Investing overseas and ISDS – Are you adequately protected by a treaty with investor-state dispute settlement provisions? - International Trade & Investment

Investor-state dispute settlement (ISDS) is a relatively recent phenomenon. Historically, foreign investors whose investments suffered due to actions of the host state were forced to persuade their home state to pursue a claim against the host state. However, beginning with the bilateral investment treaty (BIT) entered between Italy and Chad in 1969, states have been inserting clauses into their BITs and free trade agreements that allow investors of one state party, whose investments are harmed by the actions of another state party, to assert claims directly against that host state in investor-state arbitration. In effect, these investor-state dispute resolution provisions are analogous to arbitration clauses in commercial contracts as they establish the consent necessary for a valid arbitration. Accordingly, it is critical that corporations who conduct business overseas ensure that any investment so made is protected by a treaty with an ISDS mechanism.

A recent French-language ICSID award, published 5 August 2016, is a pertinent reminder that this (seemingly) simple step should not be overlooked. In Menzies Middle East and Africa SA & Aviation Handling Services International Ltd v Senegal,¹ two aviation companies, Menzies Middle East and Africa (Menzies), registered in the British Virgin Islands, and Aviation Handling Services (AHS), based in Luxembourg, brought an arbitration against the Republic of Senegal after Senegal placed one of its subsidiaries into administration. AHS claimed the tribunal had jurisdiction under the Senegal-Netherlands BIT because one, the World Trade Organisation's General Agreement on Trade and Services (GATS), to which Senegal, Luxembourg, and the Netherlands are parties, had a most favoured nation clause and two, that clause allowed AHS to invoke the ISDS mechanism in the Senegal–Netherlands BIT. The tribunal rejected the argument and found that Senegal had not unequivocally consented to submit disputes to arbitration in part because the GATS was completely silent on arbitration and, more generally, dispute resolution. Without clear consent, Senegal could not be forced to arbitrate against its will. Menzies brought its claim under the Senegal–UK BIT but the tribunal found that any offer to arbitrate would not apply to Menzies because it was incorporated in the British Virgin Islands, a British overseas territory which did not fall within the territorial scope of the BIT.

This recent award highlights the need for investors to ensure that their investments are protected by international treaties with concomitant ISDS provisions. One way in which corporations may ensure they have this protection is to incorporate in a country with which a BIT exists and channel any investment through that subsidiary.² However, investors must not wait until the point at which they are facing a dispute to ensure they have this protection. While it is perfectly legitimate for an investor to protect itself from the risk of future disputes by structuring its investment so that it is protected by a treaty that provides for investor-state arbitration, it cannot do so after a dispute arises. Indeed, if an investor restructures its investment to gain access to ISDS protection when a dispute is already in existence, reasonably anticipated, or reasonably foreseeable, a tribunal may find that any investor-state arbitration brought is "an abuse of right" and dismiss the arbitration on jurisdictional grounds.³

This was the case in the widely reported Award on Jurisdiction and Admissibility in Philip Morris Asia Ltd v Australia, which was published on 17 December 2015.⁴ In that arbitration, Philip Morris Asia sued the Australian Government for certain violations under the Hong Kong-Australia BIT by reason of its tobacco plain packaging legislation. Philip Morris International sought to obtain the benefit of the Hong Kong-Australia BIT by restructuring itself so that Philip Morris Asia, its wholly owned subsidiary and a company incorporated in Hong Kong, held the shares of Philip Morris (Australia) Limited. Critically, this restructuring took place after the Australian Government announced its intention to introduce plain packaging legislation. Philip Morris Asia argued the restructuring was part of a broader international process designed to minimise tax liabilities and optimise cash flow, but it did not produce a single witness who could testify to the rationale for the restructure or contemporaneous corporate memoranda or other internal correspondence to support the argument. As a result, the tribunal found that the "main and determinative, if not sole, reason for the restructuring" was to gain the protection of the ISDS provisions in the Hong Kong–Australia BIT.⁵ Accordingly, the commencement of the arbitration was an abuse of right, and the claims brought against Australia were dismissed.

Both Philip Morris and Menzies demonstrate what can occur if corporations fail to consider what treaty protections exist with respect to their overseas investments before a dispute arises. The cases highlight the need to obtain sound legal advice on applicable treaties at the outset of any new overseas investment (as well as in relation to existing investments). Of course, multinational corporations and other overseas investors prefer not to consider potential disputes that may arise in a seemingly friendly foreign jurisdiction. Nevertheless, contemplation of these matters and concordant preparation can be the difference between retaining the value of an investment and recovering nothing should a host state take an adverse action.

Footnotes

¹ Menzies Middle East and Africa SA & Aviation Handling Services International Ltd v Senegal (Award).

² However, some (more modern) treaties limit the capacity to adopt this strategy.

³ Tidewater Inc v Venezuela (Decision on Jurisdiction).

⁴ Philip Morris Asia Ltd v Australia (Award on Jurisdiction and Admissibility).

⁵ Ibid 184 [584].

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