9/1/2014
CONSTRUCTION LAW SUMMER SCHOOL 2014
International contracting
Jane Davies Evans and Marc Frilet
1 September 2014
INTERNATIONAL CONTRACTING
CONTENTS
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PART 1: Jane Davies Evans
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•
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Local practice and international norms
Significant developments in international contracting
PART 2: Marc Frilet
•
•
The World Bank contract conditions for construction works in civil law countries
Practical consequences of the duty to advise the employer and decennial liability in
Napoleonic civil law countries
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CONSTRUCTION LAW SUMMER SCHOOL 2014
International contracting: PART 1
LOCAL
PRACTICE
Mandatory laws
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INTERNATIONAL CONTRACTING
LOCAL PRACTICE
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What are mandatory laws?
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Laws that you cannot contract out of
•
Laws that apply by virtue of the location in which the international Contractor is working
Law that apply by virtue of your choice of applicable law
Laws that apply by virtue of where the international Contractor comes from
•
•
INTERNATIONAL CONTRACTING
LOCAL PRACTICE
Example mandatory laws that apply by virtue of the location in which the international
Contractor is working
•
•
•
•
•
•
•
•
•
•
•
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Building regulations
Technical regulations (pressure vessels, structures, concrete, welds, I&C, E&M, highway
pavements, etc etc)
Health & safety regulations
Planning and environmental requirements
Local employment laws (including minimum wage requirements and visas)
Local taxation / customs and excise requirements
Import / export requirements (including currency transfers)
Corporate/branch registration requirements
Registration with the local industry professional body for the particular type of work
Public procurement regulations for contracts with a public sector Employer
Anti bribery and corruption regimes
Investor protections
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INTERNATIONAL CONTRACTING
LOCAL PRACTICE
Example mandatory laws that apply by virtue of your choice of applicable law
• Restrictions on contractual arrangements → contract provisions (or entire contract) or
a resulting arbitration award) may be unenforceable under the applicable / local law
Examples:
• Exclusion of liability for gross negligence prohibited
• ‘Pay when paid’ clauses prohibited
• Certain disputes may not be referred to arbitration
• Prohibition against penalties (as opposed to liquidated damages that are a ‘genuine preestimate of loss’)
• Prohibition against liquidated damages
•
Implied terms / compulsory provisions
Examples:
• Adjudication of disputes
• Obligation to pay interest on unpaid sums
• Right to suspend performance for non payment
• Release from obligation to perform due to force majeure
INTERNATIONAL CONTRACTING
LOCAL PRACTICE
Example mandatory laws that apply by virtue of where the international Contractor
comes from (extra territorial mandatory laws)
•
•
•
Anti bribery and corruption regimes
Investor protections
International sanctions / trade embargoes
Note: certain jurisdictions may treat mandatory law provisions in ‘their’ law as a matter of ‘public
policy’ for the purposes of the New York Convention on of the Recognition and Enforcement of
Arbitral Awards, and refuse to enforce awards based on contractual provisions / arbitral
procedure that would have been contrary to the local law had the local law been the
applicable law of the contract
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INTERNATIONAL
NORMS
I NTERNATIONAL CONTRACTING
INTERNATIONAL NORMS RE: PAYMENT (1/2)
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Interim payments
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Monthly
•
•
•
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On completion of milestones (% of Contract Price or agreed lump sums)
Advance payment
•
•
•
•
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For Measured Work contracts by reference to work done
Minimum invoice amount is common
Most common in civil works contracts (payment to mobilize in advance of production)
Typical range? 10 / 15% of Contract Price
Secured by ‘on demand’ bank guarantee
‘Clawed back’ against future invoices once production commences
Retention
•
•
•
•
% of amounts otherwise payable retained by Employer to cover defects
Typically capped at 5% of Contract Price
Typically 50% returned on completion, the remainder after defects liability period
Contractor may be able to release retention early against an ‘on demand’ bank guarantee
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INTERNATIONAL CONTRACTING
INTERNATIONAL NORMS RE: PAYMENT (2/2)
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Late payment of sums due to Contractor
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•
•
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Interest payable to Contractor
Entitlement to suspend performance on notice
Entitlement to terminate for prolonged late payment on notice
Currency of payment
•
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Local / international currency by agreed % split
How to address currency exchange risk?
•
Security for payment?
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Price escalation?
INTERNATIONAL CONTRACTING
INTERNATIONAL NORMS RE: SECURITY TO BE PROVIDED BY THE
CONTRACTOR
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What may be secured?
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•
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Advance payment
Off site materials
Performance guarantee
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•
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General performance
Failure to meet specific criteria
Retention monies
Forms of security
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•
•
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Parent company guarantees
‘On demand’ guarantees, issued / confirmed by bank local to the Employer
Bank guarantees requiring proof of entitlement
Letters of credit
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INTERNATIONAL CONTRACTING
INTERNATIONAL NORMS RE: LIABILITY
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Mutual liability between the Contractor and Employer
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•
•
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Contractor’s liability to Employer
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•
•
•
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No liability for consequential loss
Indemnities re: insured loss/damage
Caps on liability do not apply to indemnities
Cap by reference to Contract Price
Cap does not apply in instances of fraud, gross negligence / wilful misconduct
Liquidated damages for delay
For supply of plant, liquidated damages for failure to achieve performance
specifications
Employer’s liability to the Contractor?
INTERNATIONAL CONTRACTING
INTERNATIONAL NORMS RE: TERMINATION
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Employer can terminate for convenience
•
Either party can terminate for prolonged force majeure
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Termination by Employer due to Contractor default
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•
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Non performance (with notice and opportunity to remedy)
Without notice or opportunity to remedy for liquidation / bribery and corruption
Termination by Contractor due to Employer default
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Prolonged non payment (with notice and opportunity to remedy)
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INTERNATIONAL CONTRACTING
INTERNATIONAL NORMS RE: DISPUTE RESOLUTION AND APPLICABLE LAW
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Multi tiered dispute resolution mechanisms, arbitration as the final step
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Seat, form of arbitration?
•
Applicable law?
