HOW CONTRACTORS MAY RELY ON INTERNATIONAL TREATIES TO PROTECT THEIR BUSINESS AND STRATEGICALLY MANAGE

DIFFICULT MARKET CONDITIONS ABROAD

VIRGINIE COLAIUTA

26 October 2016

MARKET CHALLENGES

-Geographical shift to less traditional regions

- Significant increase of value of projects - increased project complexity - immense resource demands - pricing volatility (costs falling, rising commodity prices)

CONTRACT CONDITIONS - Owner/contractor relationship and contractual conditions are changing to meet the challenges of the market - Developers and financiers ask contractors to assume more risks (“full wrap” contracts) - Tendencies towards higher credit or bonding capacity requirements (Bigger is increasingly better) - Providing construction financing also in public projects abroad

Construction of a pipeline project in Turkey

Turkish State Entity

Italian Contractor

TURKISH STATE

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German Subcontractor

Factual Scenarios

• Contract with a State entity • State suffers economic recession • Having insufficient funds, State entity delays payment of works done by

contractor and wrongfully terminates • To exert pressure on contractor State entity abuses its position to call the

first demand performance guarantee • Changes in law provides for retroactive environmental liability forcing

contractor to do additional works for which the employer does not want to pay

• Changes of tax regime impose on contractors unfair costs • The contract with State entity provides for exclusive jurisdiction of local State

courts

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Factual Scenario

• As a result of the economical difficulties, the Contractors’ employees

organize a general strike. • Demonstrations take place • Police is called to contain demonstrations. • Policemen helped demonstrators to enter the construction site and loot

some of the equipment and tools. • Contractor wants to leave the country and transfer its money from the local

State bank but the bank imposes a waiting period of 8 months and outrageous commissions

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Construction of a pipeline project in Turkey

Turkish State Entity

Italian Contractor

TURKISH STATE

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German Subcontractor

Why investment treaties are relevant - mitigate political risk of government interference at central,

regional or local authority level

- enjoy rights beyond the individual terms of the contract

- protect against situations affecting the project for which the contract does not provide any remedy

- recourse to arbitration directly against the Host State

- disputes are resolved on the basis of international public law

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To commence an arbitration under a treaty • If there is no investment treaty, what can be done?

– Transfer the investment? – When the transfer can be done? – What are the implications?

– Treaty shopping

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Investment protection planning • Consider investment protection when structuring the transaction • Does the Contractor’s Home State has a BIT or MIT with the

State where the project is located? • If yes, consider the protections available under the applicable

treaty and whether it allows arbitration • If not, can the investment be structured so that you can enjoy

the protections of a BIT with the Host State? • Consider provisions applicable to sovereign immunity

enforcement

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To commence an arbitration under a BIT • Where the treaties can be found? • Online websites:

– for instance http://investmentpolicyhub.unctad.org/IIA

• Ministry of Foreign Affairs • Embassies and Consulates

Treaty must be ratified!

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Qualifying Investor

• Article 1(b) Netherlands-Bangladesh BIT defines foreign investors as:

• " (i) natural persons having the nationality of that Contracting Party in accordance with its law;

• (ii) without prejudice to the provisions of (iii) hereafter, legal persons constituted under the law of that Contracting Party;

• (iii) legal persons, wherever located, controlled directly or indirectly, by nationals of that Contracting Party."

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Who is the foreign investor?

State of Indonesia

State Entity of Indonesia

Project company incorporated in Indonesia

Contract provides: - Indonesia law - exclusive jurisdiction of national courts

Consortium of French and German Contractors

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Who is the investor ? Pipeline project in Bangladesh

Bangladeshi State Entity

Contractor incorporated in Bangladesh

Contract provides: - laws of Bangladesh - exclusive jurisdiction of courts of Bangladesh

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Holding Spanish company

Holding Dutch company

Qualifying Investment

• “Investment” is broadly defined to include any kind of asset, including:

→movable and immovable property →Shares → rights to money or any performance under contract

having a financial value → intellectual property rights →business concessions

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Qualifying Investment

Canada-Ecuador BIT: "investment means any kind of asset owned or

controlled either directly, or indirectly through an investor of a third State, by an investor of one Contracting Party in the territory of the other Contracting Party in accordance with latter's laws."

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Qualifying investment

In Siemens A.G. v Argentina, the Tribunal held that: “there is no explicit reference to direct or indirect

investment as such in the Treaty. The definition of “investment” is very broad. An investment is any kind of asset considered to be such under the law of the Contracting Party….

The Treaty does not require that there be no interposed companies between the investment and the ultimate owner of the company.

Therefore, a literal reading of the Treaty does not support the allegation that the definition of investment excludes indirect investment”

INDIRECT INVESTMENT CEMEX v. Venezuela (Netherlands-Venezuela BIT) "The Tribunal notes that there is no explicit reference to direct or indirect

investments in the BIT, and in particular in Article 1(a). It also notes that the definition of investment given in that article is very broad. It includes "every kind of assets" …

"The plain meaning of this provision is that shares held by a German shareholder are protected under the Treaty. The Treaty does not require that there be no interposed companies between the investment and the ultimate owner of the company. Therefore a literal reading of the Treaty does not support the allegation that the definition of investment excludes indirect investments."

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Wrongful Acts of a State

Article 3. Characterization of an act of a State as internationally wrongful

The characterization of an act of a State as internationally wrongful is governed by international law.

Such characterization is not affected by the characterization of the same act as lawful by internal law.

Article 32. Irrelevance of internal law The responsible State may not rely on the provisions of its

internal law as justification for failure to comply with its obligations … .

Acts Attributable to a State Article 7. Excess of authority or contravention of instructions The conduct of an organ of a State or of a person or entity

empowered to exercise elements of the governmental authority shall be considered an act of the State under international law if the organ, person or entity acts in that capacity, even if it exceeds its authority or contravenes instructions.

Article 8. Conduct directed or controlled by a State The conduct of a person or group of persons shall be considered

an act of a State under international law if the person or group of persons is in fact acting on the instructions of, or under the direction or control of, that State in carrying out the conduct.

Treaty substantive protections

• Umbrella clause • Expropriation

• Fair and equitable treatment

• Full protection and security • Freedom of transfers of funds

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Umbrella Clause An “umbrella clause” in an investment treaty is designed to bring obligations that a State has entered into with respect to a specific investment agreement within the ambit of the treaty. Article 11(2) of the Greece/Syria BIT: “Each Contracting Party shall observe any other obligation it may have entered into with regards to a specific investment of an investor of the other Contracting Party.”

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Enforcement against States

• Awards may be enforced against State’s assets held in foreign countries

• Impose enforcement on commercial assets of the State

• States are only immune for activities undertaken as sovereign, and not for their commercial activities.

• Sovereign immunity against suits and enforcement actions

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