Resolving Foreign Investment Disputes

Dispute Resolution Journal, May-Jul 2006 by Fazzi, Cindy

Resolving Foreign Investment Disputes Foreign Investment Disputes: Cases, Materials, and Commentary. By R. Doak Bishop, James Crawford, and W. Michael Reisman. The Hague, The Netherlands: Kluwer Law International (www.kluwerlaw.com), 2005. Hardcover. $320. 1,653 pages.

The Overseas Private Investment Corp. (OPIC), a development agency of the U.S. government, typically grants loans and political risk insurance to American businesses investing abroad.

American investments overseas is part of the world's foreign direct investment, which in 2001 was estimated at $6.8 trillion. This important segment of international commerce is the subject of Foreign Investment Disputes, a comprehensive, scholarly compilation of cases and other materials by R. Doak Bishop of King & Spalding in Houston, Texas; James Crawford of the University of Cambridge, and W. Michael Reisman of Yale Law School.

The book traces foreign investment back to the times of the pharaohs when Egypt mined tin-necessary for forging bronze-and other metals beyond its borders. Later, foreign investment was mostly indirect, through loans and government bonds. In the mid-19th century, however, technological inventions-like the railroad and the telegraph-and the growth of corporations prompted more direct forms of investment abroad. Some national governments began to expropriate (i.e., "nationalize") foreign owned commercial enterprises that they believed were critical to their economy.

The authors explain the legal basis for expropriation of foreign investment this way: "When national governments of states hosting foreign investments expropriated foreign-owned projects, they purported to rely upon the international law principle of territorial sovereignty." They also note that "[l]ocal courts were often unsympathetic to the foreign investors." For this reason aggrieved foreign investors usually turned to their own governments for assistance. The likely response was a show of military force or diplomatic protection.

Calvo Doctrine

The expropriation of railroads in Latin America prompted Carlos Calvo, a distinguished Argentine lawyer, to promulgate what's known as the Calvo Doctrine in 1868. Under this doctrine, foreign investors were entitled to treatment no different than the citizens of the country where they invested. Foreign investors' claims would be heard by the courts of the countries where they invested. They were not entitled to seek diplomatic protection from their own governments or have their claims presented to international arbitral tribunals. Capital-exporting countries (such as the United States) rejected the Calvo doctrine, but most Latin American governments embraced it.

Foreign Investment Disputes

Direct foreign investment has continued apace, so it is not surprising that this has led to "foreign investment disputes," which the authors describe as "a dispute between an investor from one country and a government that is not its own that relates to an investment in the host country." They also note that a foreign-controlled but locally incorporated company that is in conflict with the host government over investment-related matter may also be considered a foreign investment dispute.

After World War I, the Permanent Court of International Justice heard a few important foreign investment disputes. There were also mixed claims commissions and ad hoc tribunals that handled specific claims for one country's nationals against a foreign government.

It wasn't until after World War II that efforts began in earnest to protect foreign investment and create methods for resolving disputes. In 1949, the International Chamber of Commerce (ICC) adopted the International Code of Fair Treatment for Foreign Investors. In the 1960s, the World Bank created the International Centre for the Settlement of Investment Disputes (ICSID) to administer arbitration of investment-related disputes between contracting governments and nationals of other governments.

Types of Investments

The book discusses different types of foreign investment contracts, such as concessions, product sharing agreements (PSAs), licenses and service contracts, and infrastructure and utility agreements. In the 1970s OPEC renegotiated a one-sided oil concession contract. A more common form of concession agreement used today is a joint venture agreement. These are used in a variety of industries, including construction, natural resources, and manufacturing.

Whatever the type of foreign investment, the authors recommend including an arbitration clause in the contract. Foreign investors may also have the right to arbitrate under an investment treaty between the investor's home state and the host state (i.e., the state where the investment is made). The purpose of these treaties is usually to encourage foreign investment.

The book provides examples of arbitration, choice-of-law, expert determination, and forum selection clauses. It has a chapter devoted to different fora for resolving foreign investment disputes, among them the ICSID, the ICC, the London Court of International Arbitration, the Stockholm Chamber of Commerce, and the International Centre for Dispute Resolution of the American Arbitration Association.