UK: Managing Eurozone Risk Through BIT Planning

The value of bilateral investment treaty ("BIT") protection should not be underestimated in today's turbulent economic times. Uncertainty in the global economy, not just in "risky" emerging markets, but also within Europe, has made corporate risk management and contingency planning all the more important. Whether embarking upon a new investment in the troubled Eurozone, or seeking to enforce rights in respect of an earlier investment, BITs ensure that foreign investors receive certain guarantees. The deepening Eurozone crisis (hot on the heels of the Arab Spring) is re-focusing attention on investment treaty coverage. In the case of Greece, to take one example, it remains to be seen whether aggrieved bondholders have recourse to and will seek to enforce treaty rights, as they did in the case of Argentina over the last decade.

A "BIT" of protection in uncertain times

Bilateral investment treaties protect investors from one state who invest in another state that is also party to the relevant treaty. BITs (of which there are now approximately 3000 in force, involving some 180 countries) allow aggrieved investors to pursue claims directly against sovereign states in order to protect their investment, rather than having to rely on domestic courts that might lack independence.

While most claims have traditionally been brought through ICSID (the International Centre for the Settlement of Investment Disputes), arbitrating under the UNCITRAL, SCC, or ICC Rules (where permitted by a particular BIT) has recently become more popular.

Qualifying for treaty protection

A right to BIT protection depends on:

  • the nationality of the investor
  • the existence of an "investment", and
  • completion of any pre-arbitral steps

As to nationality of the investor, this generally means (for a legal entity) being incorporated in one of the state parties to the BIT. If no BIT exists with the state of the immediate investor or ultimate parent, it may be possible to rely on a BIT in force with the state of an intermediary company in the corporate structure, subject to any specific restrictions in the BIT.

As to what constitutes a relevant investment, this is generally defined broadly to include any kind of asset, present (in more than transitory fashion) in the host state. Some BITs contain non-exhaustive lists of qualifying investments (and often include "debt, including bonds").

As to procedural formalities, a case earlier this year highlighted the danger of ignoring any pre-arbitral requirements set out in a BIT (in that case a requirement to pursue local litigation for a certain period of time before initiating international arbitral proceedings).1

Intra and extra-EU BITs

When treaty planning, a preliminary step is to determine which applicable BITs in force may provide investors with adequate protection. Within the EU, the landscape of applicable BITs between member states is currently at a cross roads following the European Commission's intervention in some recent arbitration cases2. The tribunals in those cases nevertheless decided that the BITs remained valid (and that they did therefore have jurisdiction to determine the disputes) despite the later accession of the respondent states to the EU. However the Commission views intra-EU BITs as inconsistent with the primacy of EU law and has urged Member States to take "concrete steps" to bring such reciprocal agreements to an end.

Some member states have already agreed to end their BITs (e.g. the Italy-Czech Republic; Denmark-Czech Republic; and Italy-Hungary BITs). As a result, European companies investing within the EU and/or EU accession countries or candidates should take up-to-date BIT planning advice.

As for extra-EU BITs (i.e. those between member states and non-EU countries), since the Lisbon Treaty gave the EU exclusive competence for issues of foreign direct investment, it is expected that individual BITs will at some point be replaced by an EU-wide international investment agreement, although exactly how remains to be seen.

What rights can be claimed under BITs?

Depending on the particular scope and wording of the BIT(s) relied upon and the facts of a given case, aggrieved investors can potentially bring claims in relation to:

  • A lack of fair and equitable treatment ("FET"). This is the most commonly-invoked substantive right and includes protection for an investor's legitimate expectations which arguably include the provision by the state of a stable and predictable environment for the investment. FET also includes a right to non-discrimination and non-arbitrary conduct by the host state, and the application of transparency and consistency
  • Compensation for expropriation of assets, including the outright seizure of property as well as "indirect expropriation" where, for instance, new regulatory measures deprive the investor of the economic benefit of his property
  • "Most-favoured nation treatment" ("MFN") by which investors are treated no less favourably than investors from any other state, or, in the case of "national treatment", as compared to domestic investors. Importantly, MFN clauses can be used to import provisions from other, more favourable investment treaties. Attempts to extend this to the import of procedural rights (e.g. to use an MFN clause to latch onto a right to arbitration in another treaty) have met with mixed success
  • In addition to the three main substantive provisions listed above, BITs often also provide for (i) full protection and security; (ii) free transfer of funds and assets; and (iii) protection through so-called "umbrella clauses" against breach by the state of contractual undertakings

What next?

Whatever transpires in relation to potential claims in the context of the current Eurozone crisis, the troubled economic landscape has refocused investors' minds on the relevance of treaty planning as part of a comprehensive risk strategy.

Whether used as leverage in the event of a dispute with a foreign government (in part due to potential adverse publicity), or whether the investment dispute process is triggered and potentially progressed through to final award, having BIT protection over the lifespan of an investment is critical in today's changing world.

We can advise you on optimal planning for and/or enforcement of treaty protection, whether at the time of making an investment, after an investment has been made, or subsequently in the event of a dispute.

Could Greece be the new Argentina?

Investment treaty arbitration took off following Argentina's economic crisis a decade ago. Approximately fifty ICSID claims were brought against Argentina under a variety of BITs, with investors – many of them energy and utility companies – having varied success in recovering their losses. With the Argentinian experience in mind, many investors are now weighing up their options with regard to potential investment treaty claims against troubled Eurozone members.

Bondholders are reportedly taking advice in relation to potential BIT claims against the Greek state3 and it remains to be seen whether they decide to rally together and bring a mass action. Of the many ICSID claims against Argentina, three cases were brought by bondholders. Last year, the first of these cases (the "Abaclat" case) passed the jurisdiction phase, allowing the 60,000 Italian holders of bonds issued by the Argentine government to proceed with their claims arising out of Argentina's default on its sovereign debt obligations and subsequent debt restructuring. These bondholders had refused to participate in the 2005 exchange offer under which existing bonds were exchanged for new bonds on revised terms.

In the case of Greece, this case could potentially set an example for holders of bonds who opposed the recent so-called private-sector involvement ("PSI") as part of the Greek government's debt-restructuring plan.

Faced with a BIT claim, a Eurozone state might seek to claim a "state of necessity" (whether based on wording in a particular BIT and/or on customary international law) in order to excuse it from performing an international obligation. In the case of Argentina, the opinions of international tribunals diverged as to whether the situation in Argentina was sufficiently serious to warrant reliance on the defence. In light of this, while respondent Eurozone states might seek to rely on similar arguments, the success of such arguments is difficult to predict.

Footnotes

1 ICS Inspection & Control Services (UK) v Argentine Republic (2012).

2 Eastern Sugar v Czech Republic (2007) and Eureko v Slovakia (2010).

3. Greece has signed over 40 BITs. Reports suggest that claims are contemplated under the Greek-German BIT – see Financial Times, 12 March 2012.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Practice Guides
by Mondaq Advice Centres
Relevancy Powered by MondaqAI
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions