Chapter 3: Legal vultures: Law firms driving demand for investment ...

The Legal background to Investment Arbitration in foreign government controlled companies during Covid 19

Senior Paralegal and Commercial Law specialist Balvinder Madan of Heathrow Law solicitors looks at the various challenges faced by foreign investors who are looking at investing in government projects and both the legal implications and methods of dispute resolution available to investors who may face challenges receiving a return on their investment and his own evaluation of Covid-19 impact on foreign investors and even host states.

Balvinder comes to Heathrow Law solicitors with a predominate interest in the Corporate field following his Masters education at Brunel University in September 2018.  Being taught by Peter Petkoff a lecturer at Brunel University in Uxbridge, Balvinder learned many new dispute resolution systems.

Introduction to the Topic

I have considered this topic in light of my continuing professional development in the area of Arbitration law and find investment arbitration to be of exclusive importance considering the present Covid-19 pandemic and the effects I personally believe it will have on foreign investments.

As we struggle to come to terms with what has happened to the world and economy, we must never forget the sacrifices being made by workers of the National Health Service in the UK and other key workers such as my own mother who still attends her role as a care worker for individuals with cerebral palsy

I am very fortunate, I still am able to write this whilst being in the comfort of my home in what can be described right now as my most effective way of self isolation and staying socially distant,  whilst trying to provide the most  minimal way of contribution to heed the government warnings to stay at home and save lives.

Expropriation

Expropriation is considered the most serious of all infringement of an investors right that a state can accomplish. It can involve anyone’s property, and is often the subject of international law when it involves the property of a foreign state.

Why do governments part with an investors funds?

Legal expropriation involves the customary use of a states right to expropriate alien property. So why do governments expropriate?

  1. The expropriation must be undertaken for a public purpose
  2. The expropriation must be carried out in accordance with the principles of due process
  3. The expropriation must be non-discriminatory and
  4. The investor must receive compensation.

It is not said in any of the texts I have recently referred to for this article  whether  this is a deliberate parting with an investor’s property, but only that areas where there are issues surrounding harmonization of the economy or for a moral and social benefit to the country,  the government  may decide to extinguish an investors funding on top of its own resources for the benefit of the state.

Important terms

For the purpose of this article there are two terms (host) and (home), with the host state being the country for foreign investment and the home being the investor’s country of origin. This is an important part to know for the purpose of our discussion.

  1. Home state (investors home country)
  2. Host State (country of investment)

We must also distinguish between the ways in which these disputes are resolved. They are different for countries and individual investors.

  1. Investor-State arbitration
  2. State-To-State arbitration

 For those not familiar with the term arbitration, it is again a method of resolving disputes where the decisions and awards are binding on both parties with a select arbitrator who has expertise in this field. Arbitration therefore has been the topic of many discussions such as ‘who has more authority, the National courts or the arbitration centre’s?’and the role of arbitrators and resolving disputes.

What is a public purpose?

A government may chose to expropriate an investors money for various purposes, however it is important the government can justify this to avoid legal implications of a large claim. When we talk about public purpose we are often referring to a purpose which would benefit the people and the state. A good case which illustrates whether this kind of parting with an investor’s money is justified is

Amoco International Finance Corporation v Iran the Facts

Amoco is a US corporation and investor, whilst the respondent to this claim against it is the Iranian government. The Iranian government wholly owns positions in various government companies including NPC Petroleum and National Iranian oil company (NIOC), a parent of NPC.

As a result of civil unrest in 1978, Iran began to impact operations of these companies. Air strikes stopped production at times and by late December 1978 anti American feelings were running very high. Not a nice place to be if you were Amoco at this stage.

During the 1980’s the revolution council passed the single Article Act concerning nationalisation of the oil industry of Iran. This annulled all oil and gas industry contracts that included foreign participants.

On the 11th August 1980 Amaco filed for arbitration arguing the steps taken by Iran were ‘wrongful expropriation of Amoco’s rights under Article IV (2) of the US-Iran Treaty of Amity from 1957.

Amoco relied on treaty provisions which clearly stated;

such property shall not be taken accept for public purpose, nor shall it be taken without the prompt payment of compensation’.

Iran argued that an expropriation had taken place, but claimed that it had acted legally in taking the property and that it was for a public purpose that nationalization of all private held property had taken place.

Decision in Iran

Iran did not act unlawfully. Amoco’s argument was not enough to dispute Iran’s expropriation even though it ran contrary to the principle’s pf good faith and the law of contracts.

ADC Affiliate Limited

Another case we can look at is the case of ADC Affiliate limited. ADC is a Canadian construction company and in 1995, ADC signed a Build, Operate and Transfer (BOT) contract with Hungary to renovate and expand Budapest International Airport. The contract included a 12 year operation clause.

