Foreign Direct Investment Disputes - Research Paper Example

Foreign Direct Investment (FDI) Disputes Foreign direct investment (FDI) is direct venture into business in a country by a company from another country. This can be either by buying a company in the intended country or by increasing operations of an open business in that country. In actual practice, FDI attraction may be different in various countries. In this respect, technology, market access, growth, poverty reduction and the FDI outcomes of a country are extremely significant. Other aspects such as damages to the environment, regions and local capabilities are considered to be negative in a countries economy. For the last two decades, increased technological and liberalization advances have resulted into increased growth in the flow of FDI. This means that FDI gained in share of domestic investment and GDP in many countries. It is done for numerous reasons that involve taking advantage of low cost wages or for exceptional investment privileges like rewards to obtain a link that is tariff-free towards the countries markets or the regional market through the use of tax holidays granted to the company. A brief history of foreign investment i. Introduction……………………………………………………………………………. ii. A brief history of foreign investment…………………………………………. iii. The international commitment to encouraging and protecting foreign investment…………………………………………………………………………………. iv. What is an international investment dispute? ………………………………… v. Investment treaties……………………………………………………………………… vi. International forums for resolving investment disputes………………… vii. Political risk insurance…………………………………………………………………. viii. Applicable law……………………………………………………………………………… ix. International claims……………………………………………………………………… x. Procedure and proof……………………………………………………………………. xi. Sovereign immunity and enforcement of state awards…………………… Conclusion…………………………………………………………………… International commitment to encouraging and protecting foreign investment international investment dispute Investment treaties International forums for resolving investment disputes There are a several ad hoc arbitral rules and two arbitral institutions responsible for most of the arbitrated foreign investment disputes. The ICSID is the arbitral institution, which specifically deals with international investment disputes. The ICSID specifically deals with investment disputes. It has unique advantages. As an arbitrary institution, ICSID is an affiliate of foremost international lending institution and a division of world bank. It is enjoys the advantage of perception, where it is perceived that countries would always comply with the obligations of ICSID. ICSID is supported by the ICSID Convention, which is a multilateral treaty. This way, any violation an obligation of the ICSID is regarded as a treaty violation hence a violation of the international law. The ICSID center is responsible for administering three types of procedures: conciliation, binding arbitration and a fact finding procedure. The ICSID Convention states that whenever an arbitration procedure is adhered to, ICSID should be made an exclusive forum for any kind of dispute that is submitted to it. The annulment procedure that is provided before its second tribunal, is the recourse only against the ICSID award and no appeal regarding an award may be taken to any national court. Further, it provides that the host country can only enforce a final ICSID award but not any country, which is a party to ICSID convention. The ICSID Convention has special jurisdiction requirements, which are outlined in Article 25. For an investor to ensure he satisfies the ICSID Convention jurisdictional prerequisites he/she has to demonstrate that (1) a legal dispute exists, (2) the legal dispute derived from an investment, (3) arises between a private investor from a different country which is member of ICSID Convention and government which is party to the Convention, (4) show the consent of the parties involved in the ICSID jurisdiction in order to resolve the dispute. The ICSID Facility has been made available to help arbitrate any arbitrate disputes after the parties consent to the convention and the Secretary General to the ICSID convention approves. There are several foreign investment disputes that have previously brought to ICC arbitrate tribunals. The ICC has been known as the best arbitral institution worldwide for dealing with international commercial arbitration. Both the government-owned and government companies have been reported to consent in international contracts for arbitrating under the rule of the ICC Arbitration. These disputes majorly involve ordinary commercial issues and foreign investment claims. Besides, the ICSID, ICC forums and ICSID Additional Facility, many governments have consented under the INCTRAL Arbitration Rules to arbitrate investment disputes. UNCITRAL has established Political risk insurance Making a claim through a political risk insurance policy, is the alternative to making move to sue a foreign government. There certain policies that allow bringing a claim directly under a policy without necessarily making a claim against a foreign government. On the other hand, there are other policies requiring that claim is pursued against the government concerned. The United States government established OPIC, which requires that the investments made by the United States nationals who are abroad are ensured against political risks. The political risks in this case, may include damages caused through political violence, exploration, convertibility risks, the non-payment of the arbitral awards, and currency transfers. In other nations such as Germany, Japan, France and the United Kingdom have political risk programs covering their nationals. Internationally, MIGA performs a similar role to the OPIC. There are also private insurance companies that write such political risk insurance policies. The International Commitment to Encouraging and Protecting Foreign Investment Although developing and developed nations have not reached an agreement concerning the standards on how to treat the content of an international law and foreign investment which governs foreign investment, the necessity to have foreign investment has not been is not disputable. However, since late 1970s, there has been a remarkable consensus with regard to standards for the treatment of the foreign investment. This is demonstrated by investment treaties such as the