04 Mar 2009
Protecting domestic industry vs protecting foreign investors
by Björn Gehle
Investors should consider the additional remedies available against governments that may arise as a result of investment treaties.
The past few months have highlighted the economic considerations which trigger corporate actions in this economic climate but also actions taken by governments with a view to reduce the impact of the current economic crisis.
Government policies are often the first port of call to stimulate the economy and divert pressures towards economic expansion. While government measures are usually designed to strengthen the economy on a broader level, such as the much debated "stimulus package" for Australia, some measures focus on particular industries such as banks or car manufacturers. It is those latter measures which require careful consideration in order to avoid potential breaches under foreign investment protection legislation such as:
- Bilateral and Multilateral Investment Treaties (BITs or MITs); or
- Free Trade Agreements (FTAs).
The nature of investment treaties and foreign investment protection
An investment treaty is a legal agreement between two (bilateral) or more (multilateral) countries which establishes reciprocal arrangements to encourage foreign investment. Such treaties encourage foreign investment by guaranteeing certain treatment and level of protection for an investor from one State who wishes to invest in the other State in order to encourage investment.
Investment treaties are increasing in importance and popularity not only as a means of encouraging and protecting foreign investments but also for resolving investor-state disputes arising out of foreign investments.
Standards of protection
Investment treaties vary in scope and in the nature of their protection. Common standards of protection include:
- National treatment clauses which require that the host State treat foreign investors no less favourably than its own investors.
- Most favoured nation clauses which ensure that the host State treats parties to one treaty no less favourably than the treatment they provide to parties under other treaties.
- Fair and equitable treatment clauses which require the host State to avoid subjecting the investor to arbitrary or fraudulent treatment. There may also be a requirement to maintain a stable business environment which is consistent with reasonable investor expectations (see for example LG&E v Argentina, ICSID Award 2003; Tecmen v Mexico, ICSID AF Award, 2003, para 154).
- Expropriation (nationalisation) clauses which protect foreign investors by ensuring that the host State may not arbitrarily take their investments without prompt payment of adequate compensation. Expropriation is not limited to the seizing of assets. It may also include changes in law or policy that substantially detract from the value of an investment.
- Umbrella clauses which provide additional protection to investors in that they elevate any breaches, by the host State, of its contractual obligations to the investor to the status of a breach of the treaty. Thus, increasing the motivation for host States to avoid breaching their investment treaty obligations.
To claim protection under an investment treaty, a party must satisfy two criteria: to classify itself as an "investor", and the investment must fulfil the criteria set out in the relevant investment treaty. The requirements for both will ultimately vary between the different investment treaties.
The economic climate and the resulting government regulation
The current economic climate has caused governments around the world to protect domestic businesses and industries in order to prevent further harm to their economy. Australian examples of measures aimed at a particular industry include:
- Deposit guarantees in relation to certain banks and lenders: In late 2008, Prime Minister Kevin Rudd announced that the Government will guarantee certain deposits in Australian banks, building societies and credit unions for the next three years.
- Rescue package for domestic car manufacturers: In an attempt to stimulate the industry and to prevent job losses, the Australian Government issued a $6.2 billion investment plan for domestic car manufacturers.
Although these particular examples may not be in a breach of Australia's obligations under its investment treaty obligations, from a government perspective caution should be adopted prior to the execution of such measures to ensure that these do not breach treaty obligations. Furthermore, Australian companies investing in foreign countries with which Australia has entered into an investment treaty or Free Trade Agreement should be aware of the remedies available under those treaties in case protective measures of the host government have a direct impact on their investments.
Governments' obligations under foreign investment treaties as well as the remedies available to foreign investors in circumstances where they are discriminated against indicate that caution must be taken when implementing economic policy. It is prudent for the governments to consider the impact of any measures under investment treaties before such measures are implemented. On the flipside, it is also worthwhile for investors to consider the additional remedies available against governments that may arise from investment treaties.
The author thanks Shaun Star for his assistance with this paper.