INTERNATIONAL
CONTRACTING
Significant developments
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INTERNATIONAL CONTRACTING
SIGNIFICANT DEVELOPMENTS FOR INTERNATIONAL CONTRACTING (1/2)
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Economic
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Increased willingness of Courts to block demands for payment under bank
guarantees
In the public sector
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Increased scrutiny of performance on public works contracts / concessions
Increased focus on anti bribery and corruption
Increased focus on tax compliance
Increased risk of actual / de facto expropriation etc. of international Contractor’s
assets by ‘host’ States
INTERNATIONAL CONTRACTING
SIGNIFICANT DEVELOPMENTS FOR INTERNATIONAL CONTRACTING (2/2)
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Political
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International economic sanctions
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•
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Increased regulator focus on activities of international Contractors
Prohibition on extensions of guarantees issued to targeted entities
Investor-State protections
•
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Increased risk that protections violated as governments favour national interests over
international investors
Increased recourse by contractors to international law remedies
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CONTACT DETAILS
Jane Davies Evans
[email protected]
+44 7714 960096
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CONSTRUCTION LAW SUMMER SCHOOL 2014
INTERNATIONAL CONTRACTING
Jane Davies Evans
Barrister, FCA, FCIArb, FDBF, LLB (Sc) Hons
International Arbitration │Energy & Natural Resources │ Engineering & Construction
[email protected]
+44 7714 960096
NOTES AND MATERIALS (1 September 2014)
I.
INTERNATIONAL NORMS
II.
SANCTIONS
III.
INVESTOR-STATE ARBITRATION
I.
INTERNATIONAL NORMS
Contractors or employers will often seek to justify a position in negotiations by
asserting that their position is in accordance with ‘international norms’, and external
finance is typically preconditioned on the project contracts being let on ‘internally
accepted terms and conditions’.
But what does this mean? Is there an internationally accepted approach to the
allocation of risk between employer and contractor? Does FIDIC – or other widely
used forms of contract – represent the international norm? And, if there are
international norms, are the applied consistently across different sectors?
In my experience, an individual’s view as to what constitutes the internationally
accepted norm on a given issue is typically determined by their exposure to previous
projects. On further enquiry, a deeply held opinion as to a particular norm, will often
be founded on a small selection of contracts (quite possibly numbering in single
figures).
In this paper, I share with you my view of what may constitute international norms for
key negotiating issues, acknowledging fully that these ‘norms’ are dictated by the
projects that I have been involved in – both in non-contentious and dispute situations
– over my career. Although English-qualified, I studied Scots law (which has a
Romano-Dutch historical context, and adopts many civil law principles) and spent
much of my professional career based in Paris working on international projects
governed by civil laws. My practice is almost exclusively international, based in the
energy and natural resources sector and major infrastructure, and focusing on
typically higher risk jurisdictions in Africa, Latin America, the Russian Federation
and wider CIS, India, China, Asia and the Middle East.
INTERNATIONAL NORM?
Advance payment
PAYMENT PROVISIONS
· Typically in the range of 10 → 15% of the Contract Price.
· Paid shortly after commencement.
· Provision of an ‘on demand’ bank guarantee in an agreed
form entitling the Employer to obtain repayment of the
advance without proof of Contractor default, will be a
precondition to payment of the advance.1
· The Employer will ‘claw back’ the advance against future
invoices once interim payments fall due.
COMMENTS
·
·
·
·
Interim payments
·
·
1
Standard feature of significant international contracts →
Contractor receives Contract Price spread over several
tranches.
Interim payments are typically due monthly or upon
completion of pre-agreed milestones in the project.
See items # to # below as to bank guarantees.
·
A standard feature of civil works contracts, where
advance payment will be made to fund what can
be significant mobilization costs to transport plant
and equipment to site. Not so prevalent in EPC
contracts for the supply of process or power
plants).
Conditions of contract may require the Contractor
to demonstrate how the advance was expended.
Failure to demonstrate the advance has been used
for the purposes of the project and/or general
non-performance would typically justify making
a demand on the securing guarantee.
‘Claw back’ may be deferred until interim
payments have reached an agreed level (typically
10 → 15% of the Contract Price).
Exceptionally – where the Contractor has an
equity stake in the project – the Contractor may
defer payment until the asset starts generating
income for the Employer / sponsors.
INTERNATIONAL NORM?
COMMENTS
Monthly:
·
·
·
Contractor to submit an application for interim payment
monthly setting out the work done in the previous month.
A minimum invoice amount is common.
·
·
On completion of milestones:
·
Retention
·
·
·
·
Contractor can apply for payment of a pre-agreed % of
Contract Price or agreed lump sums on completion of
milestones.
% of amounts otherwise payable retained by Employer to
cover potential defects (does not apply to the advance
payment).
Typically capped at 5% of Contract Price.
Typically 50% of retentions sums will be returned on
completion, the remainder on expiry of the defects liability
period.
Contractor may be able to release retention early against
an ‘on demand’ bank guarantee.
·
·
·
Typically used when the Contractor is being paid
by reference to Measured Works, ie, quantities of
work done paid by reference to agreed rates.
Also used when the Contractor is paid by
reference to % work completed assessed by
reference to priced work packages.
A variation on this approach may be allow the
Contractor to decide how often to submit interim
payments, stipulating that the minimum interval
between each application must be no less than 1
month.
Most common in EPC / supply agreements.
Main issue for negotiations is agreeing (a) the
definition of the milestones, and (b) how
completion of each milestone is to be evidenced.
Clear milestones that can be evidenced
objectively (for example, execution of identified
key subcontracts / supply contracts are preferable
to avoid disputes).
A normal feature of all construction contracts,
irrespective of sector.
Rare in consultancy (design, supervision, project
management) contracts.
Late payment of sums due to
Contractor
INTERNATIONAL NORM?
COMMENTS
·
·
In many jurisdictions, there would be a statutory
right to interest even if the parties did not include
a contractual right.
·
In more difficult jurisdictions, payment may be
secured / facilitated by letter of credit, but
typically at the Contractor’s cost.
FIDIC allows some protection under the right to
request ‘reasonable evidence’ of funding, and
possibility to terminate if not provided.
Currency of payment
·
·
Interest payable to Contractor if the Employer has not paid
sums due on the agreed payment date.
Entitlement to suspend performance on notice.
Entitlement to terminate for prolonged late payment on
notice.
Local / international currency by agreed % split
How to address currency exchange risk?
Security for payment
·
Not common.
·
·
·
Price escalation
·
·
Almost unheard of if contract ≤ 1 year in duration.
If allowed, by reference to indices linked to the key costs.
·
·
Employers may prefer to provide as ‘free issue’
materials that are particularly susceptible to
inflation (steel etc).
Some contracts / jurisdictions recognise the
concept of a disruption in economic balance and
may give relief to the Contractor.
INTERNATIONAL NORM?
Mutual liability between the
Contractor and Employer
LIABILITY
· No liability for consequential loss.
