BITS IN THE BACKGROUND: INVESTMENT TREATIES AS BUSINESS DEVELOPMENT AND RISK MANAGEMENT TOOLS
| Jurisdiction | Derecho Internacional |
BITS IN THE BACKGROUND: INVESTMENT TREATIES AS BUSINESS DEVELOPMENT AND RISK MANAGEMENT TOOLS
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ROBERT J.C. DEANE, Partner, Borden Ladner Gervais LLP, Vancouver. Mr. Deane is National Leader of the Firm's International Trade and Arbitration Group, and a member of the Partnership Board, the Firm's governing body. He also serves as the Co-National Leader of the Privacy and Data Protection Group and as the Vancouver Regional Leader of the Advertising, Marketing and Sponsorship Law Group. Robert practices international and domestic commercial arbitration, commercial litigation, privacy law, intellectual property litigation and advertising/competition law. He is ranked nationally and internationally as a leading lawyer in these areas. Robert has experience in all levels of court, including the Supreme Court of Canada, and in numerous significant international commercial arbitration proceedings in North America, Asia and Europe under the LCIA Rules, the ICC Rules, the ICSID (Additional Facility) Rules, the American Arbitration Association's International Arbitration Rules, the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce, the Domestic and International Arbitration Rules of the British Columbia International Commercial Arbitration Centre, and the National Arbitration Rules of the ADR Institute of Canada, among others. Prior to joining BLG, Robert was a law clerk to the Honorable Madam Justice Beverley McLachlin, Supreme Court of Canada (now Chief Justice of Canada). Mr. Deane received his LLB from the University of Victoria; is a Member of the Executive Committee, ICC Canada; Past Regional Representative for North America (Canada), Young International Arbitration Group--London Court of International Arbitration; Member of Young Canadian Arbitration Practitioners; Toronto Commercial Arbitration Society; Western Canada Commercial Arbitration Society; Former Chair, Editorial Board, Working Group on Best Practices for Electronic Document Discovery and Production in Canada (Sedona Canada); and Member of the Advisory Board of the Institute for Transnational Arbitration.
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I. Introduction
Over the past twenty years, the relevance of bilateral investment treaties ("BITs") has increased significantly, as more foreign investors have sought redress from government action by commencing arbitral proceedings in international fora ("investor-State arbitration"). As a result, the scope of protection afforded by BITs and the nature and conduct of investor-State arbitration have attracted significant legal analysis and scholarship.
From a policy perspective, BITs have been promoted as important protections for private investors and hallmarks of a free and fair economy. They have also been scrutinized as potential constraints on the legitimate policy-making role of State governments. Similarly, the dispute resolution mechanism found in most BITs - investor-State arbitration - has attracted both commendation and criticism. On the one hand, investor-State arbitration offers an international forum for the resolution of disputes, and access to an international system of award enforcement under the New York Convention. On the other hand, investor-State arbitration has been criticized for being unaccountable, unpredictable and lacking in transparency.
From a business and risk-management perspective, BITs offer important safeguards for international investors and represent an attractive feature of bilateral and multilateral international trade agreements, such as the Canada-European Union Comprehensive Economic and Trade Agreement ("CETA") and the Trans-Pacific Partnership ("TPP"). The express protections contained within BITs, such as those relating to fair compensation for expropriation, "fair and equitable treatment", and "full protection and security", amongst others, reassure foreign investors that they will enjoy a basic standard of treatment. In the event of a breach of that standard by a State government, investors are reassured that they will have recourse to a neutral, international tribunal as provided for in a relevant BIT.
However, the mere availability of investor protections in BITs does not necessarily mean they have practical utility in all circumstances. Notwithstanding the protections contained within BITs, from a practical perspective, foreign investors may be reluctant to seek recourse against the State government in which its investment is located (the "Host State"). There are many reasons why a foreign investor may not want to commence arbitral proceedings against a Host State, even if it has a strong claim to recover losses arising from a breach of a relevant BIT. Principally, foreign investors with multiple investments in the same Host State will be rightfully concerned about the impact that a legal action may have on their remaining assets and investments. Moreover, a claim under a BIT will likely compromise, or potentially preclude, any investment prospects in the same jurisdiction in the foreseeable future. Finally, legal proceedings are expensive, time-consuming and, in many cases, unpredictable in both process and outcome.
For these reasons, while scholarship on BITs has typically focused on their legal development and application, it is also important to consider the effect of BITs when a potential action against
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the Host State has not (and likely will not) crystallize. In other words, it is important to analyze BITs when they are still in the background.
This paper examines the indirect effect of BITs on foreign investors as they plan and manage their investments. It is divided into three parts: (i) preparing to invest; (ii) managing an investment; and (iii) dealing with a dispute when one arises. At all stages, before an investor has made the decision to exercise its rights under a BIT, there are important considerations related to BITs that should guide the conduct of investors. Even when BITs are in the "background", they remain relevant legal instruments that should inform the decision-making and conduct of investors operating in foreign jurisdictions.
II. Preparing to Invest;
When preparing to invest in a foreign jurisdiction, an investor should consider the BIT protections available to it. In particular, it must consider the structure of its investment, its negotiation strategy, and other forms of protection that may be available in the circumstances. On the first point, an investor should conduct the necessary due diligence to determine what steps are necessary to benefit from an existing BIT or BITs. While tax considerations represent one consideration for structuring an investment, the availability of BIT protections should also receive careful review.
International arbitral tribunals have repeatedly found that indirect investments are protected by BITs. In this regard, an investor incorporated in a particular jurisdiction (i.e., the "Home State") may be protected by a BIT between the Home State and the Host State of its investment, notwithstanding the insertion of a subsidiary between the local entity and the ultimate parent company.1 The Netherlands provides a common option for intermediate subsidiaries, as it offers both potential tax benefits as well as a broad catalogue of BITs with many other States.2
In order to benefit from the protection of a BIT, there are (amongst other considerations) a number of typical and general prerequisites to consider as part of the investment structuring process. To qualify for protection under a BIT, a few conditions must be met. First, there must be an applicable investment treaty between the Home State of the investor and the Host State of the investor's investment. Second, the investor must be a bona fide investor under the terms of the applicable treaty. Finally, the protection can only apply if the investor has made an "investment" within the territory of the Host State.
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When determining the preferred...
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