Anticipating Investor-State Disputes: Bilateral investment treaties are crucial to institutional investors in emerging markets

Friday, May 1, 2015 - 13:44

Institutional investors looking overseas for potential investment opportunities should take into account the existence of bilateral investment treaties (“BITs”) when structuring their overseas investments. Such structuring may prove to be critical should the host government take actions that affect their foreign investments. BITs typically permit investors to bring claims directly against the host government for actions that may have adversely impacted their international law rights.

Historically, the main “users” of investment treaty arbitration under BITs have been multinational companies operating in the oil and gas, mining and infrastructure sectors. But investment treaty arbitration is not simply for users in these capital-intensive sectors. Rather, in the aftermath of the financial crisis, savvy institutional investors and individuals have also resorted to investment treaty arbitration to resolve similar types of disputes against states. Recent examples include an arbitration initiated by the second-largest Chinese insurer, Ping An Life Insurance Company, against Belgium relating to the collapse of Fortis Bank;[1] an arbitration initiated by a Greek investment group, Marfin Investment Group, against Cyprus for the nationalization of Laiki Bank; [2] and several arbitrations initiated by Italian bondholders against Argentina relating to the suspension of the payment of its sovereign bonds.[3]

Institutional investors and individuals are arbitrating their disputes against governments relating directly to their investments in financial instruments (such as sovereign bonds) or in financial institutions (such as banks). Additionally, they are bringing claims against governments under other financial arrangements. For example, in the early 2000s, CDC Group plc (now Actis LLP) sued the government of the Seychelles for a breach of its loan agreement entered into for the expansion of the capacity of two local power companies focused on the generation of electronic power.[4] In 2005, Daimler Financial Services claimed that Argentina’s “pesification” measures impaired its investment in a local automotive company, which granted loans to dealers and purchasers of automotive goods.[5]

Understanding BITs and Investment Treaty Arbitration

BITs are treaties entered into by two states for the reciprocal promotion and protection of foreign investments. To date, nearly 3,000 BITs have been signed worldwide. BITs offer substantive standards for the protection of investments and investors and also typically include a dispute settlement clause that allows an investor of the nationality of one state (the “home state”) to initiate arbitration proceedings against the state where the investment is located (the “host state”) for violating the foreign investor’s rights.

Typically, BITs provide for arbitration proceedings under certain well-established arbitration rules, such as the United Nations Commission on International Trade Law Rules (the “UNCITRAL Rules”), the International Centre for Settlement of Investment Disputes (“ICSID”) Convention, the Rules of Arbitration of the International Chamber of Commerce (the “ICC”) or the Rules of Arbitration of the Stockholm Chamber of Commerce (the “SCC”). An international tribunal constituted under any of these rules will be composed of impartial and independent arbitrators who will adjudicate the dispute arising under a BIT in accordance with the terms of the specific BIT, taking into account customary international law.

The BITs permit investors to seek damages from the host state for actions taken that have impacted their investment adversely. Some of the damages awarded have been very significant. For example, former shareholders of the Yukos oil company were awarded US$50 billion in damages for breaches by the Russian Federation of the Energy Charter Treaty (a multilateral international agreement) for expropriation of their investment. Similarly, a tribunal awarded Occidental Petroleum Corporation approximately US$1.76 billion in damages resulting from Ecuador’s breach of the U.S.-Ecuador BIT.

Generally, states comply with adverse awards rendered by arbitral tribunals. Under the ICSID Convention, the losing party may seek annulment of an award before an ad hoc committee, again composed of a trio of independent and impartial members. Awards rendered by an ICSID tribunal are directly enforceable against a respondent state debtor that does not comply with the award in the more than 150 states that have ratified the ICSID Convention. Likewise, awards rendered by arbitral tribunals under the ICC Rules, the SCC Rules or the UNCITRAL Rules may be recognized and enforced in over 154 states that have ratified the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards. Given the widespread ratification of the ICSID Convention and the New York Convention, successful award creditors may seek to attach the assets of a recalcitrant state that will not pay its award debt in any of these jurisdictions where the state may have assets (subject, of course, to sovereign immunity protections).

