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27 August 2020
Where insolvency involves cross-border investments, foreign investors may have additional rights under international investment treaties or agreements (IIAs). IIAs are agreements between states in which the state receiving investment from an investor from the other state commits to provide certain levels of protection to those foreign investors in respect of their investment. Foreign investors will often (but not always) have a direct right under an IIA to commence proceedings, usually in international arbitration, against the host state for any breach of those commitments. To bring a claim under an IIA, an investor must identify whether, under the applicable IIA, the investor and type of investment in question satisfy the relevant thresholds set out in the IIA. The claimant must then identify whether there was a breach of the IIA obligations. In some instances, domestic insolvency proceedings have amounted to a breach of IIA obligations.
In the context of insolvency proceedings taking place within the host state, states are often obliged to ensure that their insolvency systems meet minimum international standards and enable parties to be treated:
As one tribunal put it, the state cannot engage in conduct that is:
arbitrary, grossly unfair, unjust or idiosyncratic, is discriminatory and exposes the claimant to sectional or racial prejudice, or involves a lack of due process leading to an outcome which offends judicial propriety – as might be the case with a manifest failure of natural justice in judicial proceedings or a complete lack of transparency and candour in an administrative process. (Waste Management v United Mexican States (2004).)
The state must apply its laws fairly, impartially, transparently, consistently and without arbitrariness. It must avoid "a wilful neglect of duty, an insufficiency of action falling far below international standards, or even subjective bad faith" (Genin v Estonia (2001)). States should also apply their own legislation fairly and without discrimination (Dan Cake v Hungary (2017)).
In assessing any claim, a tribunal will generally defer to the state to regulate domestic matters (SD Mayers v Canada) and will not assess whether the state has committed mere errors of public policy. If discrimination is alleged, any such discrimination must be unreasonable. For instance, in Saluka Investments v Czech Republic (2006), four major banks were to be privatised and the government provided financial assistance to three of them, all locally owned, but refused the fourth because it was partially owned by a foreign investor. This was held by the tribunal to be discriminatory and therefore a breach of the IIA.
States also commonly undertake in IIAs not to expropriate investments unless in the public interest and with prompt, adequate and effective compensation. Expropriation can be the outright taking of investments or where the state substantially deprives the investor of investments' economic benefit. Arguably, where an investor relies on the state to enforce contracts, loans or security but such enforcement is denied, such failure may be tantamount to expropriation.
For further information on this topic please contact James Rogers at Norton Rose Fulbright's London office by telephone (+44 20 7283 6000) or email (firstname.lastname@example.org). Alternatively, contact Paul Stothard at Norton Rose Fulbright's Dubai office by telephone (+971 4 369 6300) or email (email@example.com). The Norton Rose Fulbright website can be accessed at www.nortonrosefulbright.com.
Majdie Hajjar, trainee, assisted in the preparation of this article.
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