Investment Treaty Arbitration: Another Avenue For International Construction Disputes

• Published date: 06 January 2022
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Arbitration & Dispute Resolution
• Law Firm: Fenwick Elliott LLP
• Author: Ms Sana Mahmud

Most contractors will, of course, be familiar with international commercial arbitration as a means of resolving their disputes, but where an employer is a national government or government entity, consideration should also be given to the possibility of bringing claims under an international investment treaty. Investment treaty arbitration is arbitration between a company or an individual investor against a state for breach of that state's obligations under international law to protect the investor's investment. Sana Mahmud explains further.

Introduction

Whilst international commercial arbitration is usually prescribed by contract, an investment treaty claim is based on rights arising from bilateral or multilateral investment treaties ('BITs' or 'MITs'). These are treaties between two or more states for the promotion and protection of investments of foreign nationals.

Investment treaty arbitration is generally underused in international construction disputes, sometimes because contractors are unaware that the basis of their contractual claims may also constitute breaches of treaty protections for which a host state could be liable. A BIT is a treaty between two states under which each state agrees to afford rights and protections to investors from the other. There are 2,290 BITs currently in force globally.¹ An MIT is a similar treaty but between more than two states. These apply regardless of whether there is a contractual relationship between the state and investor.

Broadly, the following types of treaty claim might arise in the context of an international project:

• Claims under a relevant construction contract with the state where the state has failed to carry out its contractual obligations;
• Claims against a state for the conduct of its public authorities if the actions of those authorities have adversely affected works under a relevant contract;
• Claims against the state for legislative changes, including changes to taxation or other industry regulations, which make the performance of a contract significantly more onerous;
• Claims for the expropriation of companies or assets; and
• Denial of justice claims where the courts in the host state have, without legitimate reason, refused to enforce a valid commercial arbitration award.

Most claims concerning construction contracts often fall into the first category and that is the focus of this article. In that context, the first step when considering an investment treaty claim is to establish whether events that have occurred under the framework of a commercial contract can form the basis of claims under an applicable treaty.

Considering an investment treaty claim

In order to commence an arbitration under a relevant investment treaty, contractors must ensure that the following conditions are met:

• A BIT or other investment treaty must be in force between the employer's state and the state in which the contractor is incorporated;
• The contractor must qualify as an investor under the terms of the relevant treaty;
• The works contract must qualify as an investment under the terms of the relevant treaty;
• The employer must be a state or an organ of state;
• The employer, as either a state of an organ of state, must have breached the obligations contained in the relevant treaty; and
• Those breaches resulted in damage and/or loss to the contractor as an investor.

Is there a relevant investment treaty in force?

The United Nations Conference on Trade and Development (or UNCTAD) retains a database of investment treaties currently in force globally.² The database...