Foreign Investors and Nationality Planning in Investment-Treaty Arbitration

In order to avail of BIT protections, certain conditions must be satisfied. A fundamental requirement for bringing a claim in an investment treaty arbitration is that the claimant must be an “investor” under the applicable BIT. Qualified investors making the investment in the host state must be nationals of the home state. Not only individuals but also companies, including institutional investors, may qualify as investors under BITs. For example, the 2012 Model U.S. BIT, which the United States uses as the basis for its negotiations with other states, defines an investor as “a Party or state enterprise thereof, or a national or an enterprise of a Party, that attempts to make, is making, or has made an investment in the territory of the other. . . .”[6]

Since the foreign nationality of the investor is a key element in investment treaty arbitration, U.S. institutional investors should be aware of the limited number of BITs entered into by the United States. Since fewer than 50 BITs signed by the United States have entered into force, U.S. investors may be barred from BIT protection when investing in emerging countries unless they structure their investment through an investment vehicle incorporated in a state that has executed a BIT with the target state where the investment will be made. Notably, the United States has not entered into BITs with states that currently are attractive destinations for foreign direct investment, such as Russia, India, China and South Africa.

We are already seeing examples of U.S. institutional investors taking advantage of BIT structuring to initiate investment treaty arbitrations. For example, Lone Star Funds, a U.S. private equity firm, initiated an arbitration against the government of South Korea over an eight-year-long disputed sale process involving its stake in Korea Exchange Bank and other Korean companies. At the time Lone Star Funds made its investment, it paid 1 billion euros for a 51 percent stake in the Korea Exchange Bank through a Belgian subsidiary. Lone Star Funds brought its claim under the South Korea-Belgium-Luxembourg Economic Union BIT, and the arbitration is underway.[7]

Such BIT structuring is not without limits. Institutional investors may structure investments in an emerging market through a vehicle incorporated in another state that has entered into a favorable BIT with the host state at the beginning of the life of the investment or, at the very least, before a dispute with the host state has arisen. Resorting to investment-treaty planning only after the dispute has arisen could be construed as an abusive attempt to obtain access to the system of investment protection under the BIT and international law. For example, in Phoenix v. Czech Republic, the arbitral tribunal found that nationality planning was an abusive attempt to obtain access to the system of investment protection under the ICSID Convention, reasoning that most of the events that triggered the dispute already had taken place by the time the claimant routed its investment through a corporate vehicle of the nationality as a state that had concluded a BIT with the host state of the investment.[8]

Financial Instruments and Shareholding in Investment-Treaty Arbitration

The second requirement for availing of BIT protection is the existence of an “investment” under the applicable BIT. According to the wording of the BIT at stake, the interpretation of arbitral tribunals may vary, but recent jurisprudence has extended the notion of investment not only to classical tangible assets (greenfield investments), but also to intangible assets, such as patents and a variety of financial instruments. For example, the U.S. model BIT defines an investment as “every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk.” [9] The investment may take different forms, including an enterprise, shares, stock and other forms of equity participation in an enterprise; bonds, debentures, other debt instruments and loans, futures, options and other derivatives; turnkey, construction, management, production, concession, revenue sharing and other similar contracts; intellectual property rights; licenses, authorizations, permits and similar rights conferred pursuant to domestic law; and other tangible or intangible, movable or immovable property and related property rights, such as leases, mortgages, liens and pledges.[10]

Indeed, a wide variety of financial instruments have been interpreted as “investments” under various BITs. For example, arbitral tribunals have found that promissory notes,[11] sovereign bonds and securities,[12] interests in a local financial conglomerate owning a local bank,[13] deposits in a local currency exchange office,[14] and loan agreements[15] qualify as investments under the relevant treaty. Even hedging agreements are considered protected investments for the purpose of investment-treaty arbitration. Recently, an ICSID tribunal in Deutsche Bank v. Sri Lanka held that the hedging agreement entered into by Deutsche Bank and the Republic of Sri Lanka’s state oil company to limit exposure to oil prices at a time when oil prices were around US$140 per barrel was an investment for the purposes of the BIT arbitration.[16]

