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Rapidly developing economies, such as the People’s Republic of China, Vietnam and countries in the former Soviet bloc, are receiving unprecedented attention as foreign direct investments play an increasingly critical and more welcomed role in economic development. Yet the multinational company that jumps overseas with only a cursory understanding of dispute-resolution systems can encounter unexpected and unwelcome challenges. Business confidence and legal confidence are not the same thing. Businesses involved in international trade in developing or unstable economies are frequently exposed to high levels of political risk. Political risk insurance, from both government-backed and commercial providers, is a popular option. Government-backed providers, such as the Multilateral Investment Guarantee Agency, the U.S. Treasury Office of Foreign Assets Control and the British Export Credit Guarantee Department, tend to provide cover for risk such as currency-transfer restrictions, expropriation, war and civil disturbance and breach of contract. The commercial providers, such as Lloyd’s of London, American International Group Inc. and the Chubb Corp., provide additional services unique to the private market, like kidnap, ransom and extortion coverage and coverage for the cancellation of export licenses by authorities in project procurement source countries. Commercial and treaty arbitrations provide another avenue. Domestic courts in some parts of the world, particularly in developing and unstable economies, often lack effective enforcement mechanisms, reducing contractual or other rights to little or no real value. The lack of a consistently neutral or experienced judiciary, the perceived tactical disadvantage of being a foreign party and the length of time to conclude a case can all mean that a remedy available on paper is largely illusory. A well-drafted commercial arbitration provision may provide a ready forum to obtain a timely and enforceable remedy. Arbitration enables the parties to replace the domestic judiciary, who may be subjected to political interference or pressure, with an arbitral tribunal made up of individuals in whom the parties have more confidence. Consistent with the principles of party autonomy and fairness, and pursuant to national legislation which adopts the United Nations Commission on International Trade Law (UNCITRAL) model law, arbitration can be a flexible mechanism with no set procedure. When negotiating an arbitration provision, the parties will need to decide whether to opt for administered or nonadministered “ad hoc” arbitration. The major arbitral institutions include the International Chamber of Commerce based in Paris, the London Court of International Arbitration, the American Arbitration Association, the International Centre for Dispute Resolution in New York, the Stockholm Chamber of Commerce, the Singapore International Arbitration Centre and the Hong Kong International Arbitration Centre. Moscow’s International Commercial Arbitration Court is making a bid to attract foreign business by modifying its rules and other steps, but the Stockholm Chamber remains the popular institution for parties doing business in Russia and the former Soviet states. Appointment of arbitrators In assessing the most appropriate institutional rules, the mechanism for the appointment of the arbitrators is a particularly important consideration. The most common tribunal is a three-person tribunal, with each party selecting one tribunal member. The party-nominated arbitrators, or an independent body, then select the tribunal chair. Whenever possible, parties should avoid restrictions placed on arbitrator selection as a result of the choice of institutional rules. For example, the rules of the China International Economic and Trade Arbitration Commission (CIETAC) require parties to appoint from a panel, unless the parties agree otherwise and the nonpanel appointment is confirmed by the chairman of CIETAC. In the view of some observers, the recent controversies in the arbitration community in China may have set back the cause of arbitration in that country and, at least in the near term, may result in more parties who are doing business in the People’s Republic of China opting for arbitration administered by, say, the Hong Kong International Arbitration Centre. The choice of institution also may influence alternative methods of dispute resolution that are made available to the parties. For example, CIETAC has a strong tradition of tribunal conciliation. This requires tribunal members, and often the tribunal chair, to act as a conciliator but then to proceed to operate impartially as the decision-maker if the conciliation fails. For obvious reasons, this role is challenging and may only be appropriate for a suitably skilled arbitrator. That said, tribunal conciliation has proven to be successful particularly when involving parties from regions of the world in which mediation is not commonplace. The objective of negotiating an arbitration provision is to minimize political interference and risk. Parties will need to agree on the “seat,” or legal place of arbitration � one that can determine both the procedural law of the arbitration and which court will support the arbitral process and hear any challenge to the award. This choice of seat is critical, as not all countries have a judiciary with wide experience in arbitration or that is hospitable to it. For example, in Oil & Natural Gas Corp. Ltd. v. Saw Pipes Ltd., (2003) 5 S.C.C. 705, the Supreme Court of India significantly expanded the scope to challenge an arbitration award by enlarging the “public policy,” also known as “manifest disregard of applicable law,” ground for challenge. An arbitral award remains of limited value without a reliable mechanism for enforcing it. Arbitration awards made in a country that is a party to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (codified at 9 U.S.C. 201 et seq.) can be enforced in any other convention state, by the local court giving effect to the award as if it were a court judgment, subject to limited, mostly due process, exceptions. Some countries’ courts are more scrupulous than others in avoiding the revisiting of the merits of the case. The New York