· Indemnities re: insured loss/damage.
· Caps on liability do not apply to indemnities.
COMMENTS
·
·
Contractor’s
Employer
liability
to
·
·
·
·
Employer’s
Contractor
liability
to
·
Typically capped by reference to Contract Price.
Cap does not apply in instances of fraud, gross negligence
/ wilful misconduct (by contract or operation of law).
Liquidated damages for delay.
For supply of plant, liquidated damages for failure to
achieve performance specifications
·
If stipulated, capped at Contract Price.
·
·
To take care in jurisdictions that do not allow
exclusion of liability for gross negligence / wilful
default etc, does this include exclusions of
consequential loss?
To ensure due diligence as to the mutual
insurance cover taken out.
To take care in jurisdictions with Contract Acts
derived from the Indian Law of Contracts Act
1872. Liquidated damages figure may act as a cap
on liability subject to proof.
In civil law, additional ‘penalty’ provisions are
common. The theory is that this is allowed
(contrast common law jurisdictions that typically
will not enforce penalties), but legal opinion in
many jurisdictions is that unreasonable penalties
will not be enforced.
Often not addressed save for exclusion of
consequential loss etc.
INTERNATIONAL NORM?
Termination for convenience
TERMINATION
· Common feature → allows Employer to terminate on
notice (typically 14 to 28 days).
· Contractor will be paid for work done to date,
compensated for supply contracts etc that cannot be
terminated without cost and demobilization costs.
COMMENTS
·
·
·
Prolonged force majeure
·
Termination by Employer due
to Contractor default
·
·
Termination by Contractor
due to Employer default
·
·
Under many common law jurisdictions, Employer
cannot terminate to give work to another
contractor / complete itself, and will be liable to
the Contractor for loss of profits on the remaining
scope if it does so.
Many civil law jurisdictions reach the same
conclusion by requiring right to be exercised in
good faith.
Option can be used to cap liability / ensure
termination goes smoothly even if potential to
terminate for default.
Common feature to enable either party to terminate for
prolonged force majeure.
Non-performance (typically with notice and opportunity to
remedy).
Without notice or opportunity to remedy for liquidation /
bribery and corruption.
·
Period can range from 100 days to 18 months +.
·
Ideally (but infrequently) the contract will specify
whether the contractual rights are additional to
‘common law’ right to terminate for nonperformance.
Some jurisdictions recognise the concept of
futility → no need to give notice if impossible /
futile to expect Contractor to remedy. Again,
infrequently included expressly.
Prolonged non-payment (not rectified on notice).
In some sectors / geographical areas, material breach (on
notice).
·
·
Ideally (but infrequently) the contract will specify
whether the contractual rights are additional to
‘common law’ right to terminate for nonperformance.
INTERNATIONAL NORM?
Dispute resolution
DISPUTE RESOLUTION AND APPLICABLE LAW
· Multi-tiered dispute resolution mechanisms.
· Arbitration as the final step.
COMMENTS
·
·
·
Applicable law
·
No ‘norm’ per se.
·
Almost all contracts for significant international
engineering and construction projects include a
multi tired DR mechanism, requiring claims to be
addressed initially at a project level, before being
determined by an independent (or quasiindependent) second tier forum.
Almost all contracts for international contracting
require that disputes are determined finally by
arbitration. The preference for arbitration (rather
than litigation) reflects (a) concerns by
contractors working outside of their ‘home’
jurisdiction that the local court may favour a local
employer, in particular, where that employer is a
government entity and/or well connection
politically; and (b) that – due to the wide spread
application of the New York Convention – it is
generally easier to enforce an arbitration award
internationally, than it is to enforce a local court
order and/or judgement.
Increasingly, contracts typically exclude the
ability to appeal an issue of law (or any aspect of
the award) to the local courts, save where the
local law allows recourse to the supervisory
court.
Both local law and international ‘neutral’ law
(English, Swiss, New York etc) laws are
common.
II.
INTERNATIONAL SANCTIONS
INTRODUCTORY NOTES AND SLIDES
The international community is increasingly turning to sanctions or embargoes
(referred to as sanction regimes) against entities in order to effect changes in
behaviour by regimes that are considered undesirable by the broader international
community.3 In so doing, and in order to limit the circumvention of sanctions by
targeted entities, the international community has increasingly focused on the work of
international contractors (who are compelled to comply with the sanctions) when
promulgating additional sanctions.
These sanctions are not only mandatory, but carry significant penalties (both financial
and potential imprisonment) for breaches, irrespective of intent. Contractors and
suppliers operating in or dealing with regimes who are the subject of international
sanctions must therefore take extreme care not to expose itself (as a corporate entity)
and its personnel (who can be liable as individuals). At the same time, contractors
must deal with its own commercial exposure to claims under the construction contract
and associated contracts.
The following slides identify the key issues that contractors need to deal with at an
operational level, when sanctions impact on the international business.
3
The use of sanctions to limit the operational effectiveness of terrorism organisations is outside the
scope of these notes / slides.
9/1/2014
CONSTRUCTION LAW SUMMER SCHOOL 2014
International contracting and sanctions
Jane Davies Evans
1 September 2014
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS
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Agenda
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Introduction
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•
•
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Evolution of international sanction regimes
•
•
•
–
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The purpose of sanctions
Primary sources of international sanctions
Current sanction regimes (UK)
Types of measures implemented
Measures targeted at international contractors / developers
Typical exemptions
Who must comply with a given sanction regime?
Impact of sanctions on construction projects
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – THE PURPOSE OF SANCTIONS
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To encourage a change in behaviour of a target country or regime
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To apply pressure on a target country or regime to comply with set
objectives
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As an enforcement tool
–
–
•
Where diplomatic efforts have failed AND
International peace and security are threatened
To prevent and suppress the financing of terrorism
www.hm-treasury.gov.uk/fin_sanctions_role.htm
Article 41, UN Charter
Common Foreign and Security Policy (EU)
3
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – PRIMARY SOURCE MATERIAL
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United Nations Security Council Resolutions
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Regional
–
–
•
European Union Council Regulations
Arab League Declarations
National
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E.g., United Kingdom
•
•
•
Act of Parliament
Statutory Instruments
Asset Freezing Unit statements
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – EXAMPLE CURRENT REGIMES (UK)
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
13.
14.
15.
16.
17.
18.
Afghanistan
Al Qaida
Belarus
Burma / Myanmar
Democratic Republic of Congo
Egypt
Eritrea
Federal Republic of Yugoslavia and Serbia
Iran
Iraq
Ivory Coast
Lebanon
Liberia
Libya
North Korea
Republic of Guinea
Republic of Guinea – Bissau
Russian Federation
19.