Host Government’s Actions Affecting Foreign Institutional Investors

During the course of long-term investments, host governments may take actions that would impact negatively the investment and would breach the standard of protection set forth in the BIT. BITs typically protect an investor against expropriation of its investment, or unfair and inequitable treatment that violates the investor’s legitimate expectations at the time it made its investment. Additionally, most BITs guarantee an investor treatment by the host state that is at least equal to the level afforded to third-party investors or nationals of the host state. In sum, these BITs bestow upon foreign investors significant rights, which are critical given the political turmoil and governmental turnover that takes place in some states.


Before entering emerging markets, institutional investors should investigate whether the United States has entered into a BIT that is in force with the host state where the investment will be made. If such a BIT does not exist, then the investor should consider restructuring its investment in order to obtain the more favorable protection of another state’s BIT with the host state. The investor should definitely do so if the investment is in a sector that is heavily regulated by governments (such as healthcare or natural resources) or if the investment is long-term (and thus subject to the policies of the successive political parties that come into power after the investment has been made). In this way, the investor may secure international law protections above and beyond what is available under the host state’s domestic law.

[1] Ping An Life Insurance Company of China, Limited and Ping An Insurance (Group) Company of China, Limited v. Kingdom of Belgium, ICSID Case No. ARB/12/29 (pending).

[2] Marfin Investment Group v. The Republic of Cyprus, ICSID Case No. ARB/13/27 (pending).

[3] Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5 (formerly Giovanna a Beccara and Others v. The Argentine Republic) (pending).

[4] CDC Group plc v. Republic of the Seychelles, ICSID Case No. ARB/02/14 (concluded).

[5] Daimler Financial Services AG v. Argentine Republic, ICSID Case No. ARB/05/1 (concluded).

[6] 2012 U.S. Model BIT at Article 1.

[7] LSF-KEB Holdings SCA and others v. Republic of Korea, ICSID Case No. ARB/12/37 (pending).

[8] Phoenix Action, Ltd. v. The Czech Republic, ICSID Case No. ARB/06/5, Award, April 15, 2009.

[9] 2012 U.S. Model BIT at Article 1.

[10] Id.

[11] Fedax N.V. v. The Republic of Venezuela, ICSID Case No. ARB/96/3, Decision of the Tribunal on Objections to Jurisdiction, July 11, 1997.

[12] Abaclat and Others v. The Argentine Republic, ICSID Case No. ARB/07/5 (formerly Giovanna a Beccara and Others v. The Argentine Republic), Decision on Jurisdiction and Admissibility, August 4, 2011; Ambiente Ufficio S.p.A. and Others v. Argentine Republic, ICSID Case No. ARB/08/9 (formerly Giordano Alpi and others v. Argentine Republic), Decision on Jurisdiction and Admissibility, February 8, 2013; Giovanni Alemanni and Others v. The Argentine Republic, ICSID Case No. ARB/07/8, Decision on Jurisdiction and Admissibility, November 17, 2014.

[13] Renée Rose Levy de Levi v. Republic of Peru, ICSID Case No. ARB/10/17, Award, February 26, 2014.

[14] Alasdair Ross Anderson et al v. Republic of Costa Rica, ICSID Case No. ARB(AF)/07/3, Award, May 19, 2010.

[15] CDC Group plc v. Republic of the Seychelles, ICSID Case No. ARB/02/14, Award, December 17, 2003.

[16] Deutsche Bank AG v. Democratic Socialist Republic of Sri Lanka, ICSID Case No. ARB/09/2, Award, October 23, 2012.


Viren Mascarenhas is counsel and Camilla Gambarini is a foreign associate in the New York office of King & Spalding’s International Arbitration Group. The practice has been ranked in Band 1 by Chambers Global (2015) and as one of the top five globally by Global Arbitration Review (2015).  

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