The Importance of Carefully Managing Risk in Cross Border Investment

Investing in foreign countries is a tough business, especially when governments lock horns with investor companies. Some interesting recent developments show why companies need to assess the availability of investment treaties before entering into foreign contracts (especially with foreign states), so as to clearly identify the protection available in the event of a dispute..

A little over a week ago a joint venture led by Woodside Petroleum agreed to pay the Mauritanian government US$100m (A$140m) to settle a dispute over petroleum license conditions for an offshore oil exploration project in West Africa. The Mauritanian government had refused to honour commitments in oil production sharing contracts made by the previous government. Woodside threatened to refer the dispute to arbitration in Paris.

Had Woodside proceeded to arbitration it is likely that this would have been one of the first investment treaty arbitrations brought by an Australian company against a foreign state. Every company investing in a foreign country needs to be aware of when it can initiate investment treaty arbitration. A company may have this right without having nominated arbitration in its contracts or even having a contract with the foreign government.

The terms of the Woodside dispute and its settlement are confidential however reports suggest that:

• After obtaining power via a bloodless coup last August the new Mauritanian government refused to be bound by oil production-sharing contracts signed with Woodside.

• The Mauritanian government argued that the contracts, which had been signed when oil prices were lower, should no longer be valid on the basis that they were signed "outside the legal framework of normal practice, to the great detriment of our country".

• Woodside and its joint venture partners maintained the amendments had been passed into law and were proper, valid and binding.

• The dispute was to be resolved by international arbitration in Paris had the parties not reached agreement.

• Woodside agreed to pay US $100m to secure its current and future drilling plans in the area.

An inherent risk in doing business in foreign countries, especially those in the developing world, is that a foreign government may either:

1. breach a contract that it has with an investor; or
2. interfere with the contractual relationship between an investor and local companies (such as nationalising assets, introducing exchange controls or imposing foreign ownership restrictions).

If this occurs the foreign investor has little prospect of succeeding with a claim in the foreign courts.

The most effective way to manage this risk is to ensure that there exists a bilateral or multilateral investment treaty (BIT or MIT) between your own country and the state in which you intend to invest. The central premise of most investment protection treaties is that they afford investors of one contracting state protection of their "investments" (usually defined broadly, often catching all kinds of economic activity) made in the territory of another of the contracting states. Examples of MITs include the Energy Charter Treaty (of which Australia is party to but is yet to ratify) and the North American Free Trade Agreement. There are more than 2,000 BITs in existence worldwide. Australia is party to 12 BITs with such countries as Papua New Guinea, China and Indonesia.

Where there is a MIT or BIT in place it will usually provide for the host country to submit a dispute with an investor to arbitration. These disputes are typically referred to arbitration by the International Centre for the Settlement of Investment Disputes (ICSID), which was established under the 1965 Washington Convention (on the Settlement of Investment Disputes between States and Nationals of other Parties). Given the absence of any BIT or MIT between Australia and Mauritania it is possible that any investment arbitration between Woodside and Mauritania could have been conducted under the auspices of ICSID.

Investors’ protection is usually from a broad but consistent range of sins, including nationalisation or expropriation without proper compensation, failing to provide investments with adequate and proper protection or subjecting them to unreasonable measures.

It is important to remember that an investor does not need to have a contract with the state, nor an express choice of ICSID arbitration if it does have a contract, to have the possibility of pursuing international investment arbitration. It is not necessary that a foreign state’s act be directed towards the investment so as to allow an investor to have recourse to ICSID. Recent cases before ICSID have included:

• an investor alleging that the state implemented a range of economic measures which breached promises, resulting in losses by the investor. The state said that the measures were not directed at the investor or investment, but rather were measures of general economic policy not subject to the BIT or the ICSID Convention. ICSID recognised that the claims arose directly out of an investment and that therefore, even if the governmental measures were not directed expressly to that investment, they gave rise to a dispute within ICSID’s jurisdiction.

• a claim made by a Luxemburg investor who had participated in Argentina’s privatisation of the gas sector. The investor owned a substantial interest in two natural gas distribution companies, which together served seven Argentine provinces. The investor claimed that certain measures adopted by Argentine authorities (such as suspension of tariff increases, tax levies and labour restrictions) changed the regulatory framework for foreign investors and adversely affected its investment. ICSID held it had jurisdiction to hear the claims and that Argentina’s signature on the BIT represented its consent to arbitration.

Therefore, the existence of BIT’s or MIT’s to which foreign investors can resort in order to assert rights in relation to foreign investments is an important factor to consider when entering into international contracts.

The Woodside case reminds us of the importance of carefully managing risk in cross border investment. There is little doubt that Woodside’s negotiating position was much stronger by having the right to proceed to arbitration.

In the oil and gas industry, with investments costing millions of dollars and taking many years to complete, it is vital for companies to be aware of the available protection at law, particularly where they are contracting with foreign states.

Properly drafted contracts with enforceable arbitration clauses and investment treaties combine to provide a broad level of protection for foreign investors. Companies and their advisers to need to assess the availability of investment treaties before entering into foreign contracts (especially with foreign states), so as to clearly identify the protection available in the event of a dispute.
By Damian Sturzaker