Convention has been ratified by 138 countries. Government interference Of course, even the most favorable and well-drafted arbitration provisions are not bulletproof against direct or indirect attacks by foreign governments. Government changes can shift policy priorities. Some may refuse to comply with commitments made by prior leadership. In this situation, investors have the advantage. Investment treaty protections allow foreign investors to make direct claims against a foreign host state, in addition to or in place of a contractual claim. This is a developing area of international arbitration and, while there are no strict doctrines of precedent, useful concepts have been considered on a number of occasions and are becoming more widely accepted. Treaty protections are usually found in either bilateral investment treaties (BITs) or multilateral investment treaties (MITs). MITs include Chapter 11 of the North America Free Trade Agreement and the Energy Charter Treaty. Governments in developed nations tend to enter into MITs and BITs with developing nations in order to encourage their nationals to invest in regions of the world that might otherwise present an unacceptably high political risk. The protections available will depend on the detailed terms of the relevant MIT or BIT, but those most frequently relied upon tend to provide for protections against expropriation without prompt, adequate and effective compensation and a right to fair and equitable treatment. Other protections include measures against arbitrary or discriminatory treatment; a right to treatment no less favorable than that accorded to nationals of the host state; “most favored nation” treatment, which prevents the host state treating foreign investors from one state less favorably than those from another; the right to the free transfer of investments and returns; and full protection and security accorded by the host state to investments. There is a distinction to be drawn between breaches of treaty obligations and breaches of contractual obligations. Some BITs or MITs contain provisions known as “umbrella clauses,” which can effect the elevation of a breach of a contractual commitment into a treaty breach. However, these have yet to be regarded as settled law. ADC Affiliate Ltd. and ADC & ADMC Management Ltd. v. Republic of Hungary, ICSID Case No. ARB/03/16 (2006), illustrates the circumstances in which a foreign investor may obtain a remedy against a host state. The claimants, Cyprus-based but ultimately owned by Canadian interests, were to build a new terminal at Budapest airport and collect revenues from businesses operating at the terminal. However, as a result of a 2002 government decree, they were no longer able to operate the terminals or collect the associated revenue. The claimants relied on the Cyprus-Hungary BIT to bring an investment treaty claim, and Hungary was found liable for expropriating the investors’ interests without payment of full market-value compensation. The claimants were awarded more than $75 million, plus costs. Disputes over ‘investments’ The arbitral institution of particular relevance to investment treaty arbitration is the International Centre for the Settlement of Investment Disputes (ICSID). The ICSID was established by the Convention on the Settlement of Investment Disputes between States and Nationals of Other States. The ICSID’s jurisdiction extends to any legal dispute arising directly out of an “investment” between a contracting state and a national of another contracting state. It is necessary to look to the definition in the relevant BIT or MIT or in the underlying contract to assess whether the transaction at issue is an “investment.” A pure trading relationship on an ad hoc basis is unlikely to be deemed an investment. Each relevant treaty needs to be carefully scrutinized and interpreted consistent with the Vienna Convention on the Law of Treaties, rather than applying normal contractual principles of interpretation. Features suggestive of investment may include the duration of the project, including an expectation of a longer-term relationship; the regularity of profit and return; the assumption of risk; a substantial level of financial commitment; and whether the transaction is significant for the host state’s development. Nationality is an evolving concept in investment treaty arbitration. Claims may be brought by majority or minority shareholders. The nationality of a corporate entity may be assessed by more than one test. Not all investor-state disputes are referred to ICSID arbitration. Some recent data suggest that a majority of non-ICSID arbitrations were referred to UNCITRAL tribunals, while others proceed under the London Court of International Arbitration, International Chamber of Commerce or Stockholm Chamber of Commerce rules. Each treaty defines the options available. When the claim proceeds under the ICSID rules, the review of the tribunal’s award proceeds under a separate and distinct regime. When a party initiates a treaty claim under institutional rules, the “seat of arbitration” concept applies and review will proceed before the national courts at the seat of the arbitration. ICSID tribunal awards are enforced by the courts of Convention countries as if they were final judgments of national courts. International commercial arbitration and insurance can provide real mechanisms for reducing risk for parties involved in international trade. In addition, when the subject of the contract may be an investment, serious consideration should be given to structuring the investment so that the investor can claim nationality in a state that is a party to a MIT or BIT with the host state, thereby unlocking the opportunity to take advantage of relevant protections within one or more treaty. A well-drafted arbitration clause combined with an appropriate investment structure can serve to allay political risk. Jack Boos and Ian Meredith are partners and co-chairmen of the arbitration practice at Kirkpatrick & Lockhart Preston Gates Ellis, and Clare Tanner is an associate at the firm. Boos is based in San Francisco, Meredith and Tanner in London. They can be reached at [email protected], [email protected] and [email protected], respectively.

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