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23 December 2024

The ABCs Of Bilateral Investment Treaties

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SimmonsCooper Partners

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SimmonsCooper Partners (“SCP”) is a full service law firm in Nigeria with offices in Lagos and Abuja. SCP is one of Nigeria’s leading practices for transactions relating to all aspects of competition law, commercial litigation, regulatory compliance, project finance and energy. Our team has gained extensive experience in advising both local and international clients.
Bilateral Investment Treaties, commonly known as BITs, are fundamental agreements that facilitate cross-border investments by forging strong ties between nations. In recent decades, BITs have become
Nigeria Litigation, Mediation & Arbitration

Introduction and Evolution of BITs

Bilateral Investment Treaties, commonly known as BITs, are fundamental agreements that facilitate cross-border investments by forging strong ties between nations. In recent decades, BITs have become "the most important international legal mechanism for the encouragement and governance" of foreign direct investments (FDIs)1 These treaties have historical roots like the Friendship, Commerce, and Navigation Treaties (FCNs), which focused not only on commerce but also on fostering diplomatic relationships and ensuring fair treatment for foreign investors. Consider a situation where a nation offers preferential treatments to its own investors—BITs guarantee that these privileges are equally extended to foreign investors, thereby establishing a foundation of equality and fairness in international trade, shipping, and property rights.

As the global investment landscape evolved, so did the nature of these treaties. Modern BITs have refined the frameworks, setting precise guidelines for the interaction between governments and foreign investors. These treaties are more than legal documents; they are commitments to fairness and security2 within the international investment sphere, making them essential for businesses and individuals aiming to invest across borders.

Understanding Bilateral Investment Treaties

Bilateral Investment Treaties (BITs) are crucial components of the wider International Investment Agreements framework, which also includes Treaties with Investment Provisions (TIPs).3 Specifically, BITs are agreements between two countries aimed at fostering and protecting private investments made by nationals of the contracting states in each other's territories. These treaties outline the mutual obligations of the countries to promote cross-border investments and provide investors with essential rights and protections. This includes safeguards against the unjust seizure of assets by governments and assurances for the free transfer of funds and comprehensive protection of investments.

Legal Framework Governing BITs in Nigeria

In Nigeria, the investment environment is shaped by comprehensive legal, financial, trade, and tax frameworks. The oversight of this environment is managed by several key regulatory bodies, including the Nigerian Investment Promotion Commission (NIPC), the Securities and Exchange Commission (SEC), the Federal Inland Revenue Service (FIRS), the Federal Competition and Consumer Protection Commission (FCCPC), and the Corporate Affairs Commission (CAC), amongst others. These agencies play a key role in ensuring that the investment landscape is predictable, stable, and secure, thereby enhancing Nigeria's attractiveness as an investment destination.

Together, these regulatory bodies and the laws they enforce provide a strong foundation that not only facilitates but also thoroughly monitors foreign investments in Nigeria. This regulatory framework aligns with the standards and obligations outlined in various BITs, ensuring that both foreign investors and domestic interests are adequately protected.

Features of Bilateral Investment Treaties

BITs are designed with several essential terms and conditions that promote and safeguard investments between the contracting countries. Here are some of the fundamental terms and conditions typically found in BITs:

  1. Scope and Purpose: BITs clearly outline the scope, specifying the types of investments and investors it covers, including direct investments in businesses, real estate, or other assets. It aims to encourage and facilitate investment flows between the two nations.
  2. Most-Favoured-Nation (MFN) Clause / National Treatment: This principle guarantees that investors from one country receive treatment that is no less favorable than that provided to domestic investors in the other country. It is intended to eliminate discrimination against foreign investors and ensure they enjoy the same rights and protections as local investors.
  3. Expropriation and Compensation: Given that expropriation4 poses a significant risk to bilateral investments and project finance generally, assurances by a contracting party (such as, the host government) that it will not expropriate or nationalize the project/assets are often critical5. It is therefore not unusual for BITs to define the conditions under which investments can be expropriated and ensure compensation for expropriated assets. It typically requires that expropriation be carried out for a public-discriminatory manner, and accompanied by prompt, adequate, and effective compensation.
  4. Dispute Resolution Mechanisms: BITs commonly include provisions for resolving disputes between investors and the host government. This often involves arbitration by an independent tribunal to provide a fair and impartial process for addressing investment disputes.6 This mechanism is crucial for ensuring that investors have a reliable recourse in cases of disagreements.
  5. Provisions Ensuring Free Repatriation of Profits: The provision for the free repatriation of profits is a fundamental element of many BITs. It guarantees that foreign investors can transfer profits, dividends, and other financial returns from their investments to their home countries without unnecessary restrictions. This assurance is essential for building investor confidence and encouraging cross-border investment flows.
  6. Intellectual Property Rights Protection: Some BITs include measures to protect investors' intellectual property rights, safeguarding against infringement or unfair practices by the host government or third parties.
  7. Sustainable Development and Environmental Protection: Contemporary BITs may incorporate clauses that promote sustainable development and environmental protection. These provisions require investors to comply with specific environmental standards and regulations.
  8. Flexibility and Adaptability: BITs are often crafted to allow modifications and adaptations to accommodate changing economic, social, and political circumstances.

