Investment protection has become a linchpin of investment policies adopted by both developing and developed Middle Eastern jurisdictions over the past two to three decades. In the light of steadily diminishing oil reserves, the oil-rich nations in particular have become acutely aware of the need to attract foreign direct investment (FDI) for their sustained economic development in a post-oil era. As a result, most Middle Eastern countries have concluded both bilateral and multilateral investment treaties (BITs and MITs), as well as free trade agreements (FTAs) of regional and international reach. Some, in particular Kuwait, Oman, Qatar, Saudi Arabia and the United