investment treaty arbitration in the construction sector

Investment Treaty Arbitration

in the Construction Sector

Japan Institute for Overseas

Investment (JOI)

19 October 2021

1. International projects as investments

2. What is an investment treaty?

3. Why do we use investment treaties?

4. What is the structure of an investment treaty?

5. What is investment treaty arbitration?

6. Strategic considerations

7. What are the defences available to host States?

2

Roadmap

• Characteristics of construction projects:

– Cross-border projects (contractors and sub-contractors from around the world; funding from international investors)

– Complex and long-term projects

– Cannot be relocated elsewhere

• Challenges of large-scale construction and engineering projects:

– Long-term transactions of significant technical and commercial complexity

– Each State has its own cultural, legal and regulatory nuances

– Unfamiliarity of foreign investors with the host State’s legal landscape

– Long-term projects which are exposed to decisions of governments and authorities in the jurisdiction of the project

3

International projects as investments

• Protections may be found in the form of investment treaties

• Foreign investors who qualify for protection may be able to seek redress against the

host State by bringing claims to an independent arbitration tribunal, whose awards

can order compensation or other remedies for investors who have been harmed

• Disputes in the construction sector represent 16% of the total number of international

investment arbitration cases registered by ICSID

4

International projects as investments

– Cases registered and administered by ICSID in FY2021 (Source: ICSID)








5

Roadmap

• An investment treaty is:

– an agreement made between two or more countries;

– aimed at attracting and promoting foreign investments;

– containing reciprocal undertakings for the protection of private investments made by nationals of the signatories in each other’s territories;

– establishing the terms and conditions under which nationals of one country invest in the other, including their rights and protections;

– providing protected investors with an alternative to local law or local courts.

• Investment treaties can be:

– Bilateral (BITs). E.g. Japan—Cambodia BIT (2007); or

– Multilateral (MITs). E.g. North American Free Trade Agreement (NAFTA); Energy Charter Treaty (ECT)

6

What is an Investment Treaty?








7

Roadmap

• BITs not only oblige host countries to provide certain protections for foreign investments, but also create a powerful private right of action for investors against a host government if it falls short of those obligations.

• BITs offer broad legal protections that may not be available under the local law of the host country, and that can supplement the investor’s rights under any contracts governing the investment.

• Arbitral awards issued under BITs are binding and can be enforced around the world.

• When investing abroad—directly or through subsidiaries—it is important to investigate whether the investment will benefit from BIT protections.

8

Why do we use investment treaties?








9

Roadmap

• In general, investment treaties cover investments by an investor of one Contracting

State in the territory of another Contracting State.

• For these purposes an “Investor” is usually defined to include:

– individuals who are nationals of the other State;

– companies incorporated under the laws of the other State;

– direct and indirect investors, even minority shareholders.

• Some treaties impose additional requirements for companies incorporated under the

laws of the home State, e.g. “actual place of business” or “place of effective

management”.

• Some treaties define “investor” to include companies incorporated in the host State.

10

Who is typically protected?

• “Investment” is usually broadly defined to include any kind of asset

• Example: Japan—Armenia BIT (2018) – Article 1(a):

“(a) the term “investment” means every kind of asset owned or controlled, directly or indirectly, by an investor,

including:

(i) an enterprise and a branch of an enterprise;

(ii) shares, stocks or other forms of equity participation in an enterprise;

(iii) bonds, debentures, loans and other forms of debt;

(iv) futures, options and other derivatives;

(v) rights under contracts, including turnkey, construction, management, production or revenue-sharing contracts;

(vi) claims to money and to any performance under contract having a financial value;

(vii) intellectual property rights, including copyrights and related rights, patent rights and rights relating to utility models, trademarks, industrial designs, layout-designs of integrated circuits, new varieties of plants, trade names, indications of source or geographical indications and undisclosed information;

(viii) rights conferred pursuant to laws and regulations or contracts such as concessions, licences, authorisations and permits, including those for the exploration and exploitation of natural resources; and

(ix) any other tangible and intangible, movable and immovable property, and any related property rights, such as leases, mortgages, liens and pledges; […]”

11

What is an “investment”? (BIT)

• In disputes under the ICSID regime there must also be an “investment” within the meaning of Article 25 ICSID: an autonomous concept?

• Some tribunals consider that investments have an “intrinsic” quality and have applied a four-pronged test (the “Salini test”):

– a contribution of money or assets;

– a certain duration over which the project is to be implemented;

– an element of risk; and

– a contribution to the host State’s economy.

