An introduction to Investment Treaty Protection in the Middle East

January 2011

Contacts

Introduction

On 30 September 2010, Qatar signed the Convention on the Settlement of Investment Disputes between States and Nationals of other States (the ICSID Convention) to become the 156th signatory State, affirming Qatar’s commitment to international cooperation in terms of promoting and protecting economic development through the settlement of investment disputes between States and nationals of other States.

Following Qatar’s subsequent ratification, on 21 December 2010, the ICSID Convention will become fully in force in Qatar later this month (20 January 2011).

Qatar joins the UAE, Bahrain, Saudi Arabia, Oman, Kuwait, Egypt, Jordan and Lebanon as Middle East signatories to the ICSID Convention.

But what is the ICSID Convention and what further rights can it grant to investors?  In the Middle East region in particular, where the perception is that enforcement of contractual rights can be problematic and/or time-consuming, it is important that international companies understand the further, and valuable, protection which the ICSID Convention and applicable bilateral investment treaties (BITs) can provide for many different types of investment in the region.

The aim of this briefing therefore is to give a concise explanation of

  • the history and purpose of the ICSID Convention;
  • the International Centre for the Settlement of Investment Disputes;
  • what Bilateral Investment Treaties (or BITs) are, including:
  1. their typical structure;
  2. the types of investment they are intended to protect;
  3. the further protections and legal rights which they typically give to investors; and
  4. how investors can take advantage of those rights when structuring a transaction and/or making an investment.

The Convention

The ICSID Convention came into force on 14 October 1966 and was formed under a multilateral treaty by the Executive Directors of the World Bank. Its purpose was to remove major impediments to the free flow of international private investment which were posed by (among other things) the absence of specialised international methods for settlement of investment disputes.

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The International Centre for the Settlement of Investment Disputes

One of the key issues which the ICSID Convention sought to address was the need for a suitable mechanism of dispute resolution between governments and private investors. To address this, the ICSID Convention established the International Centre for Settlement of Investment Disputes (ICSID).

ICSID is, in short, an arbitral institution (like the ICC or LCIA), and is run along similar lines to those institutions. However, its remit is to administer international arbitrations between investors and States or State-owned entities.

Importantly, the ICSID Convention also creates a powerful regime for the enforcement of ICSID arbitral awards. If an ICSID Convention member-State fails to honour an ICSID arbitral award, that State would find itself in breach of its international treaty obligations under the ICSID Convention and, in particular, if the State in question is the recipient of World Bank funding (which is often the case in emerging markets), any failure to comply with an ICSID award may have ramifications for its relationship with the World Bank. Finally, the ability of a State to resist enforcement of an ICSID award under the ICSID Convention is very restricted (and far more restricted than the exceptions to enforcement set out in the New York Convention).

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Bilateral Investment Treaties

A further feature which makes ICSID arbitration appealing and increasingly popular is the significant proliferation of BITs, of which there are now thousands1 and over 900 of which contain the State’s advance consent to ICSID arbitration.

For example Qatar has signed some 43 BITs with other countries, a number of which already provide for investment disputes to be referred to ICSID arbitration.

As the name suggests, a BIT is a bilateral treaty pursuant to which two countries each agree to grant certain protections and benefits to investments made by citizens and companies of the other country. To a qualifying investor, a BIT provides additional protection beyond that contained in, for example, its contractual documents or under its insurance, and enables the investor to have recourse against the host State in a neutral forum.

Rights under a BIT exist as a matter of international treaty law and do not depend on the investor being in a contractual relationship with the host State. BITs are designed to provide a stable environment within which foreign investors, corporate or individual, feel safe to operate.


Footnote
  1. There are also multilateral treaties, such as the Energy Charter Treaty
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What constitutes an investment?

Most BITs and foreign investment laws define the types of transaction or investment to which they apply. These are usually broadly drafted, often with examples, which typically include:

  • shares or other participation in companies;
  • claims to money or other performance under a contract;
  • moveable and immoveable property and property rights; and
  • business concessions conferred by law or contract.

ICSID has permitted disputes to be referred to arbitration which relate to a wide array of investments in different sectors.

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Benefits of BITs to investors

What additional rights an investor may have against a State or state entity will depend on the terms of the relevant BIT. There is no standard form of BIT; rather, the terms of each BIT are a matter of negotiation and agreement between the contracting States.