20.
21.
22.
23.
Somalia
Sudan
Syria
Tunisia
Zimbabwe
http://www.hm-treasury.gov.uk/fin_sanctions_afu.htm
5
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – TYPES OF MEASURES
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Wide ranging trade sanctions / travel bans
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Measures targeting specific individuals / entities
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Asset freeze
•
•
•
•
–
Senior members of the regime
Banks controlled by the regime
National oil companies
Government Ministries
Travel bans
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Flight restrictions
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Currency restrictions
•
Enforcement of ‘no fly’ zones
•
Military action
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – TYPES OF MEASURES continued
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Prohibition of supply of military equipment
•
Prohibition of supply of equipment used for suppression of
internal population incl. observation or monitoring of the
population
•
Prohibition on the purchase of government bonds or
bonds issued by financial institutions in the sanctioned
state
•
Prohibition on dealings with financial institutions, provision
of insurance etc
•
Prohibition of the import, purchase or transportation of
crude oil or petroleum products originating from country
under sanction regime
7
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – TYPES OF MEASURES continued
•
Prohibition of the supply of equipment, technology,
technical assistance etc re: nuclear power
•
Prohibition of the supply of equipment related to the
extraction and processing of oil and gas
•
Prohibition of the supply of equipment or technology
related to the construction or installation of new-build
power plants
•
Prohibition on the provision of technical, brokerage and
financial assistance related to prohibited actions
•
Prohibition on investing in enterprises in the sanctioned
state engaged in prohibited actions / industries
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – TYPICAL EXEMPTIONS
•
For contracts entered into prior to [date]
–
•
But person relying on exemption must register with the relevant authority
For equipment etc to be used for certain purposes
–
–
–
–
Protection
Official observers
Media
Humanitarian purposes
•
Where a general licence has been awarded
•
Asset freeze may be relaxed by relevant authority
–
–
–
–
–
–
Basic needs
Legal representation
Bank account charges where the assets are frozen
Extraordinary expenses with prior notice
Diplomatic functions
Overseas students
9
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – WHO MUST COMPLY
•
Typical EU sanction wording
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – IMPACT ON INTERNATIONAL CONTRACTORS
National Oil Company / Government entity
Targeted Entity
EPC Contract
International Partner /
Consultant
Project Company
Targeted State
Performance Bond
International Contractor
EU / State A
Facility Agreements and
Undertaking
Local Bank
State B
Counter Guarantee
International Bank
International
11
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – IMPACT ON INTERNATIONAL CONTRACTORS
•
Typical sequence of events:
–
–
–
–
–
–
–
–
International contractor incorporated in State A is executing construction project in State
B for state entity
International contractor has provided security to the Employer
• Performance bond / bank guarantee issued by local bank to Employer
• Counter guarantee issued to local bank by contractor’s international bank
pursuant to facility agreement
Situation in state deteriorates
Government of State A recommends no non-essential travel to State B
International insurer restricts cover for project
Personnel want to leave State A
International community impose increasingly stringent sanctions against State B and/or
the Employer
International contractor notifies Employer
• Force majeure situation
• Evacuation of expatriate personnel
continued
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – IMPACT ON INTERNATIONAL CONTRACTORS
Typical sequence of events continued:
•
Employer does not recognise force majeure
•
Employer issues ‘extend or pay’ demand on the performance bond / bank
guarantee issued by local bank
•
Local bank makes demand on counter guarantee
•
International bank asks contractor
•
For permission to extend
•
To transfer funds
•
To provide indemnity for demand under Facility Agreements
13
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – COMMON QUESTIONS ASKED
•
Do sanctions → force majeure such that the contractor is excused performance of
its obligations under the EPC Contract?
–
–
–
–
–
–
What does the sanction say?
Is force majeure recognised by the relevant authorities?
What does the construction contract say?
What does the local law say?
Have other contractors continued to work?
Has the Employer completed the works / operated the facility?
National Oil Corporation v. Libyan Sun Oil Company
RSM Production Corporation v. La Republique centrafricaine
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – COMMON QUESTIONS ASKED
•
Do sanctions provide a defence to claims re: failure to meet contractual obligations? (1)
•
Common wording
•
Council Decision (EU) No.
15 36 / 2012
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – COMMON QUESTIONS ASKED
•
Do sanctions provide a defence to claims re: failure to meet contractual obligations?
(2)
Shanning International Limited vs. Lloyds Bank and others
–
–
–
–
(2001) 1 WLR 1462 (HL), (2000) Lloyd's Rep Bank 235 (CA), LTL 5/1/2000 (High Court)
Contract to supply medical equipment to Iraq
Shanning had issued counter guarantee for performance of supply contract
Supply contract could not be completed due to sanctions
HL adopted purposive approach to interpreting an equivalent provision
• Stated that any claim under the guarantee or counter guarantee would “plainly” be in
connection with the underlying supply contract
• Found that the equivalent provision provided a permanent prohibition on claims – any
potential liability for non performance was extinguished and would not revive upon the
lifting of the sanction
• Reasoned that to find otherwise would make international contractors the innocent
victims because the State could recover for non performance once the sanctions were
lifted
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – COMMON QUESTIONS ASKED
•
How does the sanctions defence operate in arbitration?
–
–
•
As a defence
Not as a ground for non-arbitrability
La Compagnie Nationale Air France v Libyan Arab Airlines et al., Quebec Court of Appeal (31 March
2003)
–
–
–
–
–
–
–
–
Contract for maintenance of aircraft by AF
UN sanctions introduced vs. Libya
AF terminated contract relying on sanctions
LAA filed arbitration for wrongful termination
Seat of arbitration in Quebec
AF raised preliminary issue: did tribunal have jurisdiction given sanctions defence?
Tribunal found they had jurisdiction
AF applied to Quebec courts for a declaration that the claim was non-arbitrable
• First instance: found for LAA
• Court of Appeal:
• Tribunal had jurisdiction to decide its own jurisdiction
• Sanctions protection operates as defence, not issue of arbitrability
17
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – HOW TO ADDRESS THE SITUATION (1)
–
–
Identify the contractual chain from the Employer to the Contractor
• Construction contract / supply chain
• Securities
• Facility Agreements and indemnities
Identify other relevant issues which may be impacted by sanctions
• Insurance
• Impact of sanctions on personnel
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INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – HOW TO ADDRESS THE SITUATION (2)
CONSTRUCTION CONTRACTS AND SUPPLY CHAIN
–
–
–
–
–
–
–
–
–
–
Identify relevant jurisdictions and sanction regimes
Notification requirements / exemptions
Is there a contractual definition of force majeure?
