Australia: How To Effectively Protect Investments In Unstable Nations: Lessons To Be Learnt From Zimbabwe

Key Point

• Australian companies should carefully structure agreements to protect their investments under a BIT by adopting a structure which will engage the best BIT available.

Australian companies can structure their foreign investments to protect against political risks, such as the forced nationalisation of their investment for no payment. This can be done utilising relevant bilateral investment treaties (BITs) to avoid the impact of expropriations, like those currently threatened in Zimbabwe. The current position in Zimbabwe provides a useful case study. The lessons learnt from that case study can be applied to all investments in foreign countries. This article sets out some of the lessons learnt.

Zimbabwe's Indigenisation and Economic Empowerment Act

Investors worldwide are faced with the risk of expropriation in Zimbabwe if President Robert Mugabe prevails in the upcoming election. Recently, President Mugabe affirmed the Indigenisation and Economic Empowerment Act. This Act provides foreign-owned companies must transfer a majority shareholding in those companies to Zimbabwean nationals. As a consequence, this Act poses a serious risk to foreign companies investing in Zimbabwe by requiring that their local subsidiaries have at least 51 percent of their shares owned by indigenous Zimbabweans, irrespective of when incorporated (ie. existing shareholders' interests will be diluted to 49 percent).

The extent of the Government's intervention remains unclear because the Act comes in the midst of a parliamentary election and President Mugabe has stated that the Government will set forth timetables to transfer shares, subsequently. If the appropriation of land, owned by foreigners, is any guide, any payment for the transfer of shares is likely to be delayed, probably indefinitely. Local law is unlikely to provide relief for foreign investors. However, some investors from countries which have a BIT with Zimbabwe will be able to seek redress by use of international law, directly against the Zimbabwe Government. The rights given by BITs are usually enforceable by arbitration at the International Centre for Settlement of Investment Disputes (ICSID).

Australia's Bilateral Investment Treaties

As discussed above BITs are usually enforced by arbitration conducted by ICSID or on an ad hoc basis. ICSID was formed by the 1965 Washington Convention on the Settlement of Investment Disputes Between States and Nationals of the Other States. There is no right of appeal from such an arbitration to a local court system (although ICSID will review awards on a very narrow basis). In addition, such awards have the benefit of being supported by the World Bank, which can bring commercial pressure to bear, so that awards are complied with.

Australia has signed 22 BITs, of which 19 have come into force, with countries including China, Hong Kong, Indonesia, and Papua New Guinea. Australia's Free Trade Agreements with Thailand and Singapore also contain sections on the treatment of investments that are very similar to an investment treaty. Australia's BITs generally contain key provisions on fair and equitable treatment, protection against expropriation unless there is a non-discriminatory public interest justification and due compensation is given, and full protection and security for the investment. However, Australia has not signed a BIT with Zimbabwe. Therefore, Australian investors, who have not structured their investments with a view to taking advantage of a BIT between Zimbabwe and a third country, will not be able to have recourse to international law and therefore, are very unlikely to have any enforceable rights against the Zimbabwean Government.

However, there are approximately 2,300 BITs which have been ratified worldwide and over 130 states have ratified the ICSID Convention. Six BITs exist between Zimbabwe and third countries that have come into force: China, Denmark, Germany, the Netherlands, Serbia and Montenegro, and Switzerland. A general survey of Zimbabwean BITs reveals that they generally contain the key provisions found in most BITs providing protection against conduct that is tantamount to expropriation. Investors from these six nations will be able to pursue claims by way of international arbitration.

Notwithstanding that Australia is not one of the six countries with a BIT, Australians could have, if they had directed their mind to the issue at the time of the investment, structured their investments so that the relevant investor is a company incorporated in one of the six countries with a BIT with Zimbabwe. That company could be a wholly owned subsidiary of an Australian parent. By so doing, the Australian investor could have taken advantage of an effective BIT, which could be used to protect its interests. This issue should be considered at the time of initial investment to ensure that an Australian investor can access and enforce rights given by an appropriate BIT. It becomes more difficult to do that now, after the trouble is apparent.

Conclusion

The issue of protecting investment overseas should be considered and addressed before entering into an investment opportunity in a developing nation. Accordingly, Australian companies should carefully structure agreements to protect their investments under a BIT by adopting a structure which will engage the best BIT available. Clayton Utz' International Arbitration Team can give the relevant advice necessary to ensure that foreign investments have the best protection available.

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.