Typically, a BIT might confer some, or all, of the following rights upon investors:

  1. A right to protection from expropriation/nationalisation (except where the expropriation or nationalisation takes place for a public purpose, is non-discriminatory and is subject to prompt and adequate compensation);
  2. A right to fair and equitable national treatment (whereby each State agrees it will treat investments made by investors from the other State in a manner that is fair and equitable to the treatment of investments made by either (i) investors from other States or (ii) its own citizens);
  3. A right to repatriate investments and earnings (which permits the unrestricted transfer of investments and returns in a currency agreed by the parties);
  4. A right to full protection and security of its investments (whereby the host State is under an obligation to take active measures to guarantee legal security enabling the investor to pursue its rights effectively and protect the investment from adverse effects. The adverse effects may stem from private parties or from actions of the host State and its organs);
  5. An agreement by the State to observe contractual obligations (whereby each State agrees that it will observe any obligation that it has entered into with investors from the other State, thereby giving potential treaty protection in relation to breach of any obligations undertaken in a contract between the investor and the State, such as a concession contract or licence for a project);
  6. A Most Favoured Nation right (MFN clauses typically provide that the host state shall provide treatment to investors from the signatory State which is at least as favourable as the best treatment afforded to investors from any third state); and
  7. A right to refer any claims against the State to a stated dispute resolution process (which may entitle the investor to commence arbitration proceedings against the relevant State in the event of any breach of the BIT. Typically, such clauses provide for ICSID or UNCITRAL arbitration. This avoids the need for the investor’s government to take action and claim against the host State in its own courts.This is perhaps the most useful element of any BIT for investors).
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Scenarios in which companies may bring a claim under a BIT

The potential scenarios are numerous, but could include:

  • where a state expropriates an investment (for example, a hotel, shares in a company or sums held in bank accounts);
  • where a concession agreement has been wrongly terminated by a State or State entity;
  • where a State has re-nationalised a privatised industry sector;
  • where a change in laws or regulations (for example, taxation laws) of a State have the consequence that an investor’s investment becomes less valuable or is de facto or progressively expropriated; and
  • where a State has failed to protect an investment from damage arising from war, riots or strikes.
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When should businesses consider BITs?

BITs should be considered at the outset of structuring a transaction or investment, and not merely after a potential dispute has arisen (although they are obviously relevant at that stage). In other words, BITs are not merely an aid to dispute resolution - they are also relevant to due diligence and risk management decisions to be made prior to making an investment in the first place (along with other important considerations such as the tax consequences of adopting a particular investment structure).

At the stage of setting up a transaction/investment involving a Sovereign State, consideration should be given to whether there are ways in which the matter may be structured so as to benefit from BIT protection. As an example, a group of companies may have a subsidiary in a country which has entered into a BIT with the host State when the country of the parent has not. In such cases, it may be possible to route the investment through that subsidiary so as to benefit from that BIT and thus provide protection to the group which would not be available if the investment were to be made direct from the parent company.

This process should be more sophisticated than merely checking which States have entered into a relevant BIT. The terms of the various BITs in force with the host State should be checked to assess which BIT provides the most favourable protection, since BITs can vary considerably in their wording.

As already noted, BIT rights are not dependent on the investor having a contractual relationship with the host State. These issues are therefore relevant irrespective of whether the investor is dealing directly with the State or is dealing exclusively with private counterparties.

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What this means when planning an investment

The importance of investors understanding and using a risk management procedure throughout the process of undertaking an investment in a separate Sovereign State cannot be overstated. With an increasing number of active BITs , the network of potentially protective agreements active for investors to utilise in their due diligence and overall risk management preparation is extensive. The planning of an investment’s risk management from the outset, by considering the international protections afforded through BITs and ICSID (under the ICSID Convention), puts investors and their investments in the best position to avoid or minimise the significant difficulties which they might otherwise face in the event of a dispute.

Registered BITs with the United Arab Emirates

The following is an illustrative list of the BITs which the UAE has signed with other States:

  1. Lebanon and United Arab Emirates
  2. Malaysia and United Arab Emirates
  3. Morocco and United Arab Emirates
  4. United Arab Emirates and United Kingdom
  5. Czech Republic and United Arab Emirates
  6. Austria and United Arab Emirates
  7. Finland and United Arab Emirates
  8. France and United Arab Emirates
  9. Germany and United Arab Emirates
  10. Italy and United Arab Emirates
  11. Switzerland and United Arab Emirates

For a list of the countries with which other Middle Eastern countries have BITs, please click here to access a page of the UNCTAD website, where you can use the drop-down menus to choose the country in which you are interested.

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How we can help?

We can provide:

  • bespoke training on the additional protection which investors can obtain from BITs ; and
  • tailored advice on the available options for structuring an investment in order to take advantage of BIT protection.

If you would be interested in learning further about this topic, please contact Patrick Bourke or Henry Quinlan in our Dubai office.

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