ADC argued the following;

In 2003 ADC initiated arbitral proceedings under the agreement between the government of the Hungarian people’s republic and the government of the republic of Cyprus.

ADC argued that this privatisation was illegal as the government had no public purpose in taking their investment.

Hungary argued the following;

The expropriation was legal and that a public purpose requirement was met by Hungary in order to harmonize their law with that of the EU. The changes were in the strategic interests of the state.

The Tribunal rejected the arguments made by the respondent in this regard. The subsequent privatisation and the agreement with BAA is unnecessary,

Compensation for Investors in cases of loss

Due Process

This includes requiring the host to notify the investor of impending expropriation to offer transparency in administrative proceedings before and during the expropriation and perhaps of giving the expropriated investor an opportunity to request a reconsideration of the decision through a hearing.

There is a three stage process which outlines how the due process works;

Guaracachi America v Bolivia

  1. Host’s action must be reasoned or accompanied by a justification of its key features
  2. Both the act and its reason’s must be formally communicated to the individual
  3. The legal procedure in question should allow the individual after being notified of such reasons to be heard before the state.

In ADC VS Hungary

The tribunal agreed with the claimant’s due process of law and the questions of compensation came.

  1. Was the expropriation legal?
  2. If so what is the measure of compensation for a legal expropriation?
  3. What is the value of the particular expropriated investment?

My Analysis

These are just a tip of the cases which form an Investment Arbitration dispute. The cases you have seen are generally investor-state arbitration disputes where one company makes investments in government owned companies hoping to receive the financial benefit. Amoco was one of these companies but due to a public purpose being fulfilled by Iran, it had no legal standing and that nationalization was justified by Iran.

We may argue this is a breach of contract by the Host state to an Investment treaty agreement. Yet the rules of due process do provide an acknowledgment to the Investor as per the reasons for the expropriation and Iran provided this. In any case it seems if there is a legitimate public purpose to be served, then a Host is justified in its actions. War, acts which are outside the control of the state and public interest issues will justify a state making the best for its own needs with an investors money.

However we saw in ADC affiliate that the expropriation was unjustified as the privatisation was illegal as there was no public purpose apart from Hungary claiming they were harmonising the law with that of the EU.

Investment arbitration goes further by providing a process by which Hosts must adhere prior to making a expropriation and Guaracachi v Bolivia provided that. It is important that investors prior to making such investments which could be foreseen undertake their own due diligence of the state.

I am not a political analyst but am not sure whether Amoco forsaw that civil unrest was taking place in Iran but it is always important for investors to do so prior to huge investments. I have not touched on State-to-State arbitration for this article as I just wished to focus on giving the reader an understanding of expropriation rules.

 I will now turn my focus to the final aim of this discussion which is how I think Covid 19 will impact investments both against the host and the investor.

What does Covid 19 mean for investors

It is uncertain how many markets will be affected by Covid-19.  If you are a corporation seeking returns of foreign investment during this pandemic, best to probably think again. Right now there are now statistical facts or proven data that would prove when we expect the Corona virus outbreak to reduce. Figures are showing social distancing measures are working to some degree if we continue to follow the government guidelines. However the market will remain volatile, a condition has arisen where companies and corporations have been forced to close thereby meaning investors who had made investments in foreign institutes possibly losing all of their money.

It could now be argued by the Host state that a public purpose maybe better suited to the investment of the investor which improves the countries economic future as a whole and helps tackle Covid 19. Covid 19 Initiatives will be presented by governments to use investor money for the public purse meaning expropriation is justified. There will be little or no available legal challenge for such investors in my opinion however I do not know the extent to which the different treaties will consider rendering an exclusion clause which would void any rights of an investor in such crisis. The UK government apart from offering initiatives for 3 months such as business rates relief, universal credit and tax relief cannot afford to focus its spending on the thousands of businesses who have closed. Therefore there would be little protection to foreign investors also who may have invested in countries such as Italy, Spain and America where the Covid-19 pandemic is at an all time high. Expropriation will be justified for the Host state and due process can be expected via written confirmation that the investments will be affected due to Covid 19.

My firm Heathrow Law solicitors has seen hundreds of individuals calling regarding employment issues where justification has been provided by the company as ‘we are in economic uncertainty  due to Covid -19 and therefore your role will be affected’.

I believe the same can be expected of Host governments expropriating investor money into fulfilling what they will describe as the legitimate aims of their government to seek a resolution to a national or world crisis before they even attempt to provide a capitalisation for investors on returns on their investment.

I hope you enjoyed this article and finally

STAY AT HOME- PROTECT THE NHS- AND SAVE LIVES

Yours faithfully

Balvinder Madan