A note to general counsel: protecting foreign investments using investment treaties


Financier Worldwide Magazine

October 2017 Issue

In early 2017, a Canadian mining company found its most important mining asset in a Latin American country subject to unexpected legislative changes that virtually wiped out the value of the mine. In examining the company’s potential recourses, the general counsel discovered too late that had the company undertaken a minor corporate reorganisation prior to the law change, the company could have gained access to potent protections available under a bilateral investment treat (BIT) between the Latin American country and a third state. Specifically, the BIT would have allowed the mining company to bring a claim in arbitration and would therefore have dramatically enhanced the company’s bargaining power vis-à-vis the foreign government. Without any treaty in force between Canada and the host state where the mine was located, however, the mining company was left with less attractive options such as mounting a legal challenge in the courts of the host state or persuading the Canadian government to espouse a claim on the company’s behalf.   

For companies with substantial investments abroad, planning for the possibility of disputes arising from harmful actions by foreign governments is essential, yet far too many general counsels miss simple opportunities to do so by harnessing protections available under BITs or multilateral investment treaties (MITs) such as the North American Free Trade Agreement (NAFTA) or the Energy Charter Treaty (ECT).

BITs and MITs

Today, there exists a growing network of over 3000 BITs and MITs that protect companies and individuals that operate internationally. These treaties typically protect against a broad range of adverse actions by the government hosting the investment, such as uncompensated expropriations, even if unintended, or other forms of detrimental interference that is considered to be ‘unfair and inequitable’ or discriminatory. However, the most innovative aspect of these treaties (or at least the vast majority of them) is that they grant the procedural right to private entities to bring claims directly against the host state in the neutral forum of international arbitration, a prerogative that was once limited exclusively to other states.

A company need not have signed a contract with the government to benefit from these protections and corporate counsel are often unaware that their companies are already protected under one or more investment treaties. In order to qualify for protection, the company, either the ultimate parent or a subsidiary, must usually be incorporated in the state party to the treaty which is not the state where the investment is located. The company’s interest in the overseas project must also meet the treaty’s definition of investment, which is usually broad and includes equity shares, IP rights and contractual interests. Short-term transactions, however, such as contracts for the sale of goods or services, are unlikely to qualify for protection.

More generally, the ability to sue the host state under an investment treaty can provide the investor powerful leverage when a dispute arises over some governmental action that harms the investment. High-profile international arbitrations can negatively affect perceptions of a country’s investment climate and have often resulted in multi-billion dollar damages awards. Given these consequences, a claimant can sometimes pressure a host government to settle a dispute simply by raising the spectre of treaty arbitration.

The importance of early planning

Laying the groundwork for investment treaty protection early in the deal cycle will ensure that a company is not left high and dry if a dispute with a host government arises down the road.

While the structure of an overseas project is often steered by considerations of tax planning, it is possible to marry an optimised tax structure with the best protections available under investment treaties. For instance, by including a Dutch B.V. in its ownership chain, a company can garner favourable tax treatment, as well as access to an extensive network of Dutch investment treaties. Dutch investment treaties typically extend their protections to holding companies incorporated in The Netherlands and include very favourable investment protections which can be enforced in international arbitration.

Even after a deal is made, it is not too late to restructure a company to secure enhanced treaty protection. However, some arbitral tribunals have rejected claims where they considered a company to have opportunistically reorganised after a dispute with the government had arisen or was reasonably foreseeable. Because it can often be difficult to pinpoint when a dispute arises or becomes foreseeable – the government might vaguely threaten measures against the investor or announce a legislative change affecting a given industry that may or may not come to fruition – the most prudent course is to organise the corporate structure to optimise treaty protections early, well before there are any rumblings of a gathering dispute.

Multiplying treaty protection

Companies may also wish to consider structuring their overseas projects to benefit from more than one investment treaty. Not all treaties are worded identically and they often offer different degrees of protection and types dispute resolution mechanisms.

For instance, some investment treaties exclude from their protections entire categories of disputes, such as those arising from taxation measures. Accordingly, if a company’s dominant concern is that its investment may face crippling fiscal measures (for example, Law 42 enacted by the Ecuadorian Congress in 2006-07 subjecting foreign hydrocarbon producers to a windfall profit tax of 99 percent), it may be prudent to incorporate an additional holding company in a state that has a BIT with the host state that allows for claims in respect of tax measures.

In a case rendered earlier this year, Supervision y Control S.A. v. Republic of Costa Rica, a Spanish company had a dispute with Costa Rica over tariff readjustment procedures under a concession agreement. The company’s local subsidiary sought to resolve the dispute in the Costa Rican administrative courts, and the parent company brought a claim against Costa Rica under an investment treaty. However, a clause in the treaty (often referred to as a ‘fork-in-the-road’ clause) required claimants to discontinue any local proceedings as a condition to bringing a treaty-based claim. The arbitral tribunal held that the domestic litigation ran afoul of this provision and dismissed the company's claims that were similar to those pending in the local courts (the tribunal dismissed the remaining claims on other grounds). With better advanced planning, the company might have been able to access another treaty that did not include the same restriction and thereby maintain the two proceedings in parallel as it wished to do. 

Other treaties place time limitations on when a company can bring an arbitration claim. In a recent case, Ansung Housing Co., Ltd. v. People’s Republic of China, a tribunal rejected claims by a Korean investor in a Chinese golf course based on a clause stating that the treaty would not apply if more than three years had elapsed from the time the company knew, or should have known, that it was incurring losses as a result of the impugned government measures. The tribunal dismissed the claims as untimely because the Korean company initiated arbitration just over three years after local officials had visited its premises to demand repayment of a loan. Again, had the claimant restructured to access another treaty without the same temporal restriction it would have been able to maintain its arbitral claim. 

Lasting investment protection

Investment protection is not static – the range of available treaties can also change during the life cycle of an overseas project.

This is particularly true following a recent trend by some states, including Bolivia, Venezuela, Ecuador, Poland, South Africa, Indonesia and India, to reduce their exposure to arbitration claims by either terminating, or taking steps to terminate, their investment treaties. The termination process is not automatic. Many investment treaties extend their protections, including the right to initiate arbitration, to existing investments at the time of termination for a defined period of time. However, this changing landscape can significantly impact the protection of a project early in its life cycle, as well as investments made after the termination of these treaties.

Monitoring current developments in available investment protections thus remains of paramount importance.

Practical steps

Particularly in this era of rising economic nationalism around the globe, general counsel must be more proactive in seeking advice on how to ensure that their companies’ foreign investments are maximally protected in the event of a dispute involving a sovereign government. These protections may include some combination of contractual rights, political risk insurance, enhancing relations with local and national governments, public relations efforts, and most importantly, investment treaty protections. 

Specifically, investment treaty planning entails the following steps: (i) identifying which investment treaties are available, depending on the present company structure, and assessing other treaties that can be accessed through restructuring; (ii) comparing the requirements, protections and dispute resolution provisions of the available investment treaties, and whether they exclude any categories of disputes; (iii) where no treaty is available, seeking to negotiate contracts with the host government containing enhanced protections and providing for dispute resolution outside the local courts; and (iv) if a dispute does arise, adapting a strategy to the requirements of available investment treaties or contracts.


Mark McNeill is a partner and Margaret Ryan is a senior associate at Shearman & Sterling LLP. Mr McNeill can be contacted on +44 (0)20 7655 5778 or by email: Ms Ryan can be contacted on +44 (0)20 7655 5130 or by email:

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