Transcript Slide 1

Introduction to Investment
Treaties
John Reynolds
Of Counsel, Lovells, London
Background to investment treaty
protection
• 1965 Convention on the Settlement of Investment
Disputes between States and Nationals of Other
States (Washington/ICSID Convention)
• Intended to support and encourage the flow of
foreign direct investment to states wishing to attract
such investment
• Creation of a neutral and effective dispute
resolution mechanism between investors and states
• ICSID – slow development followed by a period of
rapid growth
Bilateral and Multilateral Investment
Treaties
• “BITs” = Bilateral Investment Treaties containing
provisions which guarantee that the treatment of foreign
investors will meet certain standards
– No contractual relationship needed
– Relevant to investor-state disputes ONLY
– Over 2,200 bilateral investment treaties in existence
• “MITs” = Multilateral Investment Treaties, such as the
Energy Charter Treaty and the NAFTA; containing similar
provisions to BITs
Who is Covered? – A Foreign Investor
• BITS are concluded between States to provide
investment protection to the Nationals of both
States
• “Nationals” include natural persons and companies
incorporated or registered in the State
• A National from one State investing in the other
State – a foreign investor
• Non-exhaustive definition of “investment”
Typical definition of “investment”
“investment means every kind of asset and in particular, though not
exclusively, includes:
•
movable and immovable property and any other property rights such as
mortgages, liens or pledges;
•
•
shares in and stock and debentures of a company and any other form of
participation in a company;
claims to money or to any performance under contract having financial
value;
•
intellectual property rights, goodwill, technical processes and know-how;
•
business concessions conferred by law or under contract, including
concessions to search for, cultivate, extract or exploit natural
resources.”
(UK Model BIT)
Who is covered? - a Host State
• What is a Host State?
• Executive, Judiciary, Legislature
• State Owned Corporations
Typical Investment Treaty protections (1)
• Fair and equitable treatment
– No precise definition
– Maintain a stable and predictable investment environment
–
Maffezini v Spain
– CME v Czech Republic
Typical Investment Treaty protections (2)
• Protection against expropriation or
nationalisation of the investment
– Without due process and fair compensation
– May be direct or indirect or even creeping expropriation
– CME v Czech Republic
– Santa Elena v Costa Rica
Typical Investment Treaty protections (3)
•
Guarantee that the host state will observe any specific
contractual obligations it may have entered into with
regard to the investments (the “Umbrella Clause”).
– Controversial area
– Wider view
– SGS cases; Vivendi
– Narrower view
– El Paso v Argentina; Pan American v Argentina
Typical Investment Treaty protections (4)
• Treatment at least as favourable as that
afforded to nationals of the host state
– No discrimination
– Exceptions
Typical Investment Treaty protections (5)
• “Most Favoured Nation” treatment
– Not treat any foreign investor more favourably
– Substantive rights
– Procedural
– Maffezini v Spain
Typical Investment Treaty protections (6)
• Full protection and security against
unreasonable government actions or omissions
• Compensation for losses caused by war or riot
• Right to repatriate investments and returns in the
convertible currency in which the investment
was made
The Energy Charter Treaty (1)
• 51 states signatory to the ECT
• ECT covers, “Investments associated with
economic activity in the energy sector
concerning certain energy materials and
products”
The Energy Charter Treaty (2)
• “Investments” widely defined in non-exhaustive
asset-based list
• Economic activity in energy sector broadly
defined
Key Messages
• Provision of Additional Rights
• Rapidly Developing Area
• Consider what treaties exist (www.unctad.org)
• Consider the wording of the treaties
• Remember the ECT
THE BALTIC STATES AND
INVESTMENT TREATIES
Vilius Bernatonis
22 March 2007
Sutkienė, Pilkauskas & Partners
Contents of the Presentation
1. Investment treaties applicable to
Lithuania
2. Protection granted to investors
3. Practical application of the protection
mechanisms
4. Using the provisions of the
investment treaties
INVESTMENT TREATIES
APPLICABLE TO LITHUANIA (I)
• Lithuania is a party to the 1965 Washington
Convention on the Settlement of Investment
Disputes between States and Nationals of Other
States (since 5 August 1992)
• Lithuania is currently a party to 44 bilateral
investment treaties (a list is presented on the next
slide)
• Lithuania is a party to the Energy Charter Treaty
INVESTMENT TREATIES
APPLICABLE TO LITHUANIA (II)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
Argentina
Australia
Austria
Belarus
BeNeLux
Bulgaria
China
Czech Republic
Denmark
Estonia
Finland
France
Georgia
Germany
Great Britain & Ireland
16.
