Special considerations for disputes with host governments

Emily Sherkey (00:12): Welcome back to our video series on project related disputes. In our last video, we discussed some key considerations applicable to dispute resolution among private parties in connection with project development abroad. In this session, we are going to change gears and discuss approaches to dispute resolution when the party impacting your project is not your contractual counterparty, but instead a host government.

Ryan Lax (00:39): And we see these scenarios pretty frequently. For example, after years of developing a mine abroad, the local government may cancel or fail to renew a key permit or after years of developing renewable electricity infrastructure, the local government may change policy or law in favour of state-owned oil and gas companies, and in those circumstances, investors may access domestic courts to challenge the legal changes or delays, but courts may not be independent or may not be the most fair forum for dispute resolution. They may be ineffectual in addressing the ultimate cause of the problem.

Emily Sherkey (01:14): This is where investment treaty planning is important. If you are investing in a project abroad, it is essential to structure investment holdings upfront to benefit from the protection of one or more international investment treaties. These treaties are agreements between countries regarding how they will treat investments made by nationals of the other country, or countries that are party to the treaty.

Where an investor is protected by an investment treaty, if a dispute arises with the foreign state, then an international arbitration can be commenced against the state for damages for breach of that treaty, or the treaty’s protections. This is what's known as an investor state arbitration. It provides an investor with an ability to hold a host government to account in a neutral international forum.

Ryan, how does a company know if it's being protected by a treaty?

Ryan Lax (02:13): So, Emily, there may be a few steps to this analysis. And the first step is determining if you are already structured in a way that gives you treaty protection. For example, if you are a Canadian company invested in a country in Latin America, you would look at whether Canada has a specific treaty with that particular country. If that analysis reveals that there is no existing treaty in place covering you, or if your analysis reveals that the terms of the treaty are not desirable for protection of your investment, you can investigate options to structure the holding of the investment through a company located in another third country, in order to obtain treaty protections from that country's treaties.

In this analysis, it's important to consider at the time of making an investment what treaty protection is warranted, or undertake this analysis as soon as possible thereafter. If you only turn your mind to this issue when a dispute arises and realize that you need treaty protection, at that point, it's already too late. You generally can't restructure your corporate holdings in order to gain treaty protection once a dispute is reasonably foreseeable. So, Emily, what protections do these treaties generally provide?

Emily Sherkey (03:27): Once treaty protection is secured, an investor will benefit from these important protections under international investment law. There are many, I'm going to highlight two key ones, which are fair and equitable treatment and protection from expropriation without compensation. The latter is pretty self-explanatory. If a state expropriated the project or the value of the project and does not compensate the investor, the investor has a right to sue for compensation.

The other protection is fair and equitable treatment or “FET”. The protection is simple in principle. It is what it sounds like. Did the government treat your investment fairly and equitably? What's more complicated is the question of when something amounts to unfair and inequitable treatment. Generally, international tribunals have interpreted FET to mean that investors be provided treatment that is transparent, not arbitrary, not discriminatory, consistent with an investor's legitimate expectation, exercised in good faith, all of that’s highly fact-specific. We will often see these types of claims grounded in reference to domestic law. So, for example, general categories we've seen is where a state acts inconsistently with its own legislative or regulatory scheme, or where there is inconsistent treatment among various branches of government. Those types of conduct are often found to breach FET.

Ryan Lax (05:02): And in addition to those two protections, we will often see further protections against discriminatory conduct. These are in the form of guarantees of treatment equal to the treatment of nationals of the host country, and treatment equal to the treatment received by other foreign investors, right?

Emily Sherkey (05:18): Good point. Ryan, what are your final thoughts on international investment protections?

Ryan Lax (05:26): So, because projects are fixed in a particular location and developed over lengthy periods of time, many years, they're particularly vulnerable to political change and government interference. Against that backdrop, it's even more important to think through investment protection and treaty planning. At the time of making a foreign investment, even if arbitration is never ultimately used, the threat of potential arbitration can be helpful, as leverage and working with local governments to resolve issues as they arise. If you don't have that protection from the outset, it's just one fewer tool available in your project development toolbox that can lead you to a successful development.