When The Situation Abroad Becomes Unstable – A Multi-Layered Approach to Protecting Investments

Overview


Investment treaties play the most important role in protecting investments abroad. Those treaties set rule of law standards for foreign investments and in many cases give access to international arbitration. However, they are only one element for achieving a comprehensive protection. Taking Venezuela as an example, Sabine Konrad is showing how investors can secure their investments and – if necessary – seek damages in front of an international tribunal in a case of a crisis.

In Depth


FRANKFURT, 6th February. The EU has recently tightened its sanctions against Venezuela. For the first time, measures have also been taken against individuals such as Tarek Saab. Saab is the Advocate General responsible for representing Venezuela in investor state arbitration proceedings, 20 of which are currently pending at the World Bank Group’s International Centre for Settlement of Investment Disputes (ICSID).

The arbitration proceedings deal with a wave of nationalisations, tax measures and other interventions by the Chavez and later Maduro regimes. These measures and the subsequent downward spiral of one of the richest countries in Latin America are an extreme example of the political risks to which German investors abroad are also exposed. Professional preparation of an investment, its protection by investment treaties as well as political risk insurance can reduce these risks.

The treaties that Germany has concluded with more than 130 countries play the most important role in securing foreign investment. They guarantee the rule of law standards of protection for German investments. These include protection against expropriation without compensation, against arbitrary administrative acts, against the breach of state commitments, as well as a right to fair and equitable treatment, most-favoured-nation treatment, national treatment and the right to repatriate capital and returns.

Many of these agreements, including the one with Venezuela, also offer German companies access to international arbitration tribunals – investor state arbitration as it is called. In the event of a crisis, a company may, if necessary, claim damages directly from the host state in front of an independent tribunal.

The most important forums for such proceedings are ICSID and the Permanent Court of Arbitration in The Hague. The prerequisite for the protection provided by these agreements is that the investor fulfils the respective entry requirements.

In view of the 44 ICSID proceedings, Venezuela has also withdrawn from various agreements and the ICSID Convention. The German investment treaty has not been terminated by Venezuela. After such termination, existing investments would be protected for a further 15 years. However, new investments would normally not be. The withdrawal from the Convention does not per se exclude investor-state arbitration proceedings. ICSID’s Additional Facility or proceedings under the auspices of the Permanent Arbitration Court usually remain as options. Here too, the specific content of the agreement is important. The German agreement with Venezuela provides for these options.

The withdrawal from the ICSID Convention and of bilateral investment treaties by Venezuela shows how important it is to provide for such a case as well. If the investment climate threatens to change, a review of the investment structure is recommended. Political risk insurance from the Federal Government, the World Bank or private providers help to make investments more secure. However, this protection must be obtained – at least in the case of these guarantees – at the beginning of the investment. It cannot be obtained later. They are also not free of charge.

Particularly with regard to investments in Venezuela, the importance of good contracts with the state or state-owned enterprises has shown itself. In cases in which an investor-state arbitration procedure was not possible because of the absence of an investment treaty, investors were successful obtaining damages. The precondition for this was that the respective contract provided for international arbitration outside Venezuela. In contrast with arbitration under an investment treaty, which is governed by international law (and thus by public law), these are private arbitration tribunals, for example under the rules of the International Chamber of Commerce. As is the case for all contracts with an international element, it is therefore important to include arbitration clauses that really work.

SABINE KONRAD

The Author is a partner of McDermott Will & Emery.