CHAPTER 5 LEGAL MECHANISMS FOR THE PROTECTION OF FOREIGN INVESTMENT IN LATIN AMERICA
| Jurisdiction | Derecho Internacional |
(2001)
LEGAL MECHANISMS FOR THE PROTECTION OF FOREIGN INVESTMENT IN LATIN AMERICA
Urquidi, Cumplido, Ramírez, Mayorga & Co.
Santiago, Chile
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1. INTRODUCTION
Our concern is the protection of foreign investments. This subject deals with the risk in investment decisions. In fact, we know that there are two fundamental elements in a decision to invest — at least in terms of private decisions: profitability and risk. The purpose of protection is to reduce risk.
There may be three different main kinds of risk: a) Political risk, arising from instability, b) Economic risk, also arising from instability, and c) Juridical risk, when the applicable law is neither clear nor certain. This study deals with the subject of risk from a juridical point of view and specifically, with the protection that can be granted by law to investors in order to facilitate decision making.
The legal framework currently regulating foreign investment may be either international, i.e., resulting from agreements between States, or national, i.e. related with each country's domestic law.
2. INTERNATIONAL LEGAL FRAMEWORK ON FOREIGN INVESTMENT
Since the `60s, a large number of international agreements aimed at protecting foreign investment have been implemented. They are either multilateral agreements such as the Nafta or Mercosur, or bilateral agreements such as the Bilateral Investment Treaties (BITs). It is estimated that nearly 1800 Bilateral Investment Treaties are currently in place.1
The main features of BITs are the following:
a. Given that they are international agreements, their status is above the law in most countries. This implies higher juridical stability, since they cannot be amended by the unilateral will of one State, as would be the case of domestic law.
b. In the event of disputes between the investor and the recipient State, they provide for international arbitration. Practically all BITs appoint the lcsid as the dispute settlement center.
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c. The Icsid, International Centre for Settlement of Investment Disputes, was created by the Washington Convention of 1965. Currently, the Icsid hosts more than 150 member-countries.
d. The present trend for Bits is to set forth a formula known as the sole and final choice of jurisdiction. This entails that, when faced with a dispute, the investor may choose between national courts or international arbitration, but once the choice has been made, it cannot be changed.
e. BITs regulate a large number of subjects: the concept of investment, investors' rights, retrospectivity, protection of property rights, remittances of income and capital, subrogation, conflicts in interpreting the BIT itself, etc.
f. Notwithstanding the above, the essential principle in all BITs is that of "national treatment." In other words, countries commit themselves to grant equal treatment to domestic and foreign investors. To sum up, domestic law is applied to the foreign investor.
g. At the same time, they include the most-favored-nation clause which, in the context of 1800 BITs, is bound to cause some interpretation problems.2
h. The Icsid's regulations also establish that in the event of any dispute, arbitrators shall apply the rules of that State where the investment is made, unless otherwise agreed by the parties.3
In view of the above, it is essential to refer to each country's domestic law in order to learn exactly how the foreign investments are protected.
3. NATIONAL REGULATIONS ABOUT FOREIGN INVESTMENT
The Inter-American Development Bank (IDB) contracted me to prepare a comparative study of the domestic foreign investment regimes of the countries in the Americas.4 This study is based on information provided by member countries of the FTAA.
The following 27 countries provided information: Argentina, Barbados, Belize, Bolivia, Brazil. Canada, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Guyana, Honduras, Jamaica, Mexico, Nicaragua, Panama, Paraguay, Peru, St. Kitts, Suriname, Trinidad and Tobago, the United States, Uruguay, and Venezuela.
The Report is divided into six sections: (1) Legal bases for foreign investment; (2) Concept and subject of foreign investment; (3) Scope of foreign investment activities; (4) Rights and protection of foreign investment; (5) Dispute settlement; and (6) Competent authorities.