Applicable law?
Local counsel advice as to impact of sanctions on obligation to perform
Ensure all relevant contractual notices given up and down supply chain
Identify outstanding payments due / claims against Employer
Consider claims against non-targeted guarantors
Settlement options: is set off prohibited?
Consider long term strategy for project / country
• Is termination a commercial option?
• Commencing arbitration etc
19
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – HOW TO ADDRESS THE SITUATION (3)
SECURITIES
•
–
–
–
–
–
–
At each stage of the chain of securities / counter indemnities
Identify relevant jurisdictions and sanction regimes
• Is payment prohibited? If so, where are the funds frozen?
• Can guarantees be extended?
Notification requirements / exemptions
Identify directions from relevant central banks
Local counsel advice as to impact of sanctions on securities
Local counsel advice as to possibility of obtaining injunctions to protect securities
• Chances of success
• Procedure
• Legal test / required evidence
• Cost
• Consequences of a successful application
Insurance
20
10
9/1/2014
INTERNATIONAL CONTRACTING
INTERNATIONAL SANCTIONS – HOW TO ADDRESS THE SITUATION (4)
FACILITY AGREEMENTS AND DIRECT INDEMNITIES
•
–
–
–
–
–
–
At each stage of the chain of securities / counter indemnities
Identify relevant jurisdictions and sanction regimes
• Is payment prohibited? If so, where are the funds frozen?
• Can guarantees / indemnities be extended?
• Are fresh indemnities / payments into escrow permitted?
Notification requirements / exemptions
Identify directions from relevant central banks
Local counsel advice as to impact of sanctions on Facility Agreements / indemnities
Identify all potential defaults / cross defaults under Facility Agreements and take
appropriate action
[Local counsel advice as to possibility of obtaining injunctions / declarations against
banks]
21
CONTACT DETAILS
Jane Davies Evans
[email protected]
+44 7714 960096
11
Jane Davies Evans
1 September 2014
III.
INVESTOR STATE ARBITRATION
LECTURE NOTES AND SLIDES
A contractor who participates in a construction project outside its ‘home’ jurisdiction
exposes itself to additional risks above and beyond those experienced when carrying
out work domestically. The contractor’s anticipated return on the construction project
may be eroded through changes to the tax regime in the foreign jurisdiction where the
international contractor is working (the so-called ‘host’ state), restrictions on the
movement of currency outside of the host state, difficulties in registering as a foreign
entity in the country, delays (or worse) in obtaining permits or licences required to
execute the work, or other actions of the host government which have – intentionally
or innocently - forms of intervention and interference by the host government.
Traditionally, a contractor faced with such difficulties will attempt to bring claims
against the employer under the construction contract, relying on the contractual
allocation of risk for change in law, licensing and permitting and/or force majeure or
similar. In certain situations, in addition to these ‘traditional’ remedies, international
contractors working outside their ‘home’ jurisdictions may be able to benefit from
protections available to foreign investors, seeking remedies by way of investor-state
arbitration against the government of the host state if these protections are violated.
While traditional ‘commercial’ construction arbitrations typically proceed under the
agreement to arbitrate found in the construction contract,4 investor-state arbitrations
are generally founded on the host state’s unilateral agreement to have certain disputes
determined in international arbitration. A qualifying investor relies on the host state’s
unilateral agreement to arbitrate and make a claim in international arbitration against
the host state.
While a few contractors have been using investor-state arbitrations to seek
recompense for some time, the industry as a whole was initially slow to embrace the
concept. But there is a definite change in approach, with many of the investor-state
arbitrations registered in recent years relating to construction projects. The reason for
this change is multifaceted:
·
4
Firstly, there is simply better awareness of this potential route to
compensation.
For example, Clause 20.5 of the FIDIC 1999 suite of contracts.
Jane Davies Evans
1 September 2014
·
·
·
Secondly, the global economic and political turbulence of recent years has
forced host states to face difficult decisions balancing the obligation to fulfil
international obligations to foreign investors and the need to meet the
expectations of their electorate.
Thirdly, the increased use of long term project structures such as Build-OwnOperate, PFI concessions etc, has resulted in a greater number of situations in
which investor protections may be violated.
Finally, the sheer scale of international projects, the increased use of lump
sum EPC contracting, and limited contractual rights to additional payment, has
left many international contractors with significant losses and no prospect of
recovery through traditional contract claims. Combined with a reduced
number of projects in the pipeline – which may reduce a contractor’s
inclination to initiate protracted legal proceedings, contractors have become
more willing to try something different in order to make good their losses.
The attached slides and notes below provide an introduction to this issue.
THE BASIC REQUIREMENTS FOR AN INVESTOR-STATE ARBITRATION
The basic requirements for investor-state arbitration are as follows:
·
·
·
·
An investor protection regime
A qualifying investor.
A qualifying investment.
A violation of the protections afforded by the regime.
Identifying the relevant investment promotion law or treaty
Investor protection regimes are typically found in local investment promotion laws or
international treaty, with the latter being the most common arrangement.
Investment promotion laws operate unilaterally. A host state seeks to encourage
foreign investors to invest within its national boundaries, and introduces an
investment promotion law into the local statute book, promising certain protections to
qualifying investors if they invest in qualifying investments in the host state and
consenting to the determination in international arbitration of disputes in relation to
violation of the protections.
Investment treaties operate bilaterally (when entered into by two states, in which case
the treaty is referred to as a bilateral investment treaty or BIT), or multilaterally (when
Jane Davies Evans
1 September 2014
entered into by three or more states, in which case the treaty is referred to as a
multilateral investment treaty or MIT). The basic premise of both arrangements is
that (a) the contracting states agree to provide investors from the other contracting
states with certain protections on a reciprocal basis, and (b) investors from the other
contracting states to the BIT or MIT may claim recompense from the host state if
these protections are violated.
It is not always straightforward to identify what investment promotion laws and
investment treaties are in force at any given time. Many states publish domestic
legislation on government websites, but these are not always freely accessible, or may
not be up to date. The situation is more complicated for international treaties. In
many jurisdictions, the mere signing of the investment treaty is insufficient to give the
treaty legal force in the host state. The treaty must be ratified by the host state in
accordance with local law before it becomes legally binding. Finally, it is possible for
states to amend or repeal domestic legislation, or to withdraw from an investment
treaty. While certain institutions publish lists of investment treaties thought to be in
force at any given time,5 the most reliable method to confirm what laws are in force is
to contact the office of the Attorney General of the host state, the treaty section of the
relevant Ministry of Foreign Affairs and/or the host state embassy.