proliferation of BITs, ECT and NAFTA. Initially some quarters saw foreign investment as not worth. However, over time it has come to be viewed as a necessity. As estimated by authorities, in the past years, there has been an increase in the gap between developing and developed countries. Many developing nations have high population which are characterized by low level education, low wages, below poverty line, high birth rates, and low employment opportunities. Besides, these nations have poor health care. Life expectancy is significantly poor. Corruption by officials in government leads to high siphoning off of a large percentage of the government’s gross product. This leaves little for infrastructural improvements. Furthermore, poverty is high. Those parents with low level of education have less likelihood of sending their children to school and sustain them. Those who are less educated have less likelihood of developing modern skills to help them deal with technological changes and complex equipment. Besides, they have increased challenge of rapid social change. Parents who are poor are less likely to possess money or goods, land to transfer to their children. Most importantly, those parents who have poor diets, have less energy, little motivation, and little hope for better future, and few good economic models are more likely to transfer similar attitudes and habits to their offspring. The legal, as well as economic structure of most of the developing countries more often stifle entrepreneurial innovations and financial risk-taking, and do not support citizens in growing or starting businesses. The legal systems, especially in bankruptcy, labor laws, tax, corporate and criminal laws of these countries are the most affected by disincentivizing. These laws were made with a view to protect the society, creditors, and workers, but were shortchanged by the authorities of these countries to discourage citizens from who are supposed to be protected by such laws from starting businesses. Foreign investment funds are not meant to change the atrocities of such societies. However, where public funds are not available they can help jump start some of the economies. They can also be used as short cuts to improved infrastructure, better hospitals and schools, and higher wages. It can also serve as economic role models, create hope and generate financial incentives to developing nations. It serves as a motivational force to development. Investment Treaties The U.S has made great strides since 1970s in negotiating various bilateral investment treaties with many different countries. In doing this, the government has been able to develop a model treaty. This treaty has progressively been transformed. Currently, the U.S. is a party to well over forty BITs. Other developed nations such as Spain, France, the Netherlands, Germany, the United Kingdom, Denmark, Luxembourg, Switzerland, Belgium, Japan, and other developed nations have equally entered into bilateral investment treaties with developing nations. The notable US BITs include obligations that various governments undertakes towards investors from other countries. Such obligations are categorized into four: standard for expropriation, currency transfer standards, general obligations towards investments, and procedures for dispute settlement. Of these obligations, three are substantive in nature. The fourth type of obligation provides government consent to the international arbitral forum’s jurisdiction for the resolution of disputes arising out of concerns of substantive obligations. It is worth noting that the consent often provided within the treaty can make it possible for a foreign investor to initialize arbitration within the context of an international arbitral forum irrespective of whether the investor lacks an a clause of arbitration in the contract with a government. This state of affairs has been coined as “arbitration without privity”. One of the key factors that account for the most recent explosion in foreign investment disputes is the government’s consent to international arbitration as provided in Bit’s. Governments, in majority of BITs often commit themselves to providing foreign investors with favorable national treatment, fair and equitable treatment, full security and protection for their investments, treatment just as favored at that given by the international law, and the most favored national treatments. The government also often consent to engaging on arbitrary, discriminatory or unreasonable conduct, which restricts the management, operation, expansion and maintenance of the investor’s investment. In addition, governments establishes lawful expropriation. If property is taken for purposes of public, it may be expropriated indiscriminately based on the due process of the law, and adequate, full and effective compensation in paid promptly. Some of BITs require a government to effectively comply with obligations that it could have taken with an investor commonly referred to as an “umbrella clause”. The application and meaning of the equitable provision treatment and the contours of value expropriations and regulatory are being developed. There are other treaties with similar provisions to those provided by bilateral investment treaties. These are ECT and NEFTA. In NAFATA Chapter 11, there is provision of substantive obligations, which are undertaken by three nations towards foreign investors. These are similar to provisions found in BITs. NAFATA also includes the consent of the government to the international arbitration. The ECT is specific to a single industry hence it is unusual investment. ECT has more than 30 countries, which are party to it. Majority of these parties are from Europe. ECT operates like NAFTA and BITs in that it provides the consent of the government to the international arbitration in order to help resolve disputes arising from substantive obligations of the investors which was not pleasant to impleaded governments. It is not easy to predict the substantive obligations undertaken by governments towards investors. The United States has recently promulgated another Model BIT. It has started entering into (FTA) Free Trade Agreements with nations such as Singapore, Chile and Australia. It has gone ahead to negotiate a regional FTAs containing references to the Appellate Body that deals with foreign investment disputes. The government of the United States is currently working on coming up with the Appellate Body. Read More