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The ABCs of investment protection

Governments have entered into several bilateral and multilateral agreements on investment protection. These treaties provide, on the one hand, a set of standards that governments agree to abide by with respect to investors from the country with which they signed the agreement, and, on the other hand, mechanisms through which investors can seek damages for the breach of these terms.

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Published by ConnectAmericas

Unlike what occurs in the trade in goods and services, there is no single multilateral agreement for investment protection. In contrast, States have been entering into bilateral or multilateral investment treaties (BITs or MITs) that protect individuals or companies from one country investing in another. Although the text of these treaties differs, it has been government practice to include similar standards in all the agreements. The website of the United Nations Conference on Trade and Development (UNCTAD) defines Bilateral Investment Treaties as “agreements between two countries for the reciprocal encouragement, promotion and protection of investments in each other's territories by companies based in either country.” The organization provides a thorough search engine at this site to retrieve agreements currently in force.

What is an investment?

Unlike what occurs in the trade in goods and services, there is no single multilateral agreement for investment protection

Scope and definition of “investment”: The idea of investment typically differs from that of trade in goods and services, covered by other treaties. Muthucumaraswamy Sornarajah, professor at the National University of Singapore, explains that “foreign investment involves the transfer of tangible or intangible assets from one country to another for the purpose of their use in that country to generate wealth; under full or partial control of the owner of these assets.”

However, can the mere participation in a tender in another country be considered as an “investment” and be covered by a BIT? How about profit expectations or assuming risks? Sornarajah explains that the trend in BITs has been to expand the scope of the definition of foreign investment to include more than the simple establishment of branches. However, each BIT specifies different guidelines and these issues must be resolved case by case.

What type of protection does the investment receive?

Admission and establishment (freedom to invest): International Law traditionally allowed States to decide whether or not to authorize the entry of foreign investment by a company. Sornarajah explains that today, however, “some regional and bilateral treaties provide for the right of entry and establishment of investments to the nationals of contracting states.” In other words, following these treaties, countries lost their power to refuse entry to certain investments and companies gained the right to expand their business in these countries.  

National treatment: McLachlan, Shore and Weiniger state in their book “International Investment Arbitration” that “international common law did not prohibit distinctions between foreigners and nationals. To make up for this omission, the national treatment requirement, included in the majority of investment protection treaties, has the objective of finally providing an equal playing field for foreign investors (at least after they establish in the country).” The idea behind this standard is that states cannot stipulate differences between national and foreign investors, unless it is required for governmental public policy purposes. When this clause is present in a treaty, investors from a country have the right to receive the same treatment as local investors from the other BIT signatory country.   

Most-favoured nation treatment: Sornarajah explains that inclusion of this term in investment treaties “allows nationals from Member States party to the agreement to make use of the favorable treatment granted to third country nationals by some of the contracting states.” In other words, if one of the States that entered into a BIT or a MIT grants benefits to an investor from a third country, the companies from the other country that have signed the treaty can claim the same treatment for themselves. 

Fair and equitable treatment: Sornarajah explains that this phrase is “vague and is open to different interpretations.” However, throughout different arbitral awards the term has become more precise and today it can be understood as implying a minimum degree of stability and predictability, although it does not imply that investments are guaranteed against potential risks. Hence, state measures applied to investments must result from an administrative due process and must respect the investors’ legitimate expectations.

Compensation in the event of expropriation or damage to the investment: BITs generally prohibit both direct expropriation (forceful appropriation of individuals’ assets by the state through administrative or legislative actions,) as well as indirect expropriation (when the effects of the measure are equivalent to direct expropriation but without a formal transfer of title or explicit appropriation, causing substantial interference with the investor’s property rights.) Hence, for example, not only would the decision to expropriate a factory to build a highway be included in this category but also a decision from a State that would cause the factory to inevitably have to close, even though this is not the explicit purpose. In any case, the State continues to have the authority to take up the measure but it must adequately compensate the investor.  

Guarantees in connection with the free transfer of funds: Some bilateral investment treaties include provisions that guarantee that investors will be allowed to withdraw dividends and proceeds obtained from their investments and send them to the investors’ country of origin.

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United Nations Conference on Trade and Development

McLachlan, Campbell; Shore, Laurence; and Weiniger, Matthew. International Investment Arbitration. Substantial Principles. Oxford: Oxford University Press, 2007.

Sornarajah, Muthucumaraswamy. The International Law on Foreign Investment. Cambridge: Cambridge University Press, 2004.

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