Who is a qualifying investor?
Almost without exception, the criteria which determine who is a qualifying investor
are the nationality or citizenship of the investor. Investors can be natural persons or
legal entities (corporations and the like).
Investment promotion laws will typically frame the definition in the negative,
requiring that the qualifying investor is not associated with the host state. In contrast,
investment treaties will typically frame the definition positively, requiring that the
investor must be associated with the other contracting state or states in order to qualify
for protection.
For natural persons, the investment treaty will typically require that the investor has
the nationality or is a citizen of one of the other contracting parties to the treaty.
Natural persons who hold joint citizenship of both the host state and one or more of
the other contracting parties to the treaty will often be excluded. In addition, some
investment treaties require the investor to be resident in the other contracting state.
5
For example, the International Centre for the Settlement of Investment Disputes or ICSID, within
the World Bank in Washington DC.
Jane Davies Evans
1 September 2014
Whether a natural person is a national, citizen or resident of a particular state will
usually be determined, in the first instance, by reference to that law of that state.
For legal persons, relevant factors in determining nationality include:
·
·
·
the place where the investor is constituted or incorporated,
the place from where the entity is controlled,
the place where the seat of the management of the entity is located.
In addition, and in response to investors planning the structure of investments so as to
benefit from protections that would not otherwise have been available to them,
investment treaties may require that the entity has a further connection to the other
contracting state. For example, the investment treaty may require that the entity
carries out “business activities” or “substantial economic activities” in the territory of
the other contracting state, or that the management of the investor is seated in that
territory.
It is common practice for international contractors to set up a locally incorporated
special purpose vehicle or similar to undertake construction works in the host state.
This may be a requirement of the local laws of the host state, or allow for the recovery
of locally charged value added tax and similar costs by the international contractor.
Many investment treaties recognise the validity of this business structure and include
such entities in the definition of qualifying foreign investors, provided that the locally
incorporated entity is controlled directly or indirectly by nationals of another
contracting state.
What is a qualifying investment?
The ICSID Convention did not define an investment, preferring to leave this to the
consent of the parties, expressed by means of contract, national legislation or treaty.
Most BITs define the term broadly. Assessing whether or not an international
contractor’s interest in a particular international project meets the qualifying
investment criteria will therefore involve a careful analysis of previously decided
investor-state arbitrations in light of the specific wording of the relevant law or treaty.
Jane Davies Evans
1 September 2014
The following indicators are often referred to by Tribunals seeking to determine
whether the investment that is the subject of the investor-state arbitration is a
qualifying investment:6
·
·
·
·
·
the investment should continue over an appropriate duration;7
the investment should be capable of generating a profit or other return
for the investor;
the investor should assume an element of risk;
the investment should involve a substantial commitment on the part of
the investor;8 and/or
the investment should contribute to the economic development of the
host state.
A further issue which can be of relevance to international contractors is the
requirement that the investment must comply with the laws of the host state, for
example, that the construction contract was procured in accordance with the
mandatory public procurement regime. A failure to comply with the mandatory
regime, or evidence of corruption and the like may result in the Tribunal declining
jurisdiction.
There was an initial debate as to whether construction contracts were capable of being
qualifying investments, but the view that construction contracts can be qualifying
investments appears to be the preferred view (subject of course to the particular
situation).
For example, the following investments have been found to be qualifying
investments:
6
This has been referred to as the “Salini test”, by reference to the award in Salini Costruttori
S.P.A.& Italstrade S.P.A. v. Kingdom of Morocco (Jurisdiction) ICSID Case No ARB/00/4 (ICSID,
2001, Briner P, Cremades & Fadlallah). See also ICSID Case No ARB/07/21 (ICSID, 2009,
Paulsson).
7
A dredging contract lasting twenty three months was deemed to be of sufficient duration in Jan de
Nul NV & Dredging International NV v Arab Republic of Egypt (Jurisdiction) ICSID Case No
ARB/04/13 (ICSID, 2006, Kaufmann-Kohler P, Mayer & Stern). The tribunal also accepted the
Claimant’s submission that investment in the construction industry commenced when the
contractor started expending monies on the pre-qualification process.
8
For construction projects, the importing of skilled personnel, plant and machinery in order to
perform the construction works may evidence that this indicator has been met. See for example,
Toto Costruzioni Generali S.P.A. v The Republic of Lebanon (Jurisdiction) ICSID Case No
ARB/07112 (ICSID, 2009, van Houtte P, Feliciani & Moghaizel, op. cit.).
Jane Davies Evans
1 September 2014
-
the construction and operation of a hotel,9
a concession for the mining of metals and minerals,10
the renovation, construction and operation of airport terminals,11
a real estate development including construction of residential accommodation
social and commercial infrastructure12
the development of a tourist resort,13
dredging operations,14
the development of a hazardous waste landfill facility,15
the design and construction of public roads.16
THE PROTECTIONS AVAILABLE TO A QUALIFYING INVESTOR
Potential violations relevant to construction contracts include:
-
-
the host state passing legislation nullifying or modifying the underlying
construction or concession contract,
the host state interfering with the performance of the contract, for example, by
occupying part of the construction site or failing to assist the contractor in
removing unlawful occupiers from the site,
the host state – as Employer under the construction contract – failing to
perform its obligations under the contract,
expropriation of the contractor’s plant, equipment and/or materials, or the
entire project.
9
Amco Asia Corporation & others v Republic of Indonesia (Jurisdiction) ICSID Case No ARB/81/1
(ICSID, 1983, Goldman P, Foighel & Rubin).
10
Vanessa Ventures Ltd v Bolivarian Republic of Venezuela ICSID Case No ARB(AF)/04/6 (ICSID,
2013, Lowe P, Brower & Stern).
11
ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary ICSID
Case No ARB/03/16 (ICSID, 2006, Kaplan P, Brower & Van Den Berg).
12
MTD Equity Sdn Bhd & anor v Republic of Chile ICSID Case No ARB/01/7 (ICSID, 2004, Sureda
P, Lalonde & Oreamuno Blanco).
13
Waguih Elie George Siag and Clorinda Vecchi v Arab Republic of Egypt (Jurisdiction) ICSID
Case No ARB/05/15 (ICSID, 2009, Williams P, Orrego Vicuna & Pryles).