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It should be noted that the comparative study that follows was somewhat complicated by the existence of two legal systems in the Hemisphere, namely common law and civil law. As a result, some concepts or notions in countries of one system may not have an exact equivalent in the countries of the other system. As indicated above, the information provided by the countries was classified in six sections, as detailed below.
3.1 Legal Bases for Foreign Investment
The objective of this section is to determine whether each country has a foreign investment statute, and to identify the juridical rank of the regulations governing the statute in order to determine its degree of stability.
3.1.1. Constitutional Rank
Practically all the countries indicated that their constitutions contained regulations guaranteeing private property, free enterprise, and equal treatment of both nationals and foreigners. Some of the countries cited express references to foreign investment in their constitutions,5 indicating that equal treatment of national and foreign investors is expressly guaranteed, as well as the possibility of recourse to national or international arbitration in case of disputes.
3.1.2. Legal Rank
Practically all the countries have a special foreign investment statute or law, in almost all cases drafted or modified after 1990. Nevertheless, particularly because of the nature of their legal systems, some countries do not have laws on foreign investment.6 Some countries referred to the regulations contained in the Cartagena Agreement, such as Decisions 291 and 292, as legal bases for foreign investment. Finally, it should be borne in mind that, in addition to domestic regulations, investment protection treaties or other international investment instruments constitute a source of legal rights.
3.1.3. Administration Rank
Almost all the countries have organs, usually state agencies, empowered to regulate this area. Exceptionally, some countries do not have special agencies responsible for foreign investment and leave that topic to be handled by the public administration.7
4. CONCEPT AND SUBJECT OF FOREIGN INVESTMENT
The purpose of this section is to identify the definitions of investment and foreign investor, a task that is essential for determining for what and to whom the regulations are applied. This is also important in the international arena, especially in the case of dispute and arbitration.
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4.1. Concept of Foreign Investment
Several categories can be developed from the responses: Countries that define foreign investment in their legislation and others that reported that their legislation contained such a definition, but did not indicate its content. A third category of countries indicated that their legislation did not contain such a definition or did not respond to the question. Finally, some countries referred to the definition of foreign investment contained in international treaties such as the Cartagena Agreement or NAFTA, Without prejudice to their domestic regulations.
The countries may be grouped into three general categories according to their concept of foreign investment. One group emphasized the idea of transfers from abroad in its definition.8 A second group based its determination on the nature of the investor.9 The third category defined foreign investment based on the external source, be it from a natural person or juridical entity, thus uniting the concepts of the previous two categories.10 Finally, some countries, by virtue of having no specific definition in their legislation, employ the concept contained in the investment Protection Treaties or other international instruments that they have signed.
4.2. Registries and Authorization
With respect to the existence of a registry, authorization process, or other mechanisms for identifying foreign investment, most countries have them.11 Some countries referred to the existence of an investment contract to which a foreign investor could resort.12 It was reported that in most cases registries are merely for information purpose and not for authorization.
4.3. Natural and Juridical Persons
Concerning the status of the foreign investor, all the countries recognize both natural and juridical persons as foreign investors.
4.4. Nationality
With respect to nationality, one group of countries does not apply its foreign investment regime to its nationals.13 The other group of countries permits their nationals to use the foreign investment regime.14 In this latter category, some of the countries outlined the conditions under which their nationals can take advantage of that regime, usually requiring foreign domicile and/or residency, or, in certain cases, also requiring investment from abroad.
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4.5. Recipient Company
The company that receives foreign capital can take advantage of the regulations that govern foreign investment in all the countries. The majority of the countries mentioned the principle of equality or non-discrimination in their responses. Nevertheless, according to certain responses, companies with mixed capital-national and foreign-may only take partial advantage of that regime to the extent of the amount or percentage of the foreign investment.15 Inn this connection, it is worth noting the theory of control applied by some countries to determine whether a recipient company is given the status of foreign investor.
4.6. Temporary Extension
No country indicated that the...
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