12

What is an “investment”? (ICSID)

• Qualifying Investments: Real property; construction concessions; construction

licenses; large scale construction projects; project finance in the form of long term loans;

promissory notes

• Borderline: Pre-investment expenditure?

• No Investment: A letter of intent to construct a power project; pre-development

negotiations regarding a hydroelectric power plant; bank guarantees related to a project

• Cases:

– A project which involves training 63 engineers for the project (Bayandir v Pakistan)

– The construction of a national highway (Salini v Morocco)

– A contract to dredge the Suez Canal (Jan de Nul Dredging International NV v Egypt)

– Construction and operation of a water sewage infrastructure system (Biwater Gauff (Tanzania) v Tanzania)

13

Real examples of construction investments

• No Expropriation without Adequate Compensation

• Fair and Equitable Treatment (FET)

• Full Protection and Security

• No Arbitrary or Discriminatory Measures

• Most-Favoured-Nation Treatment

• National Treatment

• Umbrella Clauses

14

What legal protections are provided?

• FET violations are the most frequently found breaches.

15

What is the “fair and equitable treatment” (FET)

standard?

– El Paso Energy Int’l Co. v. The Argentine Republic, ICSID Case No. ARB/03/15, Award (31 October 2011)

• Example: Japan—Israel BIT (2017), Article 4

• Elements of the FET standard identified by tribunals:

– protection of the reasonable and legitimate expectations of foreign investors

– procedural propriety

– transparency

– conduct that is not arbitrary, grossly unfair, unjust, or discriminatory

– denial of justice

16

What are the elements of the FET standard?

Measures impacting business operations

Measures hindering economic performance

Interference with contractual rights

Interference with ownership rights

Abusive treatment

Denial of justice

Revocation or refusal to renew licenses

Export requirements

Unilateral termination of investment contract

Physical seizure of assets

Arrest of employees or family members

Denial of justice by domestic courts

Refusal to issue required permit

Withdrawal of tax exemptions

Non-renewal of investment contract

Failure to complete privatisation

Interference with business activities and management

Delays in judicial proceedings and other due process violations

Regulation or outlawing of business activity

Suspension of tariff adjustments

Breach of investment contract

Political statements

Changes to monetary policy

17

FET fact patterns

• An umbrella clause is a provision in an investment treaty that guarantees

the observance of obligations by the host State vis-à-vis the investor

• Referred to as “umbrella clauses” because they bring contractual and

other commitments under the treaty’s protective umbrella

• Allows an investor to bring disputes regarding interference with

contractual rights to an arbitration under a BIT rather than to domestic

courts.

• Example: Japan—Uzbekistan BIT (2008), Article 3(3)

18

What is an “umbrella clause”?

• The function and scope of an umbrella clause. Approaches:

– Umbrella clause is merely ‘aspirational’

– Umbrella clause transforms all breaches of contract into treaty violations

– Umbrella clause is only engaged when the respondent state has exercised sovereign power

• The effect of the contractual forum selection clause. Approaches:

– A claimant investor remains bound by the contractual dispute resolution clause

– The contractual dispute resolution clause is irrelevant to umbrella clause claims

• Is privity essential?

• Many states are refraining from including umbrella clauses in new-generation bilateral investment treaties.

19

“Umbrella clause”: Function, scope and limitations

• The State is not always a party to the construction agreement.

• Attribution of the allegedly unlawful conduct to the respondent State is an

essential component of an investment-treaty tribunal’s jurisdiction over a

claim.

• International law provides for three separate grounds on which attribution

can be established.

– State organ (Article 4 of the ILC Articles)

– Exercise of governmental authority (Article 5 of the ILC Articles)

– Directed or controlled by the government (Article 8 of the ILC Articles)

20

Attribution

• Failure to observe an obligation to make progress payments in the manner specified in a contract for the construction of highway bridges was in violation of the umbrella clause in the Turkmenistan-UK BIT (Garanti v Turkmenistan)

• Failure to pay payment certificates, to compensate for work and costs resulted from delays and inefficient working conditions and to release retention amounts, pursuant to contracts for the rehabilitation of major roadways and construction of a major urban development project, was in violation of the umbrella clause in the Austria-Libya BIT (Strabag SE v. Libya)

• Failure to fulfil an obligation (enshrined in legislation and contracts) to pay a fixed tariff at a constant rate for a 20 year period and not alter that obligation unilaterally was in violation of the umbrella clause in the Energy Charter Treaty (ESPF v Italy)