14
Jan de Nul NVop.cit.
15
Metalclad Corporation v United Mexican States op. cit.
16
Salini Costruttori S.P.A.& Italstrade S.P.A. v. Kingdom of Morocco op.cit; Bayindir Insaat Turizm
Ticaret Ve Sanayi AS v Islamic Republic of Pakistan (Jurisdiction) ICSID Case No ARB/03/29
(ICSID, 2005, Kaufmann-Kohler P, Berman & Böckstiegel); Pantechniki S.A. Contractors &
Engineers (Greece) v The Republic of Albania.
Jane Davies Evans
1 September 2014
The protections typically available to a qualifying investor are set out below.
The right to receive ‘fair and equitable treatment’ from the host state
One of the primary protections afforded to qualifying investors is the entitlement to
receive ‘fair and equitable’ treatment from the host state. The host state need not be
the Employer under the construction contract in order for the contractor to invoke this
protection. For example, a contractor who is thwarted in enforcing its contractual
rights in the host state’s courts through a so-called ‘denial of justice’ may be able to
invoke this protection. Likewise, a contractor who is denied essential building permits
for arbitrary reasons or in a manner inconsistent with the contractor’s legitimate
expectations based on assurances and/or prior experience, may be able to claim that it
was not receiving ‘fair and equitable treatment’.
The case of MTD v Chile concerned an investment by Malaysian investors to develop
real estate in Chile.17 The Chilean Foreign Investment Commission (FIC) approved
the investment, despite it being against the Chilean government’s urban policy. After
expending considerable sums buying land and developing the proposal, the investors
were refused the necessary permit to begin construction. The Tribunal found that
FIC’s approval of an investment against government policy constituted unfair
treatment under the relevant treaty.
In Metalclad v Mexico, a US investor was denied a municipal construction permit to
develop and operate a hazardous waste transfer station and landfill in Mexico after it
had received assurances from federal officials that its existing federal and state
permits allowed for the construction. In addition, the local government issued an
Ecological Decree creating an ecological reserve over the site barring the operations
permanently.18 The Tribunal found that the lack of transparency regarding the relevant
legal requirements and the municipality’s failure to arrive at its decision to deny the
permit in an orderly and timely manner constituted unfair treatment.
Protection from expropriation of the investment
Qualifying investors will normally receive protection from expropriation of the
investment or measures tantamount to expropriation, except under specified
conditions and with payment of prompt, adequate and effective compensation by the
host state. The expropriation may be partial (for example, expropriation of the
17
MTD Equity Sdn Bhd & anor v Republic of Chile op.cit.
18
Op.cit.
Jane Davies Evans
1 September 2014
contractor’s equipment, plant and/or materials) or the entire investment may be
expropriated. The expropriation may also be direct (for example, by way of
nationalisation) or indirect (for example, by cancelling a licence and thus depriving
the investor of the use and enjoyment of its investment).
Metalclad v Mexico is also an example of expropriation with the tribunal finding that
issuing the Ecological Decree barring the development permanently constituted
expropriation.19
Another example is ADC v Hungary.20 ADC had been awarded contracts to renovate,
construct and operate terminals at Budapest airport. Several years into the project, the
government legislated to change the legal and regulatory regime applicable to the
airport, and ADC’s contracts were voided. The Tribunal held this to be an unlawful
expropriation as it was neither in the public interest nor accompanied by adequate
compensation.
The right to receive full protection and security for the investment
Many investment laws and treaties provide that the qualifying investor is entitled to
have their investment protected from physical damage. The host state may be liable if
the investment is damaged through the actions of the host state, or by the host state’s
failure to take appropriate measures to prevent damage being caused by others.
Tribunals are generally slow to impose a strict liability on the host state, or to be
overly prescriptive as to the level of protection required to be provided by the host
state. Further, a claimant in an investor-state arbitration is under the same duty to
mitigate loss as a claimant in a traditional commercial arbitration. As such, an
international contractor should maintain their own security for the construction site,
and not assume that the host state’s obligation to provide ‘full protection and security’
requires the host state to provide site security for the works.
In AAPL v Sri Lanka a Hong Kong company had invested in a shrimp farm in Sri
Lanka.21 The farm was subsequently destroyed and a number of employees were
killed by Sri Lankan security forces operating against rebel forces. The Tribunal
19
Ibid.
20
ADC Affiliate Limited and ADC & ADMC Management Limited v Republic of Hungary op.cit.
21
Asian Agricultural Products Ltd (AAPL) v Republic of Sri Lanka ICSID Case No ARB/87/3
(ICSID, 1990, El-Kosheri P. Asante & Goldman)
Jane Davies Evans
1 September 2014
found that Sri Lanka had failed to provide the required protection to the investor and
its employees.
The investor in AMT v Zaire, a US company, suffered losses as a result of looting and
destruction of industrial and commercial complexes by Zairian soldiers.22 The
Tribunal found that the government had failed to provide full protection and security
to the investment.
Protection from discrimination
This protection typically has two elements.
·
·
Firstly, the right to receive the same treatment as domestic investors of the
host state (the concept of ‘national treatment’).
Second, the right to receive the same treatment as foreign investors from other
states, notwithstanding that the host state may have agreed more favourable
protections for investors from that other state (the ‘most favoured nation’ or
MFN treatment).
Returning to MTD v Chile, in that case the Malaysian investor was able to invoke the
MFN provision in the Chile – Malaysia BIT and rely on more favourable provisions
in Danish and Croatian BITs.23
Free transfer of investments and returns
A further protection commonly available to qualifying investors is the ability freely to
transfer investments to others and to repatriate returns generated by investment to the
investors’ ‘home’ jurisdiction. These protections have become of increased interest to
contractors in the current economic climate, with a number of countries introducing or
threatening to introduce currency controls and/or unable to pay international
contractors in foreign currency given the global economic crisis.24
22
American Manufacturing and Trading Inc v Republic of Zaire ICSID Case No ARB/93/1 (ICSID,
1997, Sucharitkul P, Golsong & Mbaye).
23
MTD Equity Sdn Bhd & anor v Republic of Chile op. cit.
24
However, some regimes exempt measures taken in response to economic crisis.
