Emerging markets and developing economies provide an opportunity for unprecedented returns on investment, a fact that host states are keen to emphasise when inviting foreign companies to invest. However, with increased potential comes increased risk, not least when that same host decides that it wants a larger slice of the financial cake.

Protecting investors’ interests requires proactive risk management at the investment stage and creative thinking when disputes with the state arise. This article provides a brief reminder of the potential protections available to the international investor, whose investment can range from a contractual promise to significant financial commitment, and offers some basic practical tips on how to limit risk at the investment stage by structuring the investment appropriately, and what issues to consider when problems arise.


Over the past 50 years, the international community has sought to promote the flow of capital into developing countries by establishing a network of extra-contractual protection. In addition to rights under an investment contract or national laws enacted by a state to promote foreign investment, significant protections for investors are to be found in bilateral and multilateral investment treaties (BITs and MITs) concluded between states. In a typical BIT, the host state will agree to protect investments in its territory made by nationals of the other state. Although investors are not parties to the treaties, treaties provide rights that investors can enforce directly against the host state.

Type of protection

What kinds of substantive protections are available? The type and scope of protection will vary according to the terms of the relevant treaty. Some of the investment protections common to nearly all investment treaties are considered here.

Protection against expropriation prohibits the direct or indirect expropriation of foreign investments without compensation. As well as the physical or legal taking of property, it prohibits measures that, while not depriving an investor of the legal right to their property, substantially diminish its value. Such action will generally be prohibited unless it is for a public purpose, non-discriminatory and subject to prompt and adequate compensation.

National treatment protection entitles an investor to treatment no less favourable than that which a host state accords to its own nationals. Most favoured nation treatment goes further still, increasing the level of protection to the best provided by the host state to nationals of any other state.

Fair and equitable treatment is a broad sweep provision designed to guarantee foreign investors an internationally acceptable minimum level of protection, regardless of how a state treats its own nationals. Recent cases suggest that whether the right has been breached will require consideration of the investor’s “legitimate and reasonable expectations” at the time of the investment, and whether those expectations have been frustrated unreasonably by actions of the state; and the protection may provide a remedy where no expropriation has occurred.

BITs/MITs also often provide for the right to repatriate investments and returns, and to full protection and security for the investment. Some also provide protection against breach by the host state of the initial investment contract. These so-called umbrella clauses may mean that breaches of contractual commitments effectively constitute breaches of an investment treaty, enabling the investor to rely on the often wider protection contained in the treaty.

Procedural protections

Although obtaining the substantive right to investor protection is important, its value is minimal unless there is an effective system for resolving disputes and obtaining a remedy. The host state’s domestic courts are unlikely to provide a favourable solution.

However, many BITs/MITs contain procedural protection by entitling the investor to refer state/investor disputes to be resolved by international arbitration, often under the aegis of the International Centre for Settlement of Investment Disputes (ICSID). ICSID, which was established by the Washington Convention 1965, provides a self-contained and specialised system for resolving legal disputes arising from investments.

ICSID arbitration

When is ICSID arbitration available? The Washington Convention does not directly confer rights on an investor. It simply makes the ICSID mechanism available where there is a dispute arising out of an investment in relation to which a contracting state or state entity provides its consent to ICSID arbitration.

While limiting ICSID’s jurisdiction to disputes arising out of ‘investments’, the Washington Convention does not define ‘investment’ for these purposes, leaving it to the parties and arbitral tribunals to do so on a case-by-case basis. Generally, tribunals will require an investment project to be substantial and significant to the host state’s development, to be relatively long-term and to involve an assumption of risk.

An investor will have the right to resort to ICSID arbitration if there is an ICSID arbitration clause in its investment contract with a state or state entity; if there is an applicable investment treaty in which the state has given its advance consent to ICSID arbitration; or if both the host and home states are signatories of the Washington Convention and the host state is prepared to grant its contemporaneous consent.

Investors should be aware that, although doing business with some host countries can be an enriching experience, it can also involve significant risks. However, there are various layers of protection available to limit these risks, provided that the investment is appropriately structured at the outset or any putative dispute is handled with care. This requires specialist legal advice. Failure to manage the risks can lead to more than a little trouble if the host’s mood takes a turn for the worse.

Kieron O’Callaghan is a senior associate at law firm Lovells, and Clare Connellan is an associate in the international arbitration team.



  • Consider using a corporate vehicle incorporated in a state that has a BIT/MIT with the host state that will offer wide protection for the investment.
  • Consider which of the potentially applicable treaties would be most advantageous to the investor, given the circumstances of the investment and the types of dispute that may arise, and whether the investor could obtain rights under more than one investment treaty.
  • Where the investment status of a transaction is uncertain, describe in the contract the reasons why the activity amounts to an investment, and confirm that it was the parties’ intention to treat the transaction as an investment.
  • Incorporate an ICSID arbitration clause and if the investment status of a transaction is uncertain, add a clause referring to an arbitral institution that does not have the same jurisdictional requirements.
  • Make sure the host state has consented to ICSID arbitration in the relevant BIT/MIT, and that if consent takes the form of a standing offer, the offer is accepted by the investor at the investment stage.
  • Beware of provisions that give the investor a choice of initially submitting their claim to either local courts or to international arbitration but prevent the possibility of switching jurisdictions after the initial submission is made.
  • Select a clause that provides for application to local or other courts for provisional protective measures prior to the constitution of a tribunal.
  • Investigate the state’s (or state entity’s) capacity/authority to enter into an arbitration agreement.
  • State in the contract the parties’ mutual understanding that the arbitration clause binds the state as successor of any entity it dissolves and as guarantor to the investor for the effects of any evolution in the state entity’s status.


  • Establish the extent of the protection offered by any applicable investment treaty. This may be more or less than is immediately apparent from the text.
  • Check the dispute resolution procedure in the contract; any relevant investment law and the BIT/MIT and make sure any requirements are satisfied.
  • Challenges to the jurisdiction of the arbitral tribunal are common. The way the dispute is articulated in early correspondence or negotiations may pre-empt jurisdictional challenges.