Part III Investment Disputes and Political Risk, 10 Intervention of States in Investment Disputes

This chapter discusses the actions that States may take to obtain redress against other States at whose hands their citizens are mistreated. Where no investment treaty binds home and host States, and where no other instrument offers the jurisdictional foundation for investor–State arbitration, a foreign investor may have no other remedy but to appeal to his government for assistance. A State’s intervention on behalf of its citizens may take several forms, ranging from informal diplomatic discussions to formal adversarial proceedings before ad hoc or standing international tribunals. The remainder of the chapter covers the “espousal” of claims, claims before international tribunals, economic sanctions, invalidation of title, prohibitions against the use of force, and the Foreign Claims Settlement Act of the United States.

Part III Investment Disputes and Political Risk, 8 Arbitration Procedure

This chapter provides an overview of international arbitration procedure both under arbitration treaties and contractual arrangements, particularly under the auspices of the World Bank’s International Centre for the Settlement of Investment Disputes (ICSID) and arbitration rules of the United Nations Commission on International Trade Law (UNCITRAL). The chapter begins by describing the most prominent international arbitration rules. It then covers the pre-dispute drafting of an arbitration clause. Finally, it offers a guide through a “typical” arbitration, whether initiated pursuant to contract or treaty, from the lodging of a claim and the arbitrator selection process, through written and oral argument, to the issuance and challenge of awards.

Part II The International Law Framework of Investment Protection and Political Risk, 6 The Substantive Law of Contemporary International Investment Protection

Investors increasingly rely on the substantive protections provided in a growing number of investment treaties. This chapter covers the modern international law of investment protection as embodied in multilateral and bilateral investment treaties, including principles such as fair and equitable treatment, and full protection and security. The substantive protections investment treaties described in this chapter are often echoed in the national investment laws of developing and transition-economy countries. In particular, many recent national investment codes place limitations on the State’s authority to expropriate foreign assets, sometimes granting rights superior to those provided at customary international law. International investment treaties also guarantee proper application of domestic law by government authorities, national treatment, repatriation of profits, compensation for breach and other standards of treatment.

Part I Assessment and Pre-Investment Management of Political Risk, 3 Investment Insurance

This chapter deals with the modalities of political risk insurance. Purchasing political risk insurance is one of the simplest and most direct steps that an investor can take to reduce exposure to political risk. Political risk insurance is similar in many respects to ordinary business risk insurance. It typically provides coverage against political risk such as currency inconvertibility, expropriation, and political violence. Such insurance is available from a number of sources, including State-sponsored insurance agencies such as United States’ Overseas Private Investment Corporation (OPIC), private insurers such as Lloyds of London, and the World Bank’s Multilateral Investment Guarantee Agency (MIGA). The chapter focuses on the MIGA and OPIC insurance schemes. It also discusses other national insurance programmes and private insurers that offer political risk insurance.

Introduction

This introductory chapter provides an overview of the book’s main themes. It begins with a discussion of the concept of foreign direct investment (FDI). It then details the emergence of a New International Economic Order movement, in which a large number of States initiated a campaign against the prevailing norms of equal treatment for foreign investors, culminating in a U.N. resolution known as the Charter for Economic Rights and Duties of States. It also describes developing States’ changing attitudes toward FDI. Among the questions addressed by this are: What can an investor do to deter manifestations of political risk once the investment has been made? How can international law be brought to bear as protection against political risk? What remedies are available if political risk materializes to the investors’ detriment?

Part III Investment Disputes and Political Risk, 9 Mediation and Conciliation of Investment Disputes

Not all investment-related disputes are resolved through fully adversarial processes. In fact, both private businesses and governments are increasingly turning to various forms of mediation and conciliation in the face of serious disagreements rather than resorting immediately to international arbitration. A number of investment treaties also mention the possibility of alternative dispute resolution procedures, although such procedures are rarely if ever mandatory. This chapter addresses different alternatives to arbitration and litigation, with emphasis on the rather fine distinctions between them. It also discusses the methods by which mediation and conciliation may be imposed as a mandatory step preceding arbitration or litigation, with particular attention to investment contracts.

Part II The International Law Framework of Investment Protection and Political Risk, 5 History and Development of the Customary International Law of Expropriation and Investment Protection

This chapter discusses the principles of customary international law related to expropriation. It includes an overview of the historical development of the international law of expropriation, as developed in international arbitration decisions, commentators, treaties, and State practice. It also discusses the current state of the customary international law of expropriations, including the various substantive protections established in customary and conventional international law, such as the full compensation standard for expropriation, the public purpose requirement, and the prohibition against discrimination. The chapter concludes that a State may expropriate the property of aliens within its borders, but must compensate the foreigner for full value of the property taken. The primary change in the international law of expropriation since the nineteenth century is that the State may no longer use force against another State to rectify or prevent a taking of property by the host State.

Part I Assessment and Pre-Investment Management of Political Risk, 2 Structuring Transactions to Minimize Political Risk

This chapter analyzes the types of investment projects most often undertaken in developing States, and provides an analysis of the structures that can be implemented to reduce exposure to political risk. The discussions cover project types (petroleum extraction agreements and infrastructure projects), transaction structures, investor–State contracts, core State contract clauses affecting political risk (arbitration clause, choice-of-law clause, stabilization clause, and force majeure clause), clauses for guidance of courts and tribunals (damage clause, interest rate clause, local remedies clause, and waiver of sovereign immunity), and other useful contractual provisions (conversion of currency clause, payment of currency to offshore account, and binding the State as party to the contract).

Part III Investment Disputes and Political Risk, 7 Establishing Arbitral Jurisdiction

If a State fails to carry out its obligations to a foreign investor under a contract, its own national investment code, or a treaty with the investor’s home State, the investor may be able to vindicate its rights through international arbitration. In many cases, arbitration offers parties the only neutral forum in which to resolve disputes, and the only means to obtain a remedy that is enforceable across borders. Such a right, however, is hardly automatic. This chapter considers the jurisdictional requirements for invoking investment treaty protections. It discusses contractual arbitration, preliminary treaty concerns, who may initiate arbitration under investment protection instruments, and what is protected by investment protection instruments.

Part II The International Law Framework of Investment Protection and Political Risk, 4 State Responsibility and Remedies Under Customary International Law

This chapter covers the general background international law pertaining to State responsibility, in particular State responsibility incurred in relation to foreign investment, as well as the general nature and types of remedies available to investors when a State expropriates an investor’s property or interferes with its investment. The chapter first provides a short overview of the nature and sources of customary international law. It then discusses whether international law permits a sovereign State to bind itself to a contract with a national of another State. The chapter then deals with State responsibility for acts considered illegal under international law. The chapter summarizes the remedies generally available to the investor or its home State following the taking of the investor's property. Finally, it discusses host State immunity from the jurisdiction of the national courts of other States in connection with investment claims.