In light of greater economic and political instability, BITs are potentially a powerful tool for wealthy international investors
In the past, Bilateral Investment Treaties (BITs) may have been considered relevant only to those investing in volatile, emerging markets. However in light of greater global economic and political instability, BITs are potentially a powerful tool for wealthy international investors seeking to protect their investments from loss caused by a state or state entity.
There are currently more than 2,500 BITs in force, involving most countries in the world. In broad terms, an investor or a company that is a national of one country can seek protection of their investment in another country, where those two countries are party to a BIT.
Many BITs are drafted so that the claimant is not restricted to the company that made the actual investment, but can include the parent company of the investor or a company related to the investor, thereby providing protection for investors who do not own their investments directly but through corporate and trust structures.
For example, where a UK resident owns assets in another country through a Cyprus holding company, such an individual could benefit from a BIT between Cyprus and the country where his investment is located.
A COMMON PROVISION within a BIT is the prompt and adequate compensation in the event of expropriation. This is not limited to the physical confiscation of the investment, but also covers situations where acts of a state result in the loss of the economic value or control of the investment.
The main advantage of BIT protection over domestic remedies or simply relying on the contractual terms between parties, is that many offer recourse to take disputes to the International Centre for the Settlement of Investment Disputes (“ICSID”). As ICSID has ties with the World Bank, the ability to enforce compensation awards is generally seen as more favourable (as states may feel more obliged to respect enforcement orders so not to prejudice their standing with the World Bank).
By comparison, the possibility of obtaining and enforcing an award against a state could be remote without BIT protection, as the investor would have to rely on the domestic legal system of the expropriating state for compensation or on his own government to negotiate a diplomatic resolution with the other state. Even if an investor does not wish to pursue an action under a BIT, simply having the option of going to international arbitration can be a powerful negotiating tool.
WHILE THERE IS not a vast amount of case law concerning the enforcement of BITs, there are examples of successful enforcement, including an award of US$133 million against the Egyptian government in 2009 in respect of the expropriation of a 161-acre resort property.
Ideally the potential application of a BIT should be considered prior to the investment. However, BIT protection can be obtained through restructuring investments. If this is done immediately before or after an expropriation has been commenced by a state, BIT protection may be denied.
It is also important to note that there is no standard form of BIT, so specialist advice is required to ensure that the desired BIT protection is achieved for any particular investment.