17.
18.
19.
20.
21.
22.
23.
24.
25.
26.
27.
28.
29.
30.
Greece
Hungary
Iceland
Israel
Italy
Jordan
Kazakhstan
Kuwait
Latvia
Moldova
Mongolia
Netherlands
Norway
Poland
Portugal
31.
32.
33.
34.
35.
36.
37.
38.
39.
40.
41.
42.
43.
44.
Republic of Korea
Romania
Russia
Serbia & Montenegro
Slovenia
Spain
Sweden
Switzerland
Turkey
Ukraine
USA
Uzbekistan
Venezuela
Vietnam
PROTECTION GRANTED
TO INVESTORS (I)
Scope of Application
• Definition of “Investor”
– Narrow approach
– Coverage of related parties
• Definition of “Investment”
– Different scopes
– Limitations related to compliance with national law
• Coverage of contractual claims: “umbrella clause”
Svenska Petroleum Exploration AB vs. the Republic of
Lithuania and AB “Geonafta”
PROTECTION GRANTED
TO INVESTORS (II)
Principal Guarantees
• National Treatment
• Most Favoured Nation
• Equitable Treatment
• Prohibition of Expropriation
PROTECTION GRANTED
TO INVESTORS (III)
State Responsibility
• Actions of the State
– Government actions
– Legislation
– Courts
• Political subdivisions, municipal authorities
Parkerings Compagniet vs. the Republic of Lithuania
• State enterprises, other state institutions
PROTECTION GRANTED
TO INVESTORS (IV)
Available Remedies
• Compensation of damages
– Damages caused to investment
– Lost profit
• Compensation for expropriated property
– Approach to the relevant definition of “value” of
investment in various BITs
– Value of investment in relation to the treaty definition of
“investor” and “investment”
PRACTICAL APPLICATION (I)
Local Remedies and Negotiations
• Right to apply for protection to national courts
– Lithuanian courts
– Other competent courts
• Specific provisions related to local remedies
– Principal of “exhaustion of local remedies”
– Consequences of choice of local remedies: “fork in the
road”
• Mandatory negotiations period
PRACTICAL APPLICATION (II)
Arbitration
• Available independent dispute resolution
mechanisms:
– ICSID
– Ad hoc arbitration under the UNCITRAL Rules
– Other mechanisms: Stockholm Chamber of Commerce,
ICC, LCIA
• Choice in case of several available options: main
considerations
PRACTICAL APPLICATION (III)
Enforcement of an Arbitral Award
• Good faith execution, ICSID Awards
• Place of enforcement
– New York Convention on Recognition and Enforcement
of Foreign Arbitral Awards
– Location of Assets
– Other considerations
• Recognition and enforcement process
USING THE INVESTMENT
PROTECTION MECHANISMS
Considerations prior to making of the investment
– “Friendly” forum
Tokios Tokeles case
– Maximum protection under the applicable investment
treaties
• Considerations following the investment
– Reliance on the guarantees granted by the host state
– Selection of the optimal negotiations strategy
– Decisions of relevant protective actions and application
of local remedies (“fork in the road”)
– Analysis of prospects of a possible dispute and
preparation for defence of rights
THANK YOU !
Sutkienė, Pilkauskas & Partners
Contact:
Vilius Bernatonis
Partner, Attorney-at-Law
E-mail: [email protected]
Didžioji g. 23, LT - 01128 Vilnius
Tel.: (+ 370 5) 251 4444
Fax: (+ 370 5) 251 4455
www.spp.lt
International investment protection
treaties and the Baltic States
Michael Davison
March 2007
Remedies
1. What can I do if my investment is damaged?
2. How much will I get back?
3. What will the reaction of the host state be?
What can I do? (1)
• Consult the Treaty
• Is it necessary to attempt to settle through diplomatic
channels?
• Does the Treaty identify ICSID (or UNCITRAL)?
• If ICSID, does the Treaty contain “consent in writing” to
ICSID arbitration?
• Is a three-month/six-month “cooling-off period” required?
• Is there a requirement to exhaust local remedies?
What can I do? (2)
• Commence Arbitration:
– (Conciliation)
– Request sent to Secretary-General (to identify parties, whether
parties are “designated”, date of consent, describe the issues)
– Secretary-General registers the Request “as soon as possible”,
“unless the dispute is manifestly outside the jurisdiction of the
Centre”
– Appoint Tribunal: agreed by parties:
• majority to be of “neither state”
• if no agreement: proposals exchanged for appointment
• if after 60 days no agreement: parties exchange names of partyappointed arbitrators and suggestions for a chairman
• fall-back: chairman appointed by Secretary-General
What can I do? (3)
• Rule 39: Provisional measures
“At any time after the institution of the proceedings, a party may
request that provisional measures for the preservation of its
rights be recommended by the Tribunal.”