Benefits of Bilateral Investment Treaties (BITs)

Bilateral Investment Treaties offer several key advantages that enhance the protection and management of foreign investments:

  • Guarantee of Fair and Equitable Treatment: BITs ensure that host countries adhere to international law standards, providing "fair and equitable treatment" and "full protection and security" for investments. This reduces the risk of arbitrary or discriminatory practices by the host government that could negatively impact investments.
  • Freedom of Capital Transfer: BITs facilitate the free movement of funds, allowing investors to transfer capital into and out of the host country at market exchange rates. Related transfers such as profits, liquidation proceeds, and additional financial injections, ensuring stable and predictable financial operations.
  • Restrictions on Trade-Distorting Practices: BITs prevent host governments from imposing inefficient or trade-distorting practices, such as local content requirements or export quotas. Investors are thus able to source components internationally and sell imported goods locally without undue restrictions.
  • Management Freedom: BITs allow foreign investors to appoint top managerial personnel regardless of nationality, ensuring control over business operations and alignment with the investor's standards and expectations.7

Understanding the Significance and Functionality of Most-Favoured-Nation (MFN) Clauses in Investment Treaties

Most-Favoured-Nation (MFN) clauses are a fundamental component of Bilateral Investment Treaties (BITs), playing a crucial role in ensuring equal treatment of investors across different countries. An MFN clause means that if a host country offers certain rights or privileges to investors from one country, it must extend the same benefits to investors from any other country that is party to a BIT with it.

Specifically, Article 5 of the International Law Commission (ILC) Draft Articles defines8 a 'most-favoured-nation' clause as: 'treatment accorded by the granting State to the beneficiary State, or to persons or things in a determined relationship with that third State, not less favourable than treatment extended by the granting state to a third State or to persons or things in the same relationship with that third State'.

MFN clauses promote fairness by ensuring that all foreign investors, regardless of their home country, are subject to the same regulatory treatment in the host state. This includes parity in handling import and export-related customs duties, charges, formalities, and internal regulations affecting the economic activities of foreign entities.9 Importantly, this principle also extends to the services sector, safeguarding equal treatment for all service providers irrespective of nationality. Through these clauses, nations commit to a standard of treatment that upholds the principles of equity and non-discrimination in international economic dealings.

Controversies and Challenges of Bilateral Investment Treaties

Bilateral Investment Treaties (BITs) are instrumental in promoting foreign investments, but they often stir controversies, particularly regarding their investor-state dispute settlement (ISDS) provisions. Critics argue that ISDS mechanisms can grant foreign investors disproportionate influence over a country's domestic policies, potentially leading to expensive legal battles against governments. Developing countries, such as Nigeria, have come under scrutiny for being susceptible to lawsuits from foreign investors that contest new regulations aimed at enhancing environmental protection or public welfare. For example, the Netherlands-Nigeria BIT has greatly accelerated investments, particularly in the oil and gas sectors, yet it has sparked debates over its possible constraints on Nigeria's sovereign ability to implement new, beneficial regulations that may affect these investments.

Emerging Trends in Global BITs

Considering these challenges, there is a noticeable shift in how new BITs are drafted. Contemporary treaties are increasingly focusing on sustainable development and digitalization. Many recent BITs are incorporating clauses that promote environmental protection and corporate social responsibility, mandating foreign investors to adhere to local environmental laws. This ensures that foreign investments align with sustainable development goals rather than detract from them.

Moreover, as the global economy becomes more digitized, BITs are evolving to address the needs of the digital economy. This includes provisions related to data protection, cybersecurity, and digital trade, acknowledging the significance of these factors in today's investment landscape. For instance, newer BITs are integrating sustainability objectives that align with the United Nations Sustainable Development Goals (SDGs), striving to balance investment needs with environmental preservation and social welfare. These adaptations reflect a broader recognition of the need to modernize investment treaties to keep pace with global economic and technological developments.

Conclusion

Bilateral Investment Treaties (BITs) are pivotal in protecting Foreign Direct Investments (FDIs) and advancing foreign interests, significantly boosting investment flows into Nigeria. These treaties provide international investors with a sense of security, alleviating concerns associated with the risks of investing abroad. By fostering a stable and protective investment environment, BITs contribute to Nigeria's economic growth through job creation and infrastructure development.

Footnotes

1 Competing for Capital: The Diffusion of Bilateral Investment Treaties, 1960-2000 by Elkins, Guzman, & Simmons, 2004, p. 0.

2 https://www.law.cornell.edu/wex/bilateral_investment_treaty

3 https://investmentpolicy.unctad.org/international-investment-agreements

4 In a nutshell, expropriation is the taking of a project by the state, whether for public purposes or otherwise. See; Expropriation: Investment Protection and Mitigating the Risks by Jeffery Barratt; Journal of International Banking and Financial Law, 349, 1 June (2010)

5 Project Finance: Identification, Allocation and Mitigation of Risk Factors by Adegoke Adedoyin & Ayodeji Jolaoso (See; https://www.mondaq.com/nigeria/project-financeppp-amp-pfi/1177538/project-finance-identification-allocation-and-mitigation-of-risk-factors)

6 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4687514

7 https://www.sidley.com/en/us/services/global-arbitration-trade-and-advocacy/investment-treaty-arbitration/sub-pages/the-basics-of-bilateral-investment-treaties/

8 https://www.wto.org/english/thewto_e/acc_e/cgr_e/WTACCCGR5_LEG_6.

9 Section 1, Article 2 of the Foreign Trade Law, Official Gazette, No. 28/04

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.

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