Worldwide: Investment Treaty Arbitration Increasingly Utilized

Last Updated: 4 April 2017
Article by James E. Nealon and Hussein Haeri

The future of the Trans-Pacific Partnership (TPP)—a global trade deal covering 40 percent of the world economy with 12 signatory states, including the U.S., Australia, Canada, Japan and Singapore—has experienced a major setback by an executive order signed by President Donald Trump in January 2017 to withdraw from that agreement. The TPP contains investor-state dispute settlement provisions that would have allowed U.S. investors to commence binding international arbitration against host states for unfair, discriminatory or expropriatory treatment of their international investments. Following the executive order, that mechanism under the TPP will no longer be an option for U.S. investors.

Nonetheless, the U.S. retains an extensive network of bilateral and multilateral investment treaties that continue to protect U.S. investors with arbitration rights against political risk interference in many countries around the world. These rights frequently apply to unfair treatment and discriminatory conduct that does not constitute an expropriation or state taking of the investment, but which nevertheless has a prejudicial impact on the profitability of an investment.

U.S. investors have brought more investment treaty arbitration claims (approximately 150 claims that are known) than investors from any other country. This figure is likely to grow further with the increased awareness by U.S. investors of the existence of investment treaty arbitration rights that protect them against political risk interference by foreign governments directed at their international investments. Many of these arbitrations are held at the World Bank's ICSID (International Centre for Settlement of Investment Disputes) headquarters in Washington D.C., or in other arbitration-friendly jurisdictions, such as London, Paris and The Hague.

The United States has 40 bilateral investment treaties and 50 other treaties with investment provisions (such as free trade agreements) in force. This extensive treaty network provides U.S. investors with significant protection against state and political risk interference with their international investments—whether through actions of host-state governments, legislatures, courts, or other regulatory agencies or entities of the state for which it is responsible. Many of these treaties include protection against unfair and inequitable treatment by host states—e.g., treatment that is arbitrary, lacking in due process or contrary to an investor's legitimate expectations. The treaties also typically provide a right to compensation from the foreign government for direct or indirect expropriation of U.S. investments. The majority of U.S. treaties also include protections from discrimination, such as non-discrimination by host states against U.S. investors as compared with local investors (known as "national treatment'"), or as compared with investors from third states (known as "most-favored-nation'" or "MFN" treatment).

Importantly, the arbitration right in favor of U.S. investors derives from the investment treaty rather than a contract, and is not contingent on the U.S. investor having any contract with the host-state government, or indeed any state entity. Thus U.S. investors may benefit from investment treaty arbitration rights and political risk protection even in circumstances where they did not know, when they initially contracted overseas, that an investment treaty existed that would give them those protections.

Recent investment treaty arbitration claims brought by U.S. investors have been particularly consequential for U.S. investors and highlight the great utility of investment treaty arbitration. For example, in 2006, Ecuador enacted Law 42, which imposed a 50 percent levy on "extraordinary revenues" of foreign—including U.S—companies. Occidental Petroleum Corp. brought an arbitration claim against Ecuador under the U.S-Ecuador bilateral investment treaty, claiming that this levy was a breach of the "fair and equitable" treatment standard under the treaty. The arbitral tribunal agreed and awarded Occidental $1.76 billion (USD). Although that award was reduced by $700 million (USD) in annulment proceedings, Ecuador subsequently agreed to settle the case with Occidental last year for $1.06 billion (USD).

The second decision regarding Ecuador's levy on oil profits was given by an arbitral tribunal constituted to hear a claim brought by Murphy International. In that case, the tribunal ruled that the initial 50 percent levy did not contravene the U.S-Ecuador bilateral investment treaty, but the increase in that levy to 99 percent in 2007 was a breach of Ecuador's treaty obligation of fair and equitable treatment. Consequently, the tribunal awarded Murphy damages of $20 million (USD), which reflected reimbursement to Murphy of sums paid to Ecuador over the 50 percent levy rate.

Most recently, in February 2017, Burlington Resources, a ConocoPhilllips subsidiary, obtained a net arbitration award of nearly $340 million (USD) against Ecuador under the U.S-Ecuador bilateral investment treaty relating to the levies. Burlington had ceased work following Ecuardor's imposition of the 99 percent levy, and Ecuador thereafter took over Burlington's oil blocks and transferred them to Petroamazones, a state-owned company. Ecuador was found liable by the ICSID arbitral tribunal for expropriating Burlington's investment in Ecuador by taking over the oil blocks, and was ordered to pay Burlington compensation.

Although these are among the most recent investment treaty arbitration cases brought successfully by U.S. investors, they are merely indicative of a burgeoning body of cases brought by U.S. investors for investments around the world—ranging from Argentina and other countries in the Americas (particularly Canada and Mexico, under the North American Free Trade Agreement (NAFTA)) and beyond the Americas, in the Middle East, Africa, Europe, CIS and Asia.

The nature of investment treaty arbitration is exceptional in the sense that arbitral jurisdiction derives from a treaty rather than a contract. However, the arbitration rights under these treaties are increasingly being utilized by the U.S and other investors around the world to protect against political risk interference with their international investments—something that is increasingly commonplace as a global phenomenon.

When U.S. investors are faced with foreign governmental or state interference that is having an adverse effect on their foreign business ventures, operations or investments, it is advisable to consult with lawyers having specialized investment treaty arbitration expertise to evaluate whether there might be recourse under any potentially applicable investment treaties, whether to realize a negotiated outcome or to proceed to international arbitration.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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