27 August 2015

Bilateral investment treaties: much more than a BIT of protection from political risk

Hussein Haeri
Partner | UK

One of the biggest risks and challenges to foreign investment is political risk. There are the obvious risks of nationalization and discriminatory treatment and more oblique risks such as unfair and arbitrary treatment and a lack of due process. There are the risks that a new government could tear up your deal with the previous government, or that different parts of the government or regulatory bodies may adopt different stances as to whether your investment is welcome. There are risks that you may be able to foresee and risks that could completely blindside you. In short, there are the known known risks, the known unknown risks and the unknown unknown risks.

Until relatively recently, the means for investors to protect their foreign investments from political risk outside of contractual rights were fairly limited. Political risk insurance may be a possibility, but it is generally very expensive and often quite narrow in terms of the scope of protection for investors. Trying to sue a State in its own courts can be problematic and getting your home country to bring a claim at the State-State level by means of diplomatic protection tends to be wishful thinking for all but the largest of investments, and even that is no guarantee.

All this has changed dramatically over the last few decades as governments have signed up to more than 3,000 bilateral investment treaties (BITs) worldwide. These BITs give qualifying foreign investors rights of protection vis-à-vis the States in which they invest, including a right to fair and equitable treatment, non-discrimination and a right to compensation if their investments are expropriated, whether directly or indirectly. Perhaps most significantly, most BITs give qualifying investors the right to bring international arbitration proceedings directly against the host State of their investment for any violations by the State (including its organs and agencies for which it is responsible) of the treatment standards in the BIT. This applies even if the investor doesn't have a contract, let alone a contractual arbitration agreement, with the government.

As a consequence, investors have brought successful investment treaty arbitrations against States in all parts of the world in recent years. However, many investors remain unaware of how investment treaties can protect their investments and ignore the issue until a dispute has arisen and it is too late. As in many other areas of law, to be forewarned is to be forearmed. When investors know and secure their rights, that can be the most effective way of ensuring that they won't need to exercise them.

If you are in the New York City or Greenwich, CT areas and would like to discover more about how to protect your foreign investments, please join us for our panel discussions entitled “Mapping Your International Investment Strategy,” which will be held on September 16th and 17th. Click here for more registration information.

Category: Blog

Client types: Owners and entrepreneurs