Foreign investments in the Arab Spring

March 2012

Islamic art

Ansprechpartner

Introduction

The recent events in Libya, Egypt, Tunisia, Bahrain and other parts of the Middle East (Arab Spring), though a hopeful sign for a further spread of democracy in the Arab world, were a setback for foreign direct investment in the region. Foreign investors incurred losses (for example) from physical and economic damage to property during riots and unrest, from the cancellation of concessions by the incoming governments, or from major policy changes contradicting the investors’ legitimate expectations.

However, foreign investors are not forced to simply accept these or other losses. Even if they do not have political risk insurance, foreign investors may be able to claim damages under so-called bilateral investment treaties (BITs) in force between their home state and the state in which they have invested (the so-called host state).

Protection of foreign investment under BITs

BITs serve to protect international investors from host state governments excessively interfering in the investors’ foreign investment activity.

The substantive guarantees advanced to investors under BITs are diverse in their nature. The most important guarantee is the guarantee of fair and equitable treatment (FET). Under the FET standard, host states are obliged to maintain a stable and predictable business environment and may not frustrate an investor’s legitimate expectations. This entails that sudden and unpredictable adverse changes to the regulatory framework may not be made and that regulatory permissions, once given, may not be revoked arbitrarily. If foreign investors invest their money in the host state in the reasonable expectation that certain parameters will apply and that all necessary permits will be given, these investors may demand compensation if their expectations are frustrated.

Further guarantees include the protection against expropriation without adequate compensation and the host state’s obligation of full protection and security. Full protection and security requires the host state to protect the investment against harm done by private third parties. In particular, the guarantee can be invoked if the investment was physically harmed during riots or unrest and the host state failed to act diligently to prevent the damage.

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Investor-state arbitration

Practically, the investor can invoke the substantive BIT guarantees by commencing international arbitration proceedings directly against the host state. The arbitration proceedings are often administered by the International Centre for Settlement of Investment Disputes (ICSID) in Washington, which is part of the World Bank Group. Usually, states comply with ICSID arbitral awards voluntarily. If a state does not comply voluntarily, ICSID awards can be enforced swiftly in over 145 states without any domestic court having the right to review the arbitral award.

To-date, over 400 international businesses have brought claims against states under BITs. The threat of commencing arbitration proceedings can also be used to encourage states to enter into meaningful settlement negotiations.

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BITs in force in Arab countries

The countries at the epicentre of the Arab Spring have concluded BITs with numerous countries. Libya has concluded 30 BITs (of which 17 are in force), inter alia with Germany, Switzerland, France and the Russian Federation. Egypt has concluded more than 100 BITs (of which 72 are in force), inter alia with the United Kingdom, the United States, Germany and China. Tunisia has signed 54 BITs (of which 33 are in force), inter alia with the United Kingdom, the United States, Germany and France. Bahrain has signed 30 BITs (of which 20 are in force), inter alia with the United Kingdom, the United States, Germany, France and China.

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Our experience

We have a wide-ranging investment arbitration experience in the energy, infrastructure, mining, construction, transport, technology and financial services sector. We can advise investors in relation to any remedies they may have against a government under a BIT, and help enforce these remedies during negotiations and in arbitration proceedings. We can also identify suitable third party funders who may be willing to finance a claim in return for a share of the damages recovered. From a pre-emptive perspective, we can also help structure (or restructure) foreign investment projects to ensure that they benefit from the protection available under BITs in the future.

For further information, please contact Patricia Nacimiento.

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