• Rule 41: Preliminary objections
“Any objection that the dispute or an ancillary claim is not within
the jurisdiction of the Centre or for other reasons is not within the
competence of the Tribunal shall be made as early as possible.”
“The tribunal may on its own initiative consider at any stage of
the proceedings whether the dispute or any ancillary claim
before it is within the jurisdiction of the Centre and within its own
competence.”
What can I do? (4)
The award
• By majority vote
• Deals with every question submitted to the Tribunal and gives
reasons
• Parties may apply for interpretation of the award by Tribunal (effect
of award is, as a result, stayed)
• Parties may apply for revision of the award (90 days)
• Parties may apply for annulment of the award (120 days)
–
–
–
–
–
the Tribunal was not properly constituted
the Tribunal manifestly exceeded the powers
there was corruption (120 days after discovery)
there was a serious departure from a fundamental rule of procedure
the award failed to give reasons
• Enforcement: Treaty obligation
How much will I get back? (1)
•
•
•
•
Expropriation of fixed assets
Expropriation of contracts/intangible rights
“Fair and equitable” treatment
Sovereign immunity
How much will I get back? (2)
“Standard” of value: fixed assets
Many BITs use the terms like “fair value”, “genuine value” or
“fair market value” to give a fixed expropriated asset a value.
They often fail to define these terms.
“Compensation shall be equivalent to the fair market value of the
expropriated investment immediately before the expropriation took
place (‘date of expropriation’), and shall not reflect any change in
value occurring because the intended expropriation had become
known earlier. Valuation criteria shall include going concern value,
asset value, including declared tax value of tangible property, and
other criteria, as appropriate, to determine fair market value”
NAFTA Chapter 11 – Article 1110
How much will I get back? (3)
“Fair market” value: (1)
Fair market value is:
“the amount at which property would change hands between a
willing buyer and a willing seller when neither is acting under
compulsion and when both have a reasonable knowledge of the
relevant facts.”
As defined by the American Society of Appraisers
How much will I get back? (4)
“Fair market” value (2)
• Fair market value is based upon a notional or
hypothetical transaction
• Fair market value
– Is not the “highest” price one could obtain in the
market. It is simply the price
– Does not consider the special acquisition premiums
due to synergies
How much will I get back? (5)
Other measures of value
• Strategic or “synergistic” value – the incremental amount
paid above fair market value due to cost and revenue
synergies
– Enhance revenue from product offerings
– Cost savings due to economies of scale
– These premiums must be removed because they are
generally paid to make the seller willing to transact
• Investment value – an individual’s perceived value of an
asset
– I will pay more than “fair market value” because …
How much will I get back? (6)
Going concern or not a going concern
• A going concern
– Discounted cash flow analysis
– Comparable transactions
– Comparable publicly traded companies
• Not a going concern
– Book value (that is, accounting assets less accounting debts)
– Appraised asset values less debts
• Other methods applied by Tribunals and Arbitration Panels
– Amounts invested (price paid for investment + profits earned +
other cash invested)
– Others?
How much will I get back? (7)
Lost profits and discounted cash flows
• Lost profits (in the past)
– Historical measurement period
– Actual events that occurred during the measurement period must be considered
– Measured as revenues lost due to the alleged action less “incremental expenses”
that would have been incurred to earn the lost revenue
– Lost profits typically does not consider cash flow items
– Profits are typically calculated pre-tax
• Discounted cash flows (in the future)
– Future measurement period
– Events unknown at the time of valuation are not considered (even if the valuation
date is historical date)
– Measured as “free cash flow” which considers all costs and expenses
– Cash flows are after-tax (unless the discount rate is pre-tax)
How much will I get back? (8)
“Fair and equitable treatment”
“open to Tribunals to determine a measure of compensation
appropriate to the specific circumstances of the case”
“a sufficient causal link with the specific [Treaty] provision that
has been breached: the economic losses claimed … must be
proved to be those that have arisen from a breach of the
NAFTA …”
Myers v Canada (NAFTA)
What will the reaction of the host state be? (1)
Jurisdiction issues
• Umbrella clauses
“a provision in a treaty for the protection of investments
under which the State parties undertake to observe any
obligations they may have entered into with respect to
investments. In other words, contractual obligations are put
under the treaty’s protective umbrella”
“Schreuer”
• So when is breach of contract a breach of treaty?
