January 29, 2013
Over the past several weeks, I’ve written about the importance to companies operating abroad of understanding forum-selection and arbitration clauses in international agreements and of ascertaining potential liabilities that can arise under the Foreign Corrupt Practices Act. But there’s another inherent risk to companies with substantial investments in overseas markets: political risk. When companies make significant capital investments in foreign countries, they accept any risks to the ongoing political stability—or the occurrence of instability—in those countries.
Political risks can manifest themselves in any number of ways. For example, a company’s manufacturing facilities may become nationalized; a foreign host country may renege on agreements for access to necessary utilities, such as water or electricity; civil unrest may result in damage or destruction of a company’s facilities; or new local laws or regulations may be passed that undermine foreign investments in favor of domestic operations. Yet, companies are not without options to remediate lost foreign investments when such political risks turn into reality.
Bilateral investment treaties are international agreements between two countries that establish basic terms and conditions—and guaranteed protections—for private capital investments in each country. Typical protections offered by BITs include fair and equitable treatment, most-favored nation or national treatment clauses, redress for expropriation, and security under the law. Moreover, BITs ordinarily allow for violations to be redressed in international arbitration, which permits aggrieved companies to avoid suing a host country in its own courts.
In fact, enforcement through international arbitration is one of the common features of most recent BITs, which typically do not require investors to first exhaust local legal or administrative remedies before resorting to an international arbitration forum. Not all international arbitration clauses are alike among BITs, however. For example, some BITs contemplate a months-long “cooling off” period before commencing arbitration; other BITs require claims to first be filed or litigated in some form in a foreign host country’s local courts. Thus, it is imperative to understand the terms and conditions of a BIT’s international arbitration clause before making capital investments in a foreign host country.
By knowing the protections afforded under any BITs, companies can mitigate their losses when the playing field in a foreign host country shifts in discriminatory ways, when conditions change on account of unforeseen political events, or when assets are directly or indirectly taken through a foreign government’s conduct. As companies continue making capital investments in foreign countries, knowing whether a BIT is in place—and the specific terms and conditions that apply—can be vital to protecting those assets.