Herman, Henry & Dominic | View firm profile
- Introduction
The conclusion of World War II in 1945 signified not just the end of a global conflict but also the waning of protectionist policies worldwide.The reasons for this shift was two-fold: protectionism had previously escalated tensions by compelling nations to aggressively compete for market dominance, contributing to the war’s outbreak, and post-conflict, it proved inadequate in aiding both victors and vanquished in rebuilding their devastated economies.
Against this backdrop, the embrace of free trade emerged as a cornerstone in the post-war rebuilding efforts. Over more than three decades, this newfound commitment to open markets catalyzed a paradigm shift. It paved the way for investors to venture into previously inaccessible foreign markets, thanks to sweeping reductions in global tariffs and a newfound support for cross-border investment. This era dismantled the barriers erected by erstwhile policies of market isolation and domestic production favoritism. Consequently, investors were empowered to establish overseas investments, aligning with their global business strategies and capitalizing on the enticing incentives and commitments outlined in bilateral or multilateral investment protection agreements (“BITs“). These agreements, formed between the investor’s home nation (“Home State“) and the nation receiving the investment (“Host State“), signified a new era of international economic cooperation.
Yet, international investments are not devoid of challenges. High-risk factors are inherent, and disputes with the Host State regarding investments are not uncommon. When such disputes arise, and amicable resolutions prove elusive, the stakes are high, with the potential for substantial losses. In anticipation of these complexities, BITs have evolved to include a robust mechanism for dispute resolution: international investment arbitration (“Investment Arbitration“). This mechanism offers investors a recourse to safeguard their interests. However, it’s imperative to note that Investment Arbitration, while effective, is markedly more intricate and costly than alternative dispute resolution methods like negotiation, mediation, or conciliation.
Therefore, this article aims to provide investors with critical insights and guidelines. These insights are essential for those considering the path of Investment Arbitration against a Host State, ensuring they are well-equipped to make informed decisions. The goal is to navigate these complex waters efficiently, conserving both time and resources, to secure the most favorable outcome in their investment disputes.
II. Key Considerations for Investors Prior to Engaging in Arbitration
- Selecting the Appropriate BIT:
A pivotal first step in the Investment Arbitration journey involves the careful selection of the appropriate BIT. This decision is crucial, as often there are multiple BITs or multilateral trade agreements that encompass provisions for foreign investment protection between the Home States and the Host States. Take, for example, the relationship between Vietnam and Japan, which involves multiple investment agreements including the Vietnam-Japan Agreement on Liberalization, Promotion, and Protection of Investment (VJEPA), the ASEAN-Japan Comprehensive Economic Partnership (AJCEP), and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP).
It’s essential for investors to recognize that these agreements vary in terms of the degree of protection they offer to foreign investments. This variation largely stems from the historical and political context in which these agreements were formulated. The CPTPP, for instance, was established in an era where its member states were keen on maintaining policy-making sovereignty, leading to more constrained commitments towards foreign investment protection and stricter conditions for initiating lawsuits against Host States under the CPTPP framework. On the other hand, VJEPA and AJCEP emerged during a period when Vietnam, ASEAN, and Japan were actively seeking to attract foreign investments, resulting in these agreements featuring stronger commitments to protecting foreign investors and broader conditions under which legal action can be taken against Host States.
This disparity necessitates a comprehensive and insightful analysis of these treaties by investors, as even subtle differences in the wording of investment protection clauses and dispute resolution terms can profoundly influence the outcome of an Investment Arbitration case. Typically, BITs formulated with a focus similar to that of VJEPA and AJCEP are more likely to offer advantageous positions for investors, while treaties like the CPTPP may be more protective of the interests of Host States.
Given the complexity and significance of this choice, it is highly recommended that investors seek the guidance of legal professionals who specialize in Investment Arbitration and international investment law. This expertise is invaluable in navigating the intricate nuances of these treaties and in making an informed decision about which BIT provides the most strategic foundation for arbitration.