– SGS v Philippines
– SGS v Pakistan
What will the reaction of the host state be? (2)
• “Fork in the road”
“an investor may submit the dispute either to the jurisdiction
of the Contacting Party in whose territory the investment has
been made or to international arbitration” (ICSID or
UNCITRAL)
What will the reaction of the host state be? (3)
• Parallel proceedings: civil or criminal
• Tax consequences
Tips for investment
• Is there a BIT?
• Is there a MIT?
• What are its provisions?
–
–
–
–
MFN?
Consent?
Cooling-off period?
Definition of “investment”
• Is there a local investment law?
International Investment Protection
Treaties and the Baltic States
Panel Discussion
Jurisdiction (1)
Consider if the following would attract investment
treaty protection:
• A Lithuanian company which has established a
chain of retail stores in Ukraine
• A Lithuania company which owns 100% of the
shares in a Ukrainian company which owns the
chain of retail stores in Ukraine
• An Estonian Bank which has loans with a
government-owned corporation in Spain
Jurisdiction (2)
Consider if the following would attract investment treaty
protection:
• A Latvian person who provides finance and consultancy
services to a Russian company
• Would it make any difference if the Russian company
was involved in oil exploration?
• A Lithuanian company which owns 50% of the shares in
a Kazakh construction company with a contract to build
infrastructure for the Kazakhstan Government
• Would it make any difference if the 50% shares in the
Kazakh company were owned by a Latvian Company?
Treaty Rights (1) - Moldova
A Lithuanian company, Power AB, bids for the concession
to run the retail power business in Moldova for 25 years
•Terrorists are active in the region and the retail power
infrastructure is damaged. In resolving matters further
damage is caused by the Government.
•Under the Concession Agreement the Government is
responsible for ensuring the power bills of Government
entities are paid or it is required to pay compensation.
There is a shortfall in payments by Government customers
but the Government refuses to pay compensation
Treaty Rights (2) - Moldova
• Concerned at developments in Moldova, Power AB attempts
to repatriate a substantial amount of its cash resources to
Lithuania. The transfer is blocked by the Moldova
government introducing exchange controls
• The Government introduces environmental legislation
requiring private investors in the power sector in parts of
Moldova to make a substantial annual investment in steps to
reduce carbon emissions. Government-owned companies
are exempted from the law. Power AB is the only foreign
investors in the Moldova power sector
Treaty Rights (3) - Moldova
• There is an economic crisis and a change of
Government in Moldova. A new populist
government is elected and introduces legislation
reducing electricity prices dramatically. This is in
breach of the Concession Agreement signed by
the previous government.
Treaty Rights (4) - Belarus
A Latvian Bank owns 51% of shares in a Lithuanian
company Gas AB. Gas AB is invited to tender for a
licence to prospect for natural gas by the Government of
Belarus
•The licence is given to a competitor of Gas AB. Gas AB
says it has evidence of bribes given to the Byelorussian
Minister by its competitor
•In the above scenarios does the Latvian investor have any
redress?
Treaty Rights (5) – Belarus
• Gas AB begins to build a large gas storage facility in
Belarus. A local council passes onerous new planning
laws meaning the facility must be reduced in size making
it uneconomic
• Gas AB has also been providing consulting services
under a contract with the Belarus’ Department of Energy.
Following a corruption scandal the Minister for Energy
resigns. Belarus then refuses to pay Gas AB saying the
Minister had no authority to sign the contract
• Would it make any difference if the contract was made
with a company owned by the Government? What
would happen if the Government only had 50% of the
shares?
Dispute Resolution (1) - Mongolia
A Lithuanian Company, Sports AB, has a contract to develop and
maintain for 20 years a sports complex for the Government of
Mongolia. The contract provides for all disputes to be decided in the
local courts.
• In breach of contract the Government terminates the agreement 15
years early and refuses to make the last 2 quarterly payments under
the contract
• Negotiations have failed and Sports AB wants to know what options
are available
• Sports AB sues in the Mongolian Courts but both the court process
and the judge’s reasoning are subject to substantial criticism. The local
lawyers say the decision cannot be appealed in the local courts
Dispute Resolution (2) - Mongolia
• Would the position be any different if the local
lawyers advised that Sports AB could appeal in
the local courts?
• Would it make any difference if the contract
concerned equipment to be provided for the
state-owned energy company?