Remedies available for breaches of foreign investment contracts and treaties


Financier Worldwide Magazine

January 2016 Issue

January 2016 Issue

The remedies available to an investor for breaches of a foreign investment contract are damages, rescission of the contract or specific performance.

Depending on the terms of that contract, they may be heard by state courts or by an arbitral tribunal.

The other party to a contract which amounts to a foreign investment may be an individual or a business or an instrumentality of the host state or a public company of that state.

In the latter case, in some jurisdictions, administrative courts will have exclusive jurisdiction (on claims against the state or a public company when the complaint concerns not a breach of a right in contract, but a breach of the rules which govern the conduct of that body and the investor has an interest that such breach be established). However, when the investor claims a breach of a right arising from contract, ordinary state courts have jurisdiction on it.

As to the contracts underlying a foreign investment which consists of a sale of a business, or of equity of a corporation, a debate is taking place between various doctrines. According to one of them, the sale of shares entitles an investor to damages only if the shares are defective in one way or the other, but not if the corporation (the shares of which are sold) has defects. The sale of even the entire stock capital does not then amount to a sale of that business.

According to another opinion, distinction is to be made between a sale of specific assets of a corporation, and a sale of the entire equity of the corporation. In the former case a defect of a single asset gives rise to a claim for damages. It is suggested, however, that even if the equity of a corporation is sold, defects of any of its assets or a lower value of the corporation affect its value and entitle the purchaser (the investor) to claim damages.

In a sale of equity, the investor benefits from statutory warranties, for example as to free title to that equity and as to the absence of defects of it or for aliud pro alio (a sale of something different from what had been agreed upon), or for lack of the factual premise on which the sale was based. It is suggested that there is a statutory warranty even if the value of such equity is lower, for example because of the absence or lower value of assets or of higher liabilities.

If the last warranty is not statutory, a contractual warranty is available as to: (i) the existence of assets taken into account in the balance sheet; (ii) the existence of liabilities in addition to those resulting from the balance sheet, or of higher liabilities; or (iii) if the corporation is not producing the income which results from the balance sheet.

Remedies available for breach of an investment treaty

Over 3000 bilateral investment treaties have been entered into by many developed and developing states, to encourage foreign investment.

Under an investment treaty, such as the 2012 US Model Bilateral Treaty, generally the host state undertakes toward the investor that he will benefit from fair and equitable treatment, the treatment of the most favoured nation, a minimum standard of treatment, the repatriation of funds and profits, and compensation in case of direct or indirect expropriation.

Although bilateral investment treaties are entered into between two states, if one of the commitments of the host state is not complied with, the investor of the other state is granted the right to claim damages from the host state, a mechanism which is not in line with the traditional remedy provided by treaties of international public law, which concerns disputes between the contracting states.

It is the practice of investment treaties that claims based on it will be heard by arbitration, the main option for that being the Investment Centre for Settlement of Investment Disputes (ICSID) or under the ICSID Additional Facility Rules, the alternative generally being arbitration under the UNCITRAL rules, but even state courts are referred to in some BITs.

If an umbrella clause (a clause in a BIT which requires the contracting state to comply with all its obligations with investors under the BIT) is included in such treaty, breaches of the investment contract by the host state may be seen as breaches of the treaty. Umbrella clauses have been the object of conflicting decisions by ICSID Tribunals.

The relationships between breaches of contract and breaches of a treaty depend on the treaty. The investor must select whether to act under the treaty or in contract. Sometimes he must exhaust the remedies in contract before acting under the treaty. Recourse to state courts has then been seen in some situations as a ‘fork in the road’ preventing subsequent access to arbitration.

The European Union policy

In the European Union it has been largely debated whether the present arbitration procedure is satisfactory.

First, the European Parliament, and in particular several states, such as France, the UK and Germany, then the European Commission have come to the same conclusion – that such disputes are to be decided by a permanent investment court, to which permanent judges should be assigned. This delicate topic goes beyond the purposes of this article and on which the US will take a position.

This has developed in two directions. First, there have been rulings by the Commission that Member States put an end to intra EU bilateral treaties, since this creates different rights of investors in the different Member States and must be subject to the law of the EU and to its construction by the European Court of Justice.

Along another line, the Union has been negotiating with the US over the Transatlantic Trade and Investment Partnership (a treaty which aims to promote the economy of the EU and of the US, creating new jobs and reducing the cost of living) for an investment treaty which, in view of its great economic relevance, will be a milestone in future investment policies. Its last proposal has been presented to the US.

In the meantime, the Trans Pacific Partnership Trade Agreement, which aims to create a Free Trade Zone in the Pacific, was finalised on 15 October 2015 by Brunei, Chile, New Zealand, Singapore, Australia, Canada, Japan, Malaysia, Mexico, Peru, the US and Vietnam. It is now open to ratifications.


Mauro Rubino-Sammartano is a partner at LawFed Studio Legale E Tributario Brsa and president of the European Court of Arbitration. He can be contacted on +39 02 77 07 5500 or by email:

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Mauro Rubino-Sammartano

LawFed Studio Legale E Tributario Brsa

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