For many years, wise investors have sought legal protections for their overseas investments, especially in emerging markets, under a bilateral or multilateral investment treaty, or by ensuring similar protections through domestic investment laws. The current system of arbitration, however, has often been criticized for its lack of transparency and accountability. Recently, there is a change in that direction, whether it is within existing institutions or through initiatives promoted by the UN and the EU. High risk investors, and Israelis among them, should be aware of these processes and their advantages as well as other ramifications they may entail.
Economic and political uncertainty, such as a state that mistreats or even expropriates an investment, can be mitigated by a certain way of structuring direct foreign investments. The investor may be able to bring a claim against the host state under an existing investment treaty according to international law. Investment claims are frequently high stakes, high value disputes that touch on issues of public importance, such as the exploitation of a country’s natural resources or the provision of significant infrastructure services. These disputes have traditionally been decided behind closed doors by privately appointed arbitral tribunals. That, however, is on the brink of becoming a thing of the past. One recent high-profile case involving an Israeli investor serves as a good example of how the global investment protection regime is now coming under increasing public scrutiny.
In a landmark shift from the usual paradigm, the dealings of a high-profile Israeli investor with an African State were recently put into the spotlight. Following an investigation and an administrative proceeding, the State terminated very valuable mining rights - alleging that the Israeli investor had obtained them fraudulently from a previous government. The Israeli investor (operating through an offshore investment vehicle) then commenced investment arbitration proceedings, asserting that the State had expropriated its investment and breached various other international law obligations. In the arbitration that followed - in a stark departure from the norm - the evidence of all the witnesses, including the Israeli investor and his associates, was made public. The proceedings were even live streamed on the internet.
The enhanced transparency in this example is a sign of things to come. In this case, the parties agreed to the application of relatively new rules on transparency drafted by a commission of the UN. States are also beginning to adhere to a new treaty encouraging transparency prepared by the same commission - known as the Mauritius Convention. While Israel has not yet signed the Convention, its representative to the UN Commission on International Trade Law has commended the initiative. Over the coming years, many States are expected to adhere to the Convention. Transparency will become the new norm.
In parallel with steps to grant greater visibility of investment proceedings, there are also growing calls for a more fundamental shift away from arbitration as a means of resolving these disputes. For a number of years, the European Commission has been pursuing an agenda to end investment arbitration between EU member states. In its place, the European Commission would like to establish an investment court. The Commission believes the new court will ensure not only greater transparency and accountability, but also consistency in the decision-making process. If this and other proposals - including calls for a supranational global investment court - gain traction, then investors will need to accept that their disputes will be subject to ever greater scrutiny, both by public interest groups and by their competitors.
For its part, the International Centre for the Settlement of Investment Disputes (ICSID) -- part of the World Bank and one the main bodies that administers investment disputes -- is alive to this debate. In response to criticism of the current system, ICSID has proposed to adopt a new set of rules under which the default position will be that all arbitral awards, decisions and orders can be published unless one of the parties objects.
While it is important to be aware of these procedural changes, investors should continue to ensure that their overseas investments are protected as fully as possible under international law. Hosts State courts often do not offer an adequate or reliable remedy, and the investment protection regime is designed specifically to promote investment and offer a viable alternative for resolving disputes. Investor should therefore make the most of what it can offer them. Investors need to bear in mind though, that the price for this protection is likely to come in the form of greater scrutiny of their business affairs.
Michael Ostrove is the Global Co-Chair of DLA Piper’s International Arbitration Practice. Ben Sanderson is Of Counsel and DLA Piper’s International Arbitration Global Practice Manager. They both have extensive experience representing investors and States in investment disputes. Gideon Weinbaum is a partner at ERM who frequently advises Israeli clients in investment disputes.
Published by Globes, Israel business news - en.globes.co.il - on March 27, 2019
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