Jane Davies Evans
1 September 2014
COMMENCING AN INVESTOR-STATE ARBITRATION
The applicable treaty will set out the procedure an investor needs to follow to bring a
claim. Typical provisions include:
·
Cooling-off period
Many investment treaties specify a period (usually 3-12 months) during which claims
cannot be brought pending settlement attempts. The investor typically starts the
negotiation period by sending a ‘trigger letter’ to the central authorities of the host
state, summarising the dispute and requesting negotiation. Upon expiry of the period
without settlement, the investor is free to commence arbitration.25
·
Exhaustion of local remedies
Some treaties require the investor to have presented its claim to the courts of the host
state before proceeding to arbitration. The investor is entitled to commence arbitration
only if the domestic court does not issue a decision within a specified period of time.
·
‘Fork in the road’ provisions
Investment treaties often present the investor with a series of options for pursuing its
claim after the cooling-off period has expired. These most commonly include ICSID
arbitration, ad hoc arbitration, references to the ICC and sometimes the domestic
courts of the host state. ‘Fork in the road’ provisions stipulate that once an investor
chooses a particular procedure, he is prevented from electing any of the others
potentially available.
THE ROLE OF ICSID IN INVESTOR-STATE ARBITRATION
The Convention on the Settlement of Investment Disputes between States and
Nationals of Other States (the ICSID Convention) provides a neutral forum for the
25
Non-compliance with a cooling-off period will not necessarily preclude a tribunal from hearing a
claim, for example, in circumstances where negotiation is obviously futile. See for example
Biwater Gauff (Tanzania) Limited v United Republic of Tanzania ICSID Case No. ARB/05/22
(ICSID, 2008, Hanotiau P, Born & Landau).
Jane Davies Evans
1 September 2014
resolution of investor-state arbitrations pursuant to the Arbitration Rules of the
International Centre for Settlement of Investment Disputes (ICSID).26
Parties may consent to ICSID arbitration in their contract, or the host state may have
specified ICSID arbitration in the investment promotion law and/or investment
treaties.
As of writing more than 250 disputes referred to ICSID have been determined, with a
further 160+ disputes pending. The majority of decisions (both preliminary and final)
from ICSID arbitrations are published by ICSID on the internet. 27
26
While other forums are available, ICSID remains the most commonly used forum for resolution of
investor-state arbitrations. For example, the Energy Charter Treaty provides for investors to choose
between ICSID, the Stockholm Chamber of Commerce or arbitration pursuant to the UNCITRAL
Arbitration Rules.
27
http:icsid.worldbank.org
9/1/2014
CONSTRUCTION LAW SUMMER SCHOOL 2014
Investment treaty protections – the basics
Jane Davies Evans
1 September 2014
INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
•
Basic scenario
•
•
•
Contractor from State A decides to undertake work in State B
What rights does the Contractor have against State B (the ‘host’ state) if it loses money on this venture?
•
If purely a contractual loss → unlikely to have a remedy unless State B is the Employer
•
But in some instances the loss will be protected under an investor protection regime → Contractor may have a route
to recovery under public international law
The basic requirements for enforceable investor protections
1.
2.
3.
4.
An investor protection regime
A qualifying investor
A qualifying investment
A violation of the protections afforded by the regime
1
9/1/2014
INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
The basic requirements for investor protection (1) – an investor protection regime
•
Local investor protection law
•
International treaties (most common)
Bilateral treaty = BIT
Multilateral treaty = MIT
• Approx. 2600 BITs / MITs in force currently
•
•
How to find if there is an investor protection regime?
•
Website of the ‘host’ state Ministry of Foreign Affairs (or equivalent)
Check the World Bank / ICSID (International Centre for the Settlement of Investment Disputes) websites
• Check with the Ministry of Foreign Affairs (or equivalent) of the ‘home’ state
• Unless strategically inadvisable, check with the Ministry of Foreign Affairs, AG Chambers and/or embassy
(treaty department) of the ‘host’ state in the ‘home’ state
•
•
INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
•
Two or more States enter into international treaty to encourage investment
State A
•
TREATY
Each State promises to give investors from the other State certain protections if they
invest in their country
Investor from
State A
•
State B
State B
‘Host State’
Treaty provides for investor to claim against the Host State in arbitration if these
protections are violated
Investor from
State A
ARBITRATION
State B
‘Host State’
2
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INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
The basic requirements for investor protection (2) – a qualifying investor
•
Key criteria – Nationality and Citizenship
•
Natural persons
•
•
•
•
•
Typically required to have nationality or be a citizen of one of the contracting States
Joint nationals/citizens are often excluded
May be required to be resident in the contracting State
Whether or not a national/citizen/resident normally determined (in first instance at least) by the
‘home’ State law
Legal persons – relevant criteria
Where the investor is constituted or incorporated
Where the entity is controlled
• Where the seat of the management of the entity is located
• May require ‘business activities’ or ‘substantial economic activities’ in the ‘home’ State
• Most treaties recognise the need for a Contractor to operate via an entity incorporated in the ‘host’ State
and will not exclude remedies on this basis alone
•
•
INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
The basic requirements for investor protection (3) – a qualifying investment
•
Often broadly defined (no definition in ICSID Convention)
•
Cases rely heavily on case law
•
Widely accepted indicators of investment
•
•
•
•
•
The investment should continue over an appropriate duration
The investment should be capable of generating a profit or other return for the investor
The investor should assume an element of risk
The investment should involve a substantial commitment on the part of the investor
The investment should contribute to the economic development of the host state
3
9/1/2014
INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
The basic requirements for investor protection (3) – a qualifying investment
•
Examples
•
•
•
•
•
•
•
•
The construction and operation of a hotel
A concession for the mining of metals and minerals
The renovation, construction and operation of airport terminals
A real estate development including construction of residential accommodation social and
commercial infrastructure
The development of a tourist resort
Dredging operations
The development of a hazardous waste landfill facility
The design and construction of public roads
INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
The basic requirements for investor protection (4) – typical protections and violations
Typical protections
•
•
•
•
No expropriation without full compensation
“Fair and equitable” treatment (legislative stability)
Full protection and security
No discrimination (most favored nation (MFN) and/or national treatment)
Typical violations
•
•
•
•
Host State government interferes with performance of the contract
Host State breaches its contract with you
Host State expropriates investment in its entirety
Host State adopts taxes or regulations (including currency control) that significantly affect
your investment or undermine your legitimate expectations as an investor
4
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INTERNATIONAL CONTRACTING
INVESTOR PROTECTIONS – THE BASICS
Investment structuring
Structuring investments to take advantage of protections that would not otherwise be
available to you
Investor from
State X
Structures investment
via State A subsidiary
State A
TREATY
State B
Benefits from protections in treaty
between State A and State B
CONTACT DETAILS
Jane Davies Evans
[email protected]
+44 7714 960096
5