Professional Documents
Culture Documents
Negotiation
Unit 5 – The legal framework of ISCs and
contractual devices for foreign investment
protection
David Rossati
Lecturer in Law
Salford Business School
1
Unit 5 – Learning outcomes
Part 1
• Navigate the legal framework relevant to ISCs
• Have a general understanding of the public international
law related to foreign investment
• Understand the key aspects of bilateral investment
treaties and their provisions on dispute settlement
Part 2
• Identify and understand the rationale of the most
relevant contractual clauses in ISCs, which aim to
protect the interests of foreign investors
• Understand the scope and limits of force majeure and
hardship clauses
2
Part 1 - The legal framework of
ISCs
The Public International Law (PIL) on foreign investment
Host state’s laws and regulation The elected law in the contract
3
The sources of PIL
Article 38(1) of the Statute of the
International Court of Justice:
• General principles of law
• Customs
• Treaties
• [Judicial decisions]
4
General principles
• It is a general and residual source, comprising
those general principles of law recognised by
‘civilized nations’
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Customs
• Are originated by two contextual events:
– States practice a certain conduct uniformly and
through a certain period of time (state practice);; and
7
Treaties
• They are international agreements in written
form concluded by states and covered under
international law
8
Bilateral Investment Treaties
• They are contracted between two states only
• National Treatment
• Expropriation
• Institutional arbitrations
– Are instituted by international treaties (e.g. ICSID,
PCA) or according to national laws (LCIA, ICC). They
provide a ready set of rules, including the
composition of the tribunal and its procedures
12
Enforcement of international
arbitration awards
1958 New York Convention on the Recognition
and Enforcement of Foreign Arbitral Awards
Article III
13
Part 2 – Contractual devices
for foreign investment
protection
From the point of view of the foreign investor, what
are the contractual devices available to reduce
some typical risks of ISCs?
14
ISC drafting exercise – land
concession agreement 1
The current Government of Poorland, a least developed country, has recently
accepted the offer fro a multinational corporation you represent, Seeds Inc.
(based in Richland), for the purposes of developing a 30.000 hectares palm oil
plantation. According to the minutes of the first meeting between the Ministry of
Agriculture of Poorland and Seeds Inc. managers, the project will rely on a
land lease agreement guaranteeing free and exclusive use of the identified
land for 20 years, against payment of a yearly rent based on production
performance.
As part of the legal team drafting the proposed lease agreement by Seeds. Inc,
you are requested to draft some initial contractual clauses/terms which would
minimize the risks stemming from the following facts:
• Poorland has faced three coups d’etat in 10 years and there are strong
nationalist (anti-foreigners) political factions which might be able to gain
power
• The Richland-Poorland bilateral investment treaty provides for “full
protection and security” of foreign investments … (continues in the next
slide) 15
ISC drafting exercise – land
concession agreement 2
• Poorland property law is quite different from ‘Western’ legal systems: chiefs
of villages hold customary rights on land that is considered publicly-owned
by the state. Under such customary laws, local chiefs have the right to
allocate the use of land for agriculture
• The national judiciary is strongly inclined to protect national customary land
law
• 1/3 of the land object of the lease is currently inhabited by 10 villages
counting roughly 5.000 people and, for the proper running of the project,
they will need to be resettled
• Poorland’s Government has recently passed a very-much-opposed
‘Resettlement Act’ providing in Article 32 that the “Ministry of Agriculture can
in any circumstances impose resettlement of persons residing in areas of
key importance for economic development”. While this provision will
certainly help establishing the project in the first years, due the political
situation and active resistance from local groups and NGOs, it might well
be that Article 32 or the whole Act will be amended or repealed.
16
ISC drafting exercise – land
concession agreement 3
• The Richland-Poorland bilateral investment treaty provides for “full
protection and security” of foreign investments [a clause referring to the
BIT]
• Poorland property law is quite different from ‘Western’ legal systems: chiefs
of villages hold customary rights on land that is considered publicly-owned
by the state. Under such customary laws, local chiefs have the right to
allocate the use of land for agriculture [choice-of-law clause]
• The national judiciary is strongly inclined to protect national customary land
law [arbitration clause]
• Poorland’s Government has recently passed a very-much-opposed
‘Resettlement Act’ providing in Article 32 that the “Ministry of Agriculture can
in any circumstances impose resettlement of persons residing in areas of
key importance for economic development”. While this provision will
certainly help establishing the project in the first years, due the political
situation and active resistance from local groups and NGOs, it might well
be that Article 32 or the whole Act will be amended or repealed.
[stabilization clause] 17
Vulnerabilities of ISCs
1. Time vulnerability: foreign investments are
usually considered for long-term periods. The
long duration of ISCs makes it likely that the
economic equilibrium achieved in the contract
gets modified by unforeseeable political and
economic shifts
23
Hardship and force majeure:
limits of their effectiveness
• ‘Sanctity of contract’ > restoration of economic
equilibrium
– International arbitrators are reluctant to interfere or
modify the terms of the contract unless specific terms
are agreed
• Limited types of event
– Force majeure applies to unforeseeable acts of
‘extreme nature’ (e.g. natural disasters, war, strike)
– Hardship does not apply to loss of profitability due to
changes in the economic environment for how
unforeseeable they might be
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Unit 5 – Summary 1
• The obligations and law applicable to ISCs is
not necessarily restricted to the elected contract
law and the clauses of the contracts, but
international legal norms might find application.
• In particular the international law stemming from
modern Bilateral Investment Treaties (BITs)
provides international standards of protection for
the foreign investor, which however apply
outside the contract
• In addition, BITs contain arbitration clauses
allowing foreign investors to institute arbitral
proceedings against host states 25
Unit 5 – Summary 2
• There are several ‘contractual devices’ in the
practice of ISCs which aim to reduce some
typical risks of the foreign investment
• Of these, Force Majeure and Hardship clauses
aim at avoiding the negative impacts from
events that could not be foreseen at the time of
formation of the ISC
• Force Majeure and Hardship differ both on the
type of event covered and on their effects on the
restoration of the economic equilibrium
26