What is investment arbitration?

Investing abroad can be a great adventure. It’s an opportunity to expatriate and discover a new culture while developing a company, product or service.

If you decide to invest abroad, or if you decide to invest in Canada and Quebec, you may be protected by a Bilateral Investment Treaty, and have access to an arbitration tribunal in the event of a dispute.

But then, what is investment arbitrage?

Investment arbitration involves settling a dispute between a foreign investor and a government.

In the same vein as the “private modes” of dispute resolution provided for in Article 1 of the Quebec Code of Civil Procedure, investment arbitration is therefore a hybrid dispute, involving both the private and public spheres.

Let’s take a closer look at the principles behind it.

Alternative dispute resolution

Investment arbitration is an “alternative dispute resolution method” designed to settle a dispute between a foreign investor (natural or legal person) and a state: the investor’s host state.

Arbitration offers several advantages: it is a neutral, consensual and private means of settling a conflict situation.

In some cases, investment arbitration may also be the only means of recourse available to a foreign investor in the event of expropriation by the host state.

The request for arbitration may be filed with the International Centre for Settlement of Investment Disputes (ICSID) on the basis of an article of the Investment Treaty.

But what is an Investment Treaty?

Bilateral or multilateral investment treaty

The formation of an arbitral tribunal is based on an international treaty known as an “Investment Treaty”.

This binding legal instrument can be bilateral (concluded between two parties) or multilateral (concluded between several parties). The parties to a bilateral investment treaty are States, but the treaty’s provisions are applicable to a private person: for example, Canada concluded a bilateral investment treaty with Argentina in 1993.

This treaty is the legal instrument that will govern the economic activities of investors from each of the two countries, and also provides for the dispute resolution method, i.e. arbitration.

Bilateral investment treaties often include an “arbitration clause”, meaning that the parties agree to use arbitration rather than domestic legal channels.

The principle of fair and equitable treatment

The standard of fair and equitable treatment is at the heart of investment arbitration, and it is often here that the arbitrator will have to decide.

Indeed, before the independent arbitrators who make up the Tribunal, the question that often arises is whether the foreign investor has received fair and equitable treatment?

Fair and equitable treatment manifests itself in different ways, which can also be found in domestic law. For example, non-discrimination between foreign and domestic investors, or coercion or harassment by host government bodies.

In short, fair and equitable treatment aims to ensure that a private company investing abroad is treated in the same way as a domestic company. Not only that, but this fundamental principle also means that investors must benefit from transparency and legal certainty.

All these elements derive from well-established principles of international investment law, and are explicitly or implicitly reflected in the treaties that bind states in their investment relations.

The idea behind this principle is to ensure as far as possible that foreign investors have access to mechanisms to protect them in the event of a dispute.

The reciprocal nature of the behavior to be adopted with a foreign investor also enables States to maintain friendly and commercial relations.

But sometimes complications arise…

Expropriation… and compensation

For a company – or an entrepreneur – moving abroad can be synonymous with expansion and development, but difficulties can arise.

In 2014, a Canadian company based in Peru – Bear Creek Mining Corporation – filed a request for arbitration with the International Centre for Settlement of Investment Disputes (ICSID).

In this case, the company had acquired mining rights in a particular region subject to a special regime under Peruvian constitutional law. Gradually, however, the company encountered strong opposition from the local population, and Peru’s new President issued a decree revoking the company’s mining rights.

According to the company, this decree indirectly expropriated its investment. Indirect expropriation is any measure having the same effects as nationalization or expropriation.

So, by issuing a decree revoking a company’s permits, the State is not directly expropriating the company in question, but the effects are the same: the company can no longer pursue its economic activities, and this generates financial losses.

In the case of expropriation, or any other violation of a clause in the Bilateral Investment Treaty, investment arbitration provides a means of redress.

For example, in Bear Creek Mining vs. In Mexico, the aggrieved company was awarded compensation of over eighteen million US dollars, covering losses linked to indirect expropriation.

Whether you are a foreign company established in Canada, or a Canadian company established abroad, don’t hesitate to consult one of our lawyers, who will be able to guide you serenely through your business development projects.

NOTE : Cet article ne constitue pas un conseil juridique ou un avis juridique. It is intended solely to inform readers of certain aspects of the laws surrounding business law and international arbitration.