What is Investment Arbitration?

Investment arbitration, although it is arbitration, differs from commercial arbitration in fundamental ways:

Arbitration agreement

Commercial arbitration is based on an arbitration agreement, whereas investment arbitration may be based either on (a) an investment treaty, either multi- or bilateral (BIT), (b) the host State’s national investment law, which often provides for protection of foreign investors or (c) in certain circumstances, an investment agreement

Arbitral tribunal

In commercial arbitration, the arbitral tribunal judges the contract between the parties, i.e. its conclusion, performance and termination, whereas in investment arbitration, the arbitral tribunal makes findings on the host State’s behavior towards a foreign investor

In investment arbitration, the arbitral tribunal thus judges the host State’s behavior when exercising its sovereign rights as provided for either by law, treaty or contract, in light of customary international law.

What is a Bilateral Investment Treaty (BIT)?

Bilateral investment treaties (BITs) are international agreements between countries that provide companies and individuals with special rights and legal protections when they invest in a foreign country (known as a host State). BITs set out the terms and conditions for investment in one country by private companies and individuals of another country. BITs are typically created to promote investment in the host State.

here are over 2,000 BITs in existence today, affecting numerous countries and investors around the globe.

Typical Protections under Bilateral Investment Treaties (BITs)

If you are an investor in a foreign State, and your country and that State have a bilateral investment treaty, you may be entitled to protections under that treaty. A key protection offered by the majority of bilateral investment treaties is to allow international arbitration in the event of an investment dispute, rather than force foreign investors to sue the host-State in its own courts.

BITs typically provide for the following standards of protection of an investor:

Protection from expropriation

Expropriation is the confiscation of a foreign asset by the host State with no or minimal payment, thus depriving the foreign investor of his reasonable expectations of profits and returns.

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Fair and Equitable Treatment (FET)

FET is the most frequently invoked standard in investment disputes. According to this concept, States are to maintain stable and predictable environments consistent with reasonable investor expectations. It should however be noted that the concept’s broadness and scope may vary with the wording of the clause.

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National Treatment

This standard provides that the host State must treat foreign investments no less favorably than the investments of its own nationals and companies. Therefore, foreign investors are given the same competitive opportunities as nationals and the host State cannot make any negative differentiation between foreign and national investors when enacting and applying its rules and regulations.

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Most-Favored-Nation (MFN) treatment

MFN treatment means that the beneficiary State will be granted all the competitive advantages that any other nation also receives with respect to the matters to which the particular MFN clause applies, be it trade, investment, or any field of economic cooperation.

Application of an MFN treatment will enable the beneficiary foreign investor to be treated no worse than any other investor from another country.

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Freedom to transfer means and funds

Depending on its wording, a clause may guarantee that transfers relating to covered investments, such as investment profits and other capital, are allowed to be made freely and without delay into and out of the territory.

Such rules have, however, rarely been addressed by arbitral tribunals.

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Full protection and security

The concept of full protection and security is to ensure that a host State takes active measures to protect a foreign investment from adverse effects of actions of (a) the host State, (b) its organs or even (c) third parties.

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International Arbitration under Bilateral Investment Treaties (BITs)

Typically, where a bilateral investment treaty exists, investors are free to bring arbitration actions in any of the arbitral institutions identified in the treaty, and the host State is required to submit to the jurisdiction of the arbitration institution.

Most BITs allow investors to bring their disputes before one of several arbitration institutions, such as:

International Center for the Settlement of Investment Disputes (ICSID)

International Chamber of Commerce International Court of Arbitration (ICC)

Stockholm Chamber of Commerce (SCC)