Investors Need to Protect Foreign Investments in Times of Changing Treaty Protections
All around the world, new investment treaties are redefining the protections that are available to foreign investors and their investments.
Under the current system, thousands of bilateral investment treaties or trade agreements in force between numerous countries grant protections to covered foreign investments. A specific investor or investment can seek coverage through the structuring of an investment in line with the treaty protections available in the host country of the investment. For example, a U.S. national can invest in Mexico through a Dutch subsidiary to benefit from the protections offered by the Mexico-Netherlands bilateral investment treaty, instead of protections under the North American Free Trade Agreement (NAFTA) or upcoming United States-Mexico-Canada Agreement (USMCA).
However, these currently available alternatives might disappear with time. There has been no shortage of media coverage of the European Union's criticism of the current Investor-State Dispute Settlement (ISDS) mechanism and its related promotion of a permanent investment court, nor of the USMCA and its more limited investment protections.1 The Netherlands' publication of its new model investment treaty is just another example of changing attitudes with regard to "expansive" investor protections contained in current treaties.
These changes are likely to affect the coverage of foreign investments in the years to come and should be taken into account now to avoid unnecessary problems in the future.
Anticipation Is Always Best
Investors need to think ahead and negotiate for the necessary protections to be included in investment contracts.
Some countries have domestic investment laws that provide for foreign investment protection in combination with, or most importantly, in the absence of applicable treaty provisions. Any foreign investor analyzing the protections available to them and their investment should therefore pay close attention to the domestic legal provisions in the sphere of foreign investment protection.
This being said, such domestic protection of foreign investment is not always available and can change with time. For this reason, another option for a foreign investor to guarantee the availability of protection if, and when, needed is to include the corresponding provisions directly in an investment contract. This is, of course, not an option that is available to all foreign investors. However, big investments provide some leverage that might be used to include provisions that will protect an investment in case of future problems (for example, in the event that the host state of the investment decides to withdraw from an investment treaty).
Protections that are commonly provided by investment treaties – and can be crucial for foreign investors – include protection against direct or indirect expropriation, a guarantee of nondiscrimination, of fair and equitable treatment and of full protection and security, as well as access to international arbitration.
For more information on foreign investment protection or help with investment disputes, contact the authors.
1 Legacy claims under NAFTA may still be initiated for a period of up to three years, and ongoing cases will not be affected by the termination of NAFTA and the entry into force of the USMCA. (See Holland & Knight's previous alert, "Mexico Keeps Investment Disputes Mechanism Under New USMCA," Oct. 5, 2018.)
Information contained in this alert is for the general education and knowledge of our readers. It is not designed to be, and should not be used as, the sole source of information when analyzing and resolving a legal problem. Moreover, the laws of each jurisdiction are different and are constantly changing. If you have specific questions regarding a particular fact situation, we urge you to consult competent legal counsel.