When it comes to investing and operating in high-risk jurisdictions, there are a number of tools that can help businesses manage their risk profile. Putting to one side contractual mechanisms, such as force majeure and material adverse change clauses (outlined here), one important tool – which is often overlooked – is the network of more than 2,000 bilateral investment treaties (BITs) involving more than 150 countries around the world.
BITs are agreements between two countries that establish conditions for foreign direct investment from investors of one country into the other country. BITs are intended to incentivize foreign investment and create a reasonably stable and predictable investment environment. They achieve this by using international law to reduce political risk and provide legal protection that is independent of the domestic law of either contracting State. To do so, BITs set out standards of protection under international law. Importantly, they also often include a right to arbitrate disputes with the host State. This means that investors are not reliant on national courts, which may be treacherous for a foreign litigant, and/or affected by the very conditions that make the jurisdiction high-risk in the first place.
BITs also provide protection in instances of armed conflict, regime change, and occupation, and may also apply in cases of State succession. They can therefore act as a steadying force for investment once the jurisdiction is no longer in active armed conflict, but remains high-risk.
How to qualify for BIT protection
In order to be protected by a particular BIT, a business (or individual) must be a qualifying investor that has made a qualifying investment. This is typically a question of nationality: the investor must be a national of one of the contracting States (the “home State”) that has made an investment in the other contracting State (the “host State”), but in some newer BITs, it may also be necessary to show certain links exist between the investor and their home State – similar to tests of “economic substance” sometimes included in double tax treaties. The BIT will also define which investments are protected.
BIT protections
Assuming a business is a qualifying investor with a qualifying investment in a high-risk jurisdiction, there are a number of common clauses in BITs that can provide protection and give you a path to compensation if your investment is harmed or destroyed:
- Expropriation clauses regulate the taking of foreign investments by host States. If the expropriation does not meet the BIT requirements, the investor can sue for damages.
- Fair and Equitable Treatment (FET) clauses prohibit host States from engaging in arbitrary, discriminatory, or abusive conduct.
- Full Protection and Security (FPS) clauses require States to protect foreign investments against violence by third parties.
- National Treatment (NT) or Most Favored Nation (MFN) clauses require non-discriminatory treatment, for example, when a host State chooses to provide a compensation or restitution program as a result of armed conflict.
- Extended war clauses, which appear in a limited number of BITs, are similar to NT or MFN clauses, but typically require compensation regardless of whether the host State chooses to initiate a general compensation or restitution program.
How to use BITs
While BITs are not insurance policies, foreign investors can (and often should) consider BITs in their risk mitigation strategy when investing or operating in high-risk jurisdictions.
However, not all BITs are created equal. Protections under each of the more than 2,000 BITs vary, and can vary significantly. Foreign investors must therefore be mindful of how they structure investments to obtain foreign investment protection (e.g., see here for our blog on investment structuring and other considerations to mitigate investment risks, in the context of resource nationalism). In particular, foreign investors should, at the outset of an investment (and on an ongoing basis thereafter), consider the BITs to which a prospective host State is a party. The strengths and weaknesses of each BIT’s protections – and any access a BIT provides to international arbitration – should then be factored into decisions on structuring.
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This blog post is part of an ongoing series exploring the legal, commercial, and strategic complexities of operating in conflict zones and high-risk jurisdictions. Contributors to this series include Freshfields attorneys Timothy Harkness, Kate Cooper, Joshua Kelly, Sylvia Noury, Alexandra van der Meulen, Carsten Wendler, Piusha Bose, Maria Slobodchikova, Paige von Meheren and Heather Cameron. Stay tuned for upcoming posts, and please reach out with topics, questions, or experiences you’d like us to cover as part of this ongoing conversation.
For a collection of related previous posts and webinars, please click this link.
