Over the past few decades, companies—both large and small—have increasingly become reliant on a dual-track global business model. In essence, many companies now depend on foreign sales to boost their bottom line, while simultaneously seeking to gain greater revenue through capital investments abroad. To accomplish this, companies often need to accept certain risks that such foreign activities can pose as the cost of doing business.

In particular, as companies make significant capital investments in foreign countries, they accept unavoidable political risks to the ongoing stability—or the occurrence of instability—in those countries. The political risks in a given country are usually inversely proportional to the strength of government institutions and the rule of law. Thus, in countries where government institutions and the rule of law are weak, the political risks are highest. These risks can manifest themselves in, for example, the nationalization of a company’s manufacturing facilities; the reneging by a foreign host country on agreements for access to necessary utilities, such as water rights; the damage or destruction of a company’s facilities in the course of civil unrest; and the imposition of local laws or regulations which undermine foreign investments in favor of domestic operations.

And yet companies are not bereft of options to recover lost foreign investments when such political risks turn into reality. When foreign investments go south, companies may have the ability to seek relief under bilateral investment treaties (BITs). BITs are international agreements between two countries that establish terms and conditions for businesses to invest their capital in each country, and typically offer companies a number of guaranteed protections, including fair and equitable treatment, most-favored nation or national treatment clauses, redress for expropriation, and security under the law. In addition—and most importantly—BITs ordinarily allow for violations to be redressed in international arbitration, as opposed to having to sue a host country in its own courts.

Fair and Equitable Treatment

The “fair and equitable treatment” standard is the basic standard that a host country must provide to companies under most BITs. Typically, the analysis of whether treatment of a company’s foreign investment is fair and equitable follows two prongs: First, government action in a host country must be found unreasonable and arbitrary to be prohibited. Second, the standard requires that a host country behave consistently with the legitimate expectations of the company. While illegal government conduct in a host country may not be per se disallowed under this standard, governments in host countries are usually required to maintain the legal and business environment at the time a given foreign investment is made.

For example, in 2009 a $165 million award to a U.S.-based water services company was upheld in its dispute with the government of Argentina regarding the company’s acquisition of an exclusive right to operate a water and sewage utility in Buenos Aires. When concerns about water quality were raised soon after the U.S. company commenced operations, an Argentine water regulator ordered that the company cease charging its customers for several weeks and pay a fine. The company denied liability, claiming that the water-quality conditions pre-dated its acquisition and were the result of improper construction and maintenance of water treatment facilities by provincial government authorities. Ultimately, the company commenced arbitration proceedings and alleged, among other claims, that Argentina failed to provide it fair and equitable treatment.

Most-Favored Nation and National Treatment Clauses