin of the investment or the capital is not a requirement or a criterion used to determine the existence of a foreign investment. The Egypt BIT follows this approach. The Egypt BIT requires the capital to be acquired from legitimate sources or allows the investor to invest the capital in the Host State. The OIC MIT however does require that the capital be employed from a contracting state.

As such, it is vital to include a term in the agreement to this effect. This is in line with the United Nations Sixth Committee (the International Law Commission) guiding principles issued and applicable to unilateral declarations of States capable of creating legal obligations. Ask for a document from the specific member.

Many investors do consider availing political risk insurance. Unlike other policies, political risk insurance generally cover non-commercials risks.

Investors can reach out to private insurers, governmental-led insurers, or multilateral organisations to cover the risks. Examples of the multilateral organisations include the Islamic Corporation for the Insurance of Investment and Export Credit, and the Multilateral Investment Guarantee Agency/Corporation.

The risks covered varies from a company to another. It may include, currency inconvertibility, capital invested, government interference, wars, acts of terror. It does not generally however include nuclear risks, as well as currency depreciation. Duration also varies, private companies usually insure from 3 years and up to 15, while governmental-led insurers and multilateral organisations may insure up to 20 years. Below are a few notes regarding the main agencies/corporations.

Without consideration at this juncture of Article 24 of the Articles of Agreement of the ICICE, Article 18 of the MIGA Convention, Article 21 of the AIECGC Convention and any contract entered into between the insurance company and the investor, generally speaking, there is no foundation or principle under international law that releases the Host State from its liability if the investor is insured, or that the investor was reimbursed.

For example, the UAE-UK BIT (1992) does state, in Article 8(a), that “[t]he Contracting Party which is a party to the dispute shall not raise as an objection at any stage of the proceedings or enforcement of an award the fact that the investor which is the other party to the dispute has received in pursuance of an insurance contract an indemnity in respect of some or all of his or its losses.”

In Hochtief AG v Republic of Argentina (ICSID Award 2016), the tribunal stated, in paragraph 309 the following:

We suggest that }}}}}}}}}}}}}}}}}}}}}}} International Investment LLC to consider or (as the case may be) ensure to consider generally the following: