the importance of carefully managing risk in cross border investment

Investing in foreign countries can be complicated, especially when governments lock horns with investor companies. Recent developments show how important investment treaties can be in protecting contractual rights (especially with foreign states), in the event of a dispute.

This article will focus on the recent dispute between the government of Mauritania and the Woodside joint venture and also the potential claims arising out of Bolivia’s nationalisation of its oil fields. Both are good examples of the important role that investment treaty arbitration may play in both managing contractual risk and ensuring continued protection of investments in foreign countries.

the woodside dispute

Recently a joint venture led by Woodside Petroleum agreed to pay the Mauritanian government US$100m (A$140m) to settle a dispute over petroleum licence conditions for an offshore oil exploration project in West Africa. The Mauritanian government had refused to honour commitments in oil production sharing contracts made by the previous government. Woodside threatened to refer the dispute to arbitration in Paris.

The terms of the Woodside dispute and its settlement are confidential, however reports suggest that:

·       the Mauritanian government argued that the contracts, which had been signed when oil prices were lower, should no longer be valid on the basis that they were signed "outside the legal framework of normal practice, to the great detriment of our country"

·       Woodside and its joint venture partners maintained the amendments had been passed into law and were proper, valid and binding

·       the dispute was to be resolved by international arbitration in Paris, had the parties not reached agreement

·       Woodside agreed to pay in excess of US $100m to secure its current and future drilling plans in the area

potential claims arising from bolivia’s nationalisation of oil fields

On 1 May 2006, Bolivian President Evo Morales signed a decree to nationalise his country's oil and gas industries. He also said that the state would recover the Bolivian hydrocarbon companies that were privatised in the 1990s. Troops were subsequently ordered to occupy gas fields.

Foreign energy companies have been given a six-month period to either sign new contracts that give a state-owned company majority control over petroleum production, or leave the country. About 20 foreign oil companies including BP, British Gas and ExxonMobil have operations in Bolivia.

Further nationalisation of Bolivia’s mining, forestry and water industries is set to follow.

what protection is available when investing across borders?

An inherent risk in doing business in foreign countries, especially developing countries, is that a foreign government may either:

·       breach a contract that it has with an investor or

·       interfere with the contractual relationship between an investor and local companies (such as nationalising assets, introducing exchange controls or imposing foreign ownership restrictions)

If this occurs, the foreign investor has little prospect of succeeding with a claim in the foreign courts.

Fortunately, in addition to contractual rights, investors may seek redress from international arbitral tribunals pursuant to bilateral or multilateral investment treaties (BIT or MIT) between your own country and the state in which you intend to invest. The central premise of most investment protection treaties is that they afford investors of one contracting state protection of their "investments" (usually defined broadly, often catching all kinds of economic activity) made in the territory of another of the contracting states.

Examples of MITs include the Energy Charter Treaty (Australia is party to this treaty, but has not ratified it) and the North American Free Trade Agreement. There are more than 2,000 BITs in existence worldwide. Australia is party to 12 BITs with countries such as Papua New Guinea, China and Indonesia.

Where there is an MIT or BIT in place, it will usually provide for the host country to submit a dispute with an investor to arbitration. These disputes are typically referred to arbitration by the International Centre for the Settlement of Investment Disputes (ICSID), which was established under the 1965 Washington Convention (on the Settlement of Investment Disputes between States and Nationals of other Parties). Given the absence of any BIT or MIT between Australia and Mauritania, it is possible that any investment arbitration between Woodside and Mauritania could have been conducted under the auspices of ICSID.

Thus, investors are able to seek redress without becoming embroiled in the national court system of the host state, which (rightly or wrongly) might be perceived by as being unfriendly to foreign interests. They can also have greater confidence over the enforceability of any awards they obtain.

Investors’ protection is usually from a broad but consistent range of sins, including nationalisation or expropriation without proper compensation, failing to provide investments with adequate and proper protection, and other unfair treatment by the state. Accordingly, unless coupled with prompt, adequate and effective compensation, both the Bolivian nationalisations, as well as the Mauritanian government’s actions, would likely breach those states’ respective international law treaty obligations, entitling affected investors to compensation.

Other legislation or decrees that would adversely impact investors in those countries – whether by nationalising assets, unfairly altering the applicable tax regimes, denying investors of returns on investments, divesting investors of control of investments, or treating foreign investors unfairly or in an unequal manner – might also violate the rights granted to investors pursuant to BITs. Where such breaches occur, investors could be entitled to monetary compensation.

when is investment arbitration appropriate?

An investor does not need to have a contract with the state, nor an express choice of ICSID arbitration if it does have a contract, to have the possibility of pursuing international investment arbitration. It is not necessary that a foreign state’s act be directed towards the investment so as to allow an investor to have recourse to ICSID. Below are two examples of recent cases that have been arbitrated before ICSID.

Example 1 - An investor alleged that the state implemented a range of economic measures which breached promises, resulting in losses by the investor. The state said that the measures were not directed at the investor or investment, but rather were measures of general economic policy not subject to the BIT or the ICSID Convention. ICSID recognised that the claims arose directly out of an investment and that, therefore, even if the governmental measures were not directed expressly to that investment, they gave rise to a dispute within ICSID’s jurisdiction.

Example 2 - A Luxemburg investor claimed that certain measures adopted by Argentine authorities (such as suspension of tariff increases, tax levies and labour restrictions) changed the regulatory framework for foreign investors and adversely affected its investment. The investor had participated in Argentina’s privatisation of the gas sector. The investor owned a substantial interest in two natural gas distribution companies, which together served seven Argentine provinces. ICSID held it had jurisdiction to hear the claims and that Argentina’s signature on the BIT represented its consent to arbitration.

Therefore the existence of BITs or MITs, to which foreign investors can resort in order to assert rights in relation to foreign investments, is an important factor to consider when entering into international contracts.

why this is important

These two examples remind us of the importance of carefully managing risk in cross border investment. For example, there is little doubt that Woodside’s negotiating position was much stronger by having the right to proceed to arbitration.

In the oil and gas industry, with investments costing millions of dollars and taking many years to complete, it is vital for companies to be aware of the available protection at law, particularly where they are contracting with foreign states.

The trend by developing countries to threaten to "nationalise" privately held investments in the resources sector means companies with large investments in developing countries need to be especially careful in managing risk. Properly drafted contracts with enforceable arbitration clauses and investment treaties combine to provide a broad level of protection for foreign investors. Lenders and shareholders in these companies should insist that investors have the option of an investment treaty arbitration where the foreign state takes an action that is in breach of either the contract or the relevant investment treaty.

Gadens Lawyers’ cross border disputes team is experienced in advising clients on the rights of investors pursuant to BITs entered among states around the world, as well as pursuant to national legislation and direct contracts. We can advise clients on steps they can take to protect their assets from nationalization and other “political risks” both before and after these events occur.

For further details, or if you are interested in learning more about how to avoid any adverse consequences for your foreign investments, please contact Damian Sturzaker or Kim Middleton.

This publication represents a brief summary of the law applicable as at the date of publication and should not be relied on as a definitive or complete statement of the relevant laws.

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