- Corporate Restructuring:
In scenarios where the BITs between an the Home State and the Host State offer less favorable protections compared to BITs between the Host State and a third country, or in the absence of a BIT between the Home State and the Host State, investors might contemplate a corporate restructuring strategy. This move aims to leverage more favorable BIT provisions by aligning with a third country, thereby facilitating arbitration against the Host State.
For example, a Vietnamese company aiming to challenge Japan may find the BIT between South Korea and Japan more advantageous than the one between Vietnam and Japan. In such a case, the Vietnamese company could restructure, transferring its Japanese investment ownership to a South Korean entity it establishes. This entity could then engage in arbitration against Japan under the South Korea-Japan BIT.
However, it’s imperative to approach this strategy with caution. Investment Arbitration Tribunals often scrutinize such maneuvers, particularly regarding their legitimacy and intent. They may decline jurisdiction if they perceive the restructuring as ‘Treaty Shopping Abuse’—an attempt to manipulate treaty provisions unfairly. Tribunals typically assess the following factors:
Timing: Restructuring immediately before initiating an arbitration against the Host State can be viewed as treaty abuse, indicating a strategic maneuver rather than a genuine business decision.
Purpose: If the tribunal discerns that the restructuring serves primarily the purpose of arbitration rather than business efficiency, it may be deemed as abusing the process.
To navigate these complexities, investors are advised to contemplate restructuring well in advance of foreign investments. Proactively selecting the most advantageous BIT before investing can ensure an appropriate business structure conducive to potential arbitration scenarios. If restructuring is considered as a prelude to arbitration, meticulous planning is essential. Legal counsel experienced in Investment Arbitration is crucial to developing a strategy that aligns with both the investor’s goals and the principles of fair legal engagement. This approach helps in avoiding the pitfalls of Treaty Shopping Abuse while positioning the investor favorably in any subsequent arbitration under the chosen BIT.
- Third-Party Funding:
One of the major challenges in pursuing Investment Arbitration is the substantial financial burden it entails. This often puts small and medium-sized investors in a predicament, as they may lack the necessary resources to afford the costs of arbitration, legal fees, and expert advice. In such cases, seeking third-party financial support can be a strategic option, enabling these investors to access the justice system provided by investment agreements. However, this approach requires careful consideration to ensure that it doesn’t adversely affect the arbitration’s outcome.
Third-Party Funding in Investment Arbitration typically involves a non-disputing third party underwriting the arbitration costs for one of the parties involved, on a non-recourse basis. This means that the investor does not have to repay the funds if they lose the case. However, if the investor wins, the third-party funder is entitled to a portion of the arbitration award, usually a percentage relative to the funding provided.
While this mechanism is generally accepted, it has raised concerns among some Host States about potential breaches of confidentiality and the encouragement of frivolous lawsuits. Notably, the investment protection agreement between Argentina and the United Arab Emirates (UAE) uniquely prohibits third-party funding for arbitration. In most other BITs, third-party funding is not explicitly addressed or prohibited.
Investors considering third-party funding should be mindful of the following:
Financial Stability of the Funding Party: Ensure the third-party funder has adequate financial resources to support the arbitration process to its conclusion. Inadequate funding could jeopardize the investor’s ability to sustain the lawsuit.
Disclosure Obligations: Comply with any disclosure requirements at the outset of the arbitration. This typically involves revealing the existence of a third-party funding agreement and the identity of the funder, while the content of the agreement itself may remain confidential. Disclosure is crucial for identifying potential conflicts of interest with the tribunal’s arbitrators. Failure to disclose, or late disclosure, can lead to protracted legal proceedings or even annulment of a favorable ruling due to the perceived arbitrator’s lack of impartiality. Further insights into this topic will be discussed in Section 5.
Overall, while third-party funding can provide vital financial support for investors seeking justice through Investment Arbitration, it necessitates a strategic approach. Investors must thoroughly vet potential funders, adhere to disclosure requirements, and understand the implications of such funding on the arbitration process.
Author: Nguyen Hoang Nguyen Anh