Getting a BIT of protection for your overseas investments

By Andrew Stephenson.

Key Points:
Bilateral Investment Treaties can provide Australian investors with an enforceable right to fair non-discriminatory treatment.

Bilateral Investment Treaties ("BITs") are agreements between two States for the reciprocal encouragement, promotion and protection of investments in one State by nationals of the other State. Such treaties are designed to promote the flow of capital for economic development between investors of each State by setting out minimum rights which each State guarantees to investors of the other State. Australia has negotiated 22 BITs with other countries of which 19 are currently in force.[1]

To whom do they apply?

BITs apply to "investments" and "investors" of each State which is a signatory to the BIT.

In BITs concluded by Australia, "investments" is generally defined very broadly to include every type of asset including, among other things, tangible and intangible property; shares, stocks, bonds and debentures; intellectual and industrial property rights including goodwill; and business concessions and any other rights required to conduct economic activity and having economic value conferred by law or under a contract.

In BITs concluded by Australia an Australian "investor" is generally defined as either a "national" or a "company" of Australia. The definition of a "national" is a natural person who is an Australian citizen. In some BITs Australian permanent residents are also included in this definition. A "company" generally means any legally recognised entity that is organised under Australian law, or an entity which is organised under the law of a third country and is owned or controlled by an Australian entity.

Accordingly, while many investments are likely to be made indirectly through companies incorporated in foreign States, the nationality of the holder of the ultimate investment is not relevant. Australian shareholders will be able to take action to protect their investments in party States.

What rights do they accord foreign investors?

Benefits granted to foreign investors under BITs concluded by Australia generally include:

• The host State must treat "investors" and "investments" as favourably as it treats its own investors and their investments or investors and investments from any third country. The BIT generally affords the better of national treatment or most favoured nation treatment for the full life of an investment.
• The expropriation of investments can only be done for a public purpose and on a non-discriminatory basis. Further, when expropriation takes place prompt, adequate and effective compensation must be paid.
• Investors have the right to engage the key technical and managerial personnel of their choice regardless of nationality.
• Funds can be transferred into and out of the host country without unreasonable delay using a market rate of exchange. This covers all transfers related to an "investment".

Obviously these generally expressed undertakings are potentially of very wide effect and should give potential investors in a foreign country (and their insurers) significant comfort that their investments have a measure of legal protection.

However, that comfort will be largely illusory if there is no effective way of enforcing the rights created by the BIT.

Therefore BITs concluded by Australia contain an arbitration clause which allows Australian investors to take the host State to arbitration where it claims that there has been a breach of the BIT. The ability to take a host State to arbitration is very significant for foreign investors. This is because previously the only recourse available to a foreign investor against a host State was to commence action against the host State in its local courts or to request its own government to take diplomatic action. Neither of these avenues assures the investor of a fair and independent hearing of its claim. The right of an investor to take a host State to arbitration before an independent and unbiased tribunal is one of the major benefits of BITs.

Arbitration under a BIT is unusual as the right to commence arbitration does not exist in an agreement between the investor and the host State. The host State's consent to arbitrate is contained in the BIT which constitutes a standing offer to arbitrate from the host State to Australian "investors". An investor may then accept this offer by following the procedure set out in the BIT.

Obviously the purpose of the BIT is to promote foreign investment. That is done by providing a stable environment for investors of other countries. Accordingly, the experience has been that an award of an arbitration conducted in accordance with a treaty is likely to be honoured, as otherwise the purpose of the treaty would be lost as it became apparent that the State would refuse to comply with arbitrations pursuant to the treaty.

Conclusion

When investing in a foreign State the possible application of a BIT must be considered.

A BIT can provide reasonable comfort to Australian investors that their investments in the other State will be the subject of fair non-discriminatory treatment.

Further, if there is a breach of a BIT, an investor has the right to bring a claim by way of international arbitration.

[1]  Australia has BITs in force with Argentina, Chile, China, the Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Laos, Lithuania, Pakistan, Papua New Guinea, Peru, The Philippines, Poland, Romania, Uruguay and Vietnam. BITs have been signed but are not yet in force with Mexico, Turkey, and Sri Lanka.  Australia also has concluded Free Trade Agreements with New Zealand, Thailand, Singapore, and USA.

For further information, please contact Andrew Stephenson.