A decision rendered on Aug. 20, 2020, by an investor-state dispute settlement (ISDS) tribunal in the Portigon AG v. Kingdom of Spain arbitration (ICSID Case No. ARB/17/15) is welcome news for investment funds and banks active in project finance. For the first time, an ISDS tribunal has qualified project finance as a foreign investment protected under an investment treaty.
Investor-State Dispute Settlement
Foreign investors and their investments are protected by thousands of bilateral investment treaties or trade agreements in force between numerous countries, which grant protections to covered foreign investments. Mexico in particular signed bilateral investment treaties with numerous countries and is a member of the United States-Mexico-Canada Agreement (USMCA) and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), which offer investment protections to U.S. and Canadian investors in Mexico.
Protections that are commonly provided by investment treaties include protection against direct or indirect expropriation; and a guarantee of non-discrimination, fair and equitable treatment, full protection and security and crucial access to international arbitration.
Investor-state arbitration is a private form of dispute settlement that presents an alternative to litigation in the investment's host state and allows for more flexible proceedings, including the parties' appointment of the arbitrators and their agreement on a procedural calendar that fits their needs. Arbitration also results in enforceable awards that are often easier to execute than national judgments.
Investors alleging the violations of investment protections under the applicable treaty or legal instrument can claim compensation for the damages they have suffered as a consequence of the host state's breaches. The applicable standard of compensation always depends on the claim in question under the applicable treaty, but the most generally admitted principle is to compensate the investor in a way that reestablishes the situation that would in all likelihood have existed but for the treaty breach by the host state. In other words, compensation in investor-state disputes seeks to wipe out the consequences of the host state's treaty breach.
To be protected by a bilateral or multilateral investment treaty, an investor and an investment must comply with the corresponding definitions set out in the treaty in question and, in the case of proceedings under the Arbitration Rules of the International Centre for Settlement of Investment Disputes (ICSID), also have to qualify as an investment under Article 25 of the ICSID Convention.
Article 9.1 of the CPTPP, for example, defines "investment" to mean "every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit or the assumption of risk." It further lists forms that an investment may take, including inter alia "bonds, debentures, other debt instruments and loans."
Article 14.1 of the USMCA also defines "investment" as "every asset that an investor owns or controls, directly or indirectly, that has the characteristics of an investment, including such characteristics as the commitment of capital or other resources, the expectation of gain or profit, or the assumption of risk." It also states that "[a]n investment may include [.] bonds, debentures, other debt instruments, and loans; [...]."
The general definition of "investment" contained in both the CPTPP and the USMCA closely mirror the requirements generally attributed to the objective definition of "investment" under Article 25 of the ICSID Convention, which has often been interpreted to varying degrees to require a substantial commitment from the investor in the host state, a certain duration of the investment, an assumption of risk and less commonly, a contribution to the host state's economic development.
Project Finance as a Protected Investment
Although the decision has not yet been published, it has been reported that the tribunal in Portigon v. Spain, by majority, ruled that project finance qualified as an investment under the Energy Charter Treaty and Article 25 of the ICSID Convention, thereby paving the way for a lender to claim losses allegedly caused by measures taken by Spain that are said have negatively affected renewable companies to which it had provided debt capital.
It appears that the tribunal, by majority, found that no distinction had to be drawn between equity and debt, and that both fulfil the requirements for an investment under the Energy Charter Treaty (ECT) and Article 25 of the ICSID Convention. The ECT explicitly includes "bonds and other debt of a company or business enterprise" and "claims to money and claims to performance pursuant to contract having an economic value and associated with an Investment" in its definition of "investment" (Article 1(6)).
Taking into account that both the CPTPP and the USMCA explicitly refer to debt instruments and loans in their definitions of investment, and that any analysis of the objective definition of "investment" under Article 25 of the ICSID Convention likely applies to the general definition of investment contained in the two treaties cited above, one could conclude - subject to a closer review once the decision becomes public - that the reported findings of the Portigon v. Spain tribunal could be applied to the USMCA and the CPTPP, and that consequently and subject to the compliance with other requirements, third-party financial lenders from the U.S. and Canada might see their Mexican investments protected.
A protected investment through the correct legal structure could bring confidence to investors and banks in several infrastructure or other projects financed within a project finance structure.
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.