Investment arbitration is a specific field in international arbitration. Investments in the host state (“Host State”) are especially important for the development and growth of that state.
Broadly speaking, 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, meant that any negative impact on the investor’s asset was regarded as 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. Diplomatic protection, which still applies, went beyond political and economic means and historically even included 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:
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, mediation, ICSID Arbitration, United Nations Commission on International Trade Law (UNCITRAL) ad-hoc rules of arbitration, and the International Court of Justice arbitration rules. Also, some BITs refer to the 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 to protect investors. The following are examples: the Arab League Investment Agreement (1970); the Agreement on Investment and Free Movement of Arab Capital Among Arab Countries (1980); the Arab Investment Agreement (1980); the Unified Agreement for the Investment of Arab Capital in the Arab States (1982); the Agreement for the Settlement of Investment Disputes between the Arab Countries (2000); the Agreement on Investment and Free Movement of Capital Among Arab Countries (2000); and the Unified Agreement for the Investment of Arab Capital in the Arab States – Amended (2014). Other regional agreements include the Economic Agreement between the Gulf Cooperation Council (2001).
Furthermore, several countries are 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.
“Each Contracting State shall recognize an award rendered pursuant to this Convention as binding and enforce the pecuniary obligations imposed by that award within its
territories as if it were a final judgment of a court in that State.”
Article 54 of ICSID Convention
There is no universal definition of who is considered an investor. 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 examine this risk to decide whether to invest in the Host State.
The test that must be applied to conclude who qualifies to be an investor is subjective. The states are usually free to define who qualifies to be an investor and who does not qualify as an investor and, therefore, the definition varies from one treaty to another.
Furthermore, if a claimant wishes to proceed with filing a claim before the ICSID, then generally the test will be subjective and objective. Put differently, the claimant must qualify as an investor pursuant to the BIT/MIT (and sometimes the national laws or agreements), as well as the ICSID Convention.
Regarding a natural person, a certificate of nationality is, on the face of it, evidence of the existence of that nationality. 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. If one of the parties held the nationality of the Host State and lost it thereafter, then they may be able to have a recourse.
As far as the ICSID Convention is concerned, dual nationals who also hold the nationality of the Host State, have no recourse under ICSID. For matters outside the ICSID jurisdiction, there are two contradictory authorities, one that confirms that holding the nationality of the Host State is not an obstacle, and another that takes into consideration the most ‘dominant’ nationality.
So far as concerns a juristic person, the nationality of the owner(s) of a company from a contracting state may play a key role in determining whether the relevant company is protected under a BIT, MIT, or otherwise. Again, there is no universal definition. In general, unincorporated entities are not covered in BITs or MITs (although a BIT/MIT may provide otherwise). The most commonly used criteria to determine the nationality are 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 consideration. In those cases, absent a specific provision, examining the nationality of the owners of the relevant company might be irrelevant. There are instances that the nationality of the owners may be relevant. Also, predominant interest may play a role in determining or defining whether the relevant party is an investor.
The ICSID Convention does not define what an investment is, unlike bilateral and multilateral investment treaties, which usually do. To determine what is considered an investment under BITs and MITs, a subjective test is required. In addition to the subjective test, and as previously mentioned, an objective test is also required for the purpose of the ICSID Convention.
There are several legal bases to claim against acts by the Host State. Some of the common legal basis for claims under BITs and MITs are the following:
Investment arbitration has additional distinct features. Some of which are briefly outlined below:
General Expertise and Public International Law: International investment arbitration requires, among other things, knowledge in public international law. A notable example is the Israel-UAE BIT (2021), where, in some instances, the arbitrators must have experience in public international law.
Some rules of interpretation or sources of law include, without limitation: the treaties in place, customary international law, the Vienna Convention on the Law of Treaties (VCLT), the national laws of the Host State, and general principles of Law.
Class Action/Mass Claim/ Multi-Party Proceedings: Broadly speaking, it is established in the GCC region that class action, mass claims, or multi-party proceedings have no legal merit. This is also the case in many other jurisdictions. It is, however, possible to file such claims before ICSID.
Diplomatic Protection: In some instances, the state of the nationality of the investor backs the investor by filing a direct claim under the principles of public international law and takes it up under its own name.
In Mavrommatis Palestine Concessions, Judgment dated 30 August 1924, the Permanent Court of International Justice (PCIJ) explained that the State has the right under international law to ensure that the Host State respects the rule of international law.
PCIJ Mavrommatis decision (1924), a cornerstone of international investment law…
Download documentThis privilege is generally limited and at the discretion of the contracting state. The investor who wishes to persuade the state to give diplomatic protection will not have much control over the legal proceedings or claim of the right. Some conditions must also be met for the contracting state to be able to take this to an international level. As previously said, historically, a contracting state was able to use armed forces to protect its investors. This is no longer an acceptable means of protection under international law pursuant to the Charter of the United Nations.
Foreign Direct Investment as Opposed to Portfolio Investment and Other Transactions: Generally speaking, absent specific agreement between the Host State and the investor, most MITs and BITs exclude portfolio investments from protection.
There are five (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 different words, foreign direct investment has more active role, while portfolio investment has more passive role.
In any case, both types of investment are different from ordinary transactions involving sales of goods or services and short-term financial transactions, which are usually fall outside the intended protection.
Insurance: Many investors do consider political risk insurance. Unlike other policies, political risk insurance generally covers non-commercial risks.
Investors can reach out to private insurers, governmental-led insurers, or multilateral organisations to cover the risks. Examples of multilateral organisations include the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC), the Multilateral Investment Guarantee Agency/Corporation (MIGA) and The Arab Investment & Export Credit Guarantee Corporation (AIECGC).
The risks covered varies from one company to another. It may include currency inconvertibility, invested capital, government interference, wars, and acts of terror. It does not generally, however, include nuclear risks or currency depreciation. Duration also varies: private companies usually insure from three (3) to fifteen (15) years, while governmental-led insurers and multilateral organisations may insure up to 20 years.
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Contact usAmong other things, the investor may benefit from more than one source of legal rights. Although the local laws of the Host State may contain provisions to protect investments, in practice, many provisions are added that do not align 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 their claim.
Although the protections afforded to investors under international law are diverse, there is often a lack of effective mechanisms to fully enforce such protections in practice. As a result, arbitration often proves to be the most effective solution in a substantial number of cases.
For further information please contact us at arbitration@lac.ae.