21

Examples of “umbrella clause” breaches

• MFN provisions typically provide that a State Party must ensure that the other State’s investors or investments are treated “no less favourably” than investors or investments under the State Party’s investment treaties with other States

• MFN clauses are usually general in their wording and most are silent on whether MFN treatment includes only substantive protections or also extends to procedural provisions, such as dispute resolution

• Investors have invoked MFN clauses to: access another forum of arbitration; broaden the scope of the arbitrable disputes; avoid procedural requirements; import a broader definition of “investment” or “investor”; expand the temporal scope of the BIT

• Example: Japan–Cambodia BIT (2007), Article 2(1)

22

What is the “Most-Favoured Nation” (MFN) clause?

• Direct expropriation: outright taking of property generally accompanied by a formal transfer of title.

• Indirect expropriation: total or near-total deprivation of property without a formal transfer of title or outright seizure

– value of the investment has been “neutralised or destroyed” or “virtually annihilated”

– loss of control

• Creeping expropriation: a type of indirect expropriation, consisting in a series of acts taken over time which cumulatively result in deprivation of property.

• Expropriation is not in itself an illegitimate act.

• To be lawful, the expropriation must meet the following conditions: (i) public purpose; (ii) non-discriminatory measure; (iii) due process; and (iv) prompt, adequate and effective compensation.

23

What is an “expropriation”?

24

Examples of expropriations in the construction sector

• Denial of a permit to an investor. The denial of a permit without any basis can amount to an indirect expropriation (Metalclad v Mexico).

• Failure to honour a money order or similar instrument. The outright refusal by a State to honour a money order or similar instrument under its own law, may constitute an expropriation or at least tantamount to an expropriation (Waste Management Inc (II) v United Mexican States).

• Cessation of payments leading to a deprivation of the investment. The failure to remunerate an investor under the relevant contract, depriving the investor of all economic value in their agreements may amount to an expropriation (Alpha Projketholding GmbH v Ukraine).

• Unlawful termination of an agreement. An unlawful termination of an agreement concluded between an investor and a State or State entity may amount to an expropriation (Ampal-American v Egypt).

• Change of regulatory regime. A government’s decision to change the legal and regulatory regime relating to an investment, voiding a contract, may amount to an unlawful expropriation (ADC v Hungary).

• Forcibly removing an investor. The forcible seizure of an asset and an investor is a strong indication of an expropriation (Wena Hotels v Egypt).








25

Roadmap

• Investment treaty arbitration is:

– arbitration between a company or individual investor;

– against a State;

– for breach of the State’s obligation under international law;

– to protect the investor’s investment.

• Investment treaties provide host States’ consent to arbitrate disputes.

• Investment treaties give investors a private right of action to submit an investment dispute with the host government directly to international arbitration.

• Disputes under investment treaties will be governed by the terms of the relevant provisions of the treaty and international law.

• The treaty will usually specify a choice of arbitral forum and rules: ICSID, UNCITRAL, and other arbitration institutions (PCA, ICC, SCC, CIETAC, HKIAC).

26

What is investment treaty arbitration?

• Part of the World Bank group

• Created by the Washington Convention of 1965

• Over 150 Member States

• Key features:

– Neutral and self-contained: not bound by arbitration law of any country.

– Effectiveness: awards are binding and enforceable; limited review system.

– Limited jurisdiction: only covers investment disputes.

27

What is ICSID?

• Article 52(1): Annulment. Grounds:

– (a) Tribunal was not properly constituted;

– (b) Tribunal has manifestly exceeded its powers;

– (c) Corruption on the part of a Tribunal member;

– (d) Serious departure from a fundamental rule of procedure;

– (e) Award has failed to state the reasons on which it is based.

• Article 53: Enforcement. Award is binding on the parties; not subject to

any appeal or to any other remedy except those provided in the Convention.

• Article 54: Enforcement. Award shall be recognized as binding and

enforceable by the Contracting States.

28

ICSID: Annulment and enforcement








29

Roadmap

• Investments must be properly structured. Consider:

– strategic nationality planning; and

– introducing a suitable investment vehicle into the corporate structure.

• However, restructuring when a dispute had already arisen or was sufficiently

foreseeable may amount to impermissible treaty shopping.

• Example:

30

Structuring the investment at the outset?

Investor (Contractor)

Japan

Investor’s subsidiary

Netherlands

Consortium to build wind farm

Namibia

BIT = extended protection

No BIT = limited protection

• Investors must take into account the procedural steps provided for in the

investment treaty:

– Is there a “Fork in the Road” provision? Article 8(2) France- Argentina BIT: “once an investor has submitted the dispute either to the jurisdiction of the Contracting Party involved or to arbitration, the choice of one of the other of these procedures shall be final.”

– Does the treaty request the exhaustion of local remedies? Article 8 Albania-Lithuania BIT: “If such a dispute cannot be settled amicably within six months … and domestic judicial and administrative remedies have been exhausted, the Contracting Party or the investor shall be entitled to submit the dispute. . .”

– Are there local litigation requirements? Article 8 Italy-Argentina BIT, requiring litigation before local courts for 18 months as a precondition to arbitration.

– Is there a cooling off period? Article 26 ECT: “(1) Disputes between a Contracting Party and an Investor of another Contracting Party ... shall, if possible, be settled amicably. (2) If such disputes cannot be settled according to the provisions of paragraph (1) within a period of three months from the date on which either party to the dispute requested amicable settlement, the Investor party to the dispute may choose to submit it for resolution…”

31

Preliminary procedural considerations

• To address concerns about increased length and cost in international arbitration, in

2010 the Debevoise & Plimpton International Dispute Resolution Group issued a

Protocol to Promote Efficiency in International Arbitration.

• Some of the measures to make proceedings more efficient include for example:

– Formation of the Tribunal. Asking arbitrators to commit to conduct the proceedings efficiently and to adopt procedures suitable to the circumstances.

– Establishing the Case and the Procedure. Avoiding unnecessary and multiple proceedings, for example, by considering joinder/consolidation/overlapping appointments, stays and coordinated hearings and briefing schedules.

– Evidence. Limiting and focusing requests for the production of documents. Limiting cross-examination of witnesses.

– Pleadings: Imposing page limits on pleadings.

– Hearing. Not automatically requesting post-hearing briefs.

– Settlement consideration. Consider settlement options at the outset of each case.

32

How to make proceedings more efficient?








33

Roadmap

• Non-compliance by investors with host State’s law and international public policy.

– Whenever a clause “in accordance with the laws of the host state” is contained in a treaty, some tribunals have interpreted it to imply that investments made in violation of national laws are not covered by the treaty.

– Therefore, a tribunal could conclude that the words “in accordance with the laws” relate not just to the laws on admission and establishment but also to other rules of the domestic legal order, including those relating to corruption.

– Investments made in violation of domestic rules may be outside the substantive guarantees contained in the relevant treaty, depending upon the nature and gravity of the violation.

– In Plama v Bulgaria, the claimant had misrepresented his role as investor to the host State in a privatisation agreement, leading the government to believe that the claimant had substantial assets; in reality, the claimant had very limited resources and managerial capacity. The tribunal found that the claimant’s conduct amounted to deliberate concealment and to fraud. The tribunal denied the claimant the right to invoke the substantive rights of the ECT.

34

What are the limits to investors’ protection?

• Limited number of cases involve a counterclaim submitted by the host State.

• Consent to arbitration by both the host State and the investor is indispensable to the

jurisdiction of the treaty tribunal. Treaty tribunals will need to find the investor’s

consent with regard to the State’s counterclaim before they can assume jurisdiction

over it.

• Example: Urbaser v. Argentina

– First tribunal to accept jurisdiction over a human rights counterclaim.

– In December 2016, the tribunal issued an award accepting jurisdiction over Argentina’s counterclaim, but dismissing the counterclaim on the merits.

– The tribunal relied on the wording of the treaty’s dispute resolution provision which referred to a dispute arising between the parties and being submitted to arbitration at the request of either party to the dispute.

– The tribunal rejected the claimants’ argument that the scope of their consent to arbitration had been implicitly limited to exclude counterclaims, as the claimants had been silent on this point in accepting Argentina’s offer of arbitration under the treaty, and, in any event, if such acceptance had been in narrower terms than the offer then it would not have encompassed the claimants’ claims either.

35

What about the host State’s counterclaims?

• The tribunal’s findings in Urbaser were considered in Aven v Costa Rica

36

Environmental Counterclaims

David R. Aven and Others v. Republic of Costa Rica, ICSID Case No. UNCT/15/3, Final Award, 18 September 2018, ¶ 739.

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investment treaty arbitration in the construction sector

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