Over the past half-century, dozens of governments have passed domestic laws that have set out protections and incentives for foreign direct investments. For investors, one of the most coveted features of such laws can be the host country’s consent to use international arbitration to resolve foreign investment disputes.
However, growing investor interest in – and use of - such domestic investment laws has occasioned something of a backlash on the part of the countries. Recently, El Salvador became the latest country to amend its domestic investment legislation so as to remove an offer to arbitrate disputes with any and all foreign investors. The tiny Central American country has been hit with several arbitration claims by mining companies that object to a de-facto moratorium on mining development within its boundaries.
A recent study by Investment Arbitration Reporter has found that other countries have also responded to investor lawsuits by rolling up the red carpet that enables FDI disputes to go to international arbitration.
In mid-2009, Georgia amended a 1996 law so as to roll back a pledge to resolve FDI disputes before arbitration panels. Georgian government officials characterised the move as a modernising one, and noted that many investors rely upon bilateral investment treaties instead of local laws. However, the amendment was viewed less charitably by investors that hail from countries that have never negotiated such treaties with Georgia.
Georgia is in good company though. Egypt may have been one of the first countries to execute a U-turn by amending a 1970s law in the mid-1980s after the country found itself on the receiving end of a lawsuit. More recently, Uzbekistan announced that it too would “clarify” its own legislation so as to ensure that investors cannot drag the country to arbitration unless the government wants – and consents – to resolve a particular dispute using that method.
From the perspective of governments, these legislative retreats may be a rational defensive strategy. There is no question that governments will be less exposed to financial liability if they make it harder for investors to sue outside of the host country. (Cynics would say that this is because local courts in many countries are stacked against foreigners.) Luckily for the countries, though, there is no hard evidence (yet) to show that altering local laws so as to withdraw arbitration offers will have a negative impact on future FDI flows.
The reality is that large multinational investors will have the muscle to negotiate one-off contracts that leave open a pathway to international arbitration. However, less powerful investors – unless they can find an international treaty to shelter under – will find themselves relegated to resolving their differences in the local courts.
Luke Eric Peterson is the editor of InvestmentArbitrationReporter.com an online reporting service tracking FDI disputes between foreign investors and states.