Insights

energysource | issue 19 19 Dec 2017 MENA investment protection: an augmentation of options

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It is now commonplace for investors to take advantage of the legal protections available for their investments under bilateral and multilateral investment treaties (BITs and MITs). The availability of such protection is considered by investors from the outset of investment planning, relying on the approximately 3000 BITs that have been entered into by Governments across the globe.   States in the Middle East and North Africa (MENA) region have featured significantly over the years as respondents in cases brought by unhappy investors before various types of tribunals, including before investment treaty arbitration tribunals. Recent, but largely unreported, developments mean that significantly more effective treaty protection may now be available for investors within the MENA region.  

Impetus for treaty protection

Public international law treaty protection for investments matters because it is both free to obtain and effective.  In many instances it can be a great deal more effective than private law alternatives such as litigation in domestic courts or contract-based international arbitration. The sectors for which investment protection under BITs and MITs is most relevant are those requiring close interaction with states and state agencies.  It is no surprise, therefore, that the energy and resources sectors feature at the top of the list for claims under BITs and MITs. Claims for infringement of treaty obligations have been especially prevalent in areas such as taxation, licensing and environmental regulation, all of which represent clear "pressure points" for interaction with states.

Availability of treaty protection

Treaty protection is available subject to nationality tests being met (i.e. the requirement that the investor has the nationality of an investment treaty signatory and does not have the nationality of the host-state signatory).  It is often enough that such test is met at just one of the stages in a chain of ownership and control – for example, the personal nationality of a shareholder or corporate nationality of a holding company. The widespread use of special project companies and tax-focused holding structures in the energy and resources sectors means there will often be significant scope for "treaty shopping" through the use of "brass plate" entities aimed at acquiring relevant nationality in order to trigger the protection of one or more treaties.  In this context it is important to note that attempts have been made by the drafters of some treaties to exclude such entities through "denial of benefits" clauses that require substantive economic activity by a corporate entity at its place of incorporation.

Investment treaties also require the relevant economic activity to qualify as an "investment".  The very broad definitions of "investment" commonly contained in BITs and MITs, along with the expansive interpretation given by tribunals, mean that a very wide spread of economic activities commonly qualify (in certain cases even extending to cash held in a bank account). 

The protections provided

The most significant areas of protection afforded by BITs and MITs are: protection from expropriation; a requirement to afford "full protection and security" to investments; and – crucially – the obligation to provide "fair and equitable treatment" (FET) to an investor. 

These concepts are interpreted under public international law (i.e. the body of law that governs relationships between states), not private law, and have been applied broadly by tribunals.  It is important to appreciate the full breadth of these concepts under public international law. For example, tribunals have found that outright seizure (such as Venezuela's expropriation of oil projects in the Orinoco Belt) is not necessary and that the test for expropriation is met where an investor is deprived of the economic value of the investment.  The test may be met even where individual measures by the host state are not immediately expropriatory but, when considered as a whole, are "tantamount to expropriation" (such as a refusal to renew or withdrawal of a licence). 

Similarly, the obligation of FET has been interpreted as requiring treatment that is consistent with representations given by the host state at the time the investment was made, and that engagement by state authorities with the investor is in a manner that is transparent and consistent.  The FET standard, in effect, can therefore operate as a "minimum legal standard" for the treatment of investors by host states.  In practice, the standard focuses upon "due process" requirements in a host state's legal and administrative structures, rather than whether a host state's actions are substantively legal or not.

A number of the investment treaty cases relating to FET have concerned the tax treatment of investments – for example, a series of recent cases relating to investment in renewable energy projects in Spain.  This is timely as states in the MENA region are putting in place new regulations relating to the introduction of new forms of taxation.  Foreign investors will be looking closely at whether the processes for introduction of such taxes provides them with treatment that meets the FET standard, especially in terms of non-discrimination, transparency and predictability.

Enforceability

These treaty protections for investment are effective because – uniquely in the world of public international law – they are directly enforceable by investors through international arbitration, and the resulting arbitral awards are enforceable against states through either the Washington Convention of 1965 or the New York Convention of 1958.  Because the arbitration process operates in the public international law sphere it is effectively immune from interference by state courts (or indeed other forms of state interference). 

Intra-MENA investment protection

Countries in the MENA region have entered into numerous BITs but few have been intra-MENA, meaning that relatively little bilateral investment treaty-based protection has been available to investors from one state in the region who have made their investment into another state within the region. 

However, in actual fact, there have for decades been MITs in place between states in the region that are capable of providing protection to investments under public international law.  However, these have – until relatively recently - been ineffective procedurally or excessively narrow in their application.  Recent developments have changed this position but appear to have gone largely unnoticed. 

One established MIT in the region is the Unified Agreement for the Investment of Arab Capital in Arab States (the Arab Investment Agreement).  It came into force in 1980 but its scope is limited to the protection of "an Arab citizen who owns Arab capital which he invests in the territory of a State Party of which he is not a national".  The requirement that the citizen investing and the origin of the capital be Arab has the effect that much investment in the region will not be covered because it cannot be demonstrated to be "Arab capital". Given the global nature of so much international financing of investment activity, particularly within states in the MENA region this restriction is very limiting. 

The alternative MIT that covers the region suffers no such restriction as to the nature of the capital involved, but has until recently been largely ineffective for other reasons.  The Agreement on Promotion, Protection and Guarantee of Investments of the Organisation of Islamic Cooperation (referred to here as the OIC and the OIC Agreement) has been ratified by 27 states, including Egypt, Indonesia, Iran, Jordan, Morocco, Pakistan, Saudi Arabia and the UAE and has been in force since 1986.

Because the OIC Agreement contains what is known as a "most favoured nation" clause, it is possible to import into it terms that exist in treaties that OIC signatory states have signed with third party states (i.e. non OIC signatory states).  This means that protection such as the FET standard (not otherwise provided for in the OIC Agreement) may be imported in.  Because of the "minimum legal standard" it effectively applies, it may be especially useful for investors in the region, if they are concerned that treatment by state entities lacks transparency or consistency, or that it may be negatively discriminatory.

Following a decision by the arbitration tribunal in Hesham Al-Warraq v Indonesia, the OIC Agreement was found to permit ad-hoc arbitration (in this instance adopting the UNCITRAL rules) "until an Organ for the settlement of disputes arising under the Agreement is established".  It therefore appeared as though the OIC Agreement might become an effective vehicle for investment protection, but hopes proved short-lived when respondent states adopted a practice of refusing to nominate an arbitrator and the OIC Secretary General followed likewise in refusing to make a default appointment, thus ensuring that any arbitration process was frustrated at the outset.  Three cases filed in 2014 against Egypt by a Saudi investor failed to proceed for this reason.  The result of this practice, while convenient for host states, was to frustrate the effective enforcement of the investment protections in the OIC Agreement.

Recent developments and the potential for wider use of the OIC Agreement

Most recently, however, the secretary general of the Permanent Court of Arbitration (PCA) (an international body that offers administrative support to various types of arbitral processes, based in the Hague) appointed an arbitrator following Libya's and the OIC Secretary-General's failure to do so.  It is reported that the appointment was made through a route involving the MFN clause importing a right to ad-hoc arbitration under the UNCITRAL rules from a BIT between Libya and a third party state, the rules of which expressly stated that the PCA may play the default appointment role.

The OIC could move to establish a dispute resolution "organ", with the result that there would no longer be any entitlement to ad-hoc arbitration.  Such a dispute resolution "organ" could have characteristics or procedures that would make it, from an investor's perspective, a less attractive forum for resolving disputes.  However, there are as yet no signs of it doing so.

A further aspect of the OIC Agreement's operation that may appeal to investors needing to seek a remedy from an OIC host state is the availability of conciliation processes.  A common reason for investors being reluctant to commence full blown investment treaty arbitration claims against host states is the fear that the respondent state will see it as a highly hostile move, precluding the investor from future opportunities in the state (indeed the option of commencing such claims has been described as the "nuclear option").  Unusually for an investment treaty, the OIC Agreement contains formal conciliation procedures as an alternative to ad-hoc arbitration.  This may be a particularly attractive option where an investor is simply unable, through contract-based arbitration or domestic legal processes, to get the attention of the host state authorities but does not wish to "burn bridges" with the host state by commencing a formal arbitration process.

Final thoughts

The expansion of effective investment treaty protection to many investors within the MENA region (as presumably originally intended by the drafters of the OIC Agreement) is a potentially significant boost to legal protection for investors in the region. It is important that investors are aware of the protections now available and that their investment planning strategies take full account of them.  Because of their unique vulnerabilities to state action, such protections are likely to be of particular importance in the energy and resources sectors.

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The information provided is not intended to be a comprehensive review of all developments in the law and practice, or to cover all aspects of those referred to. Readers should take legal advice before applying it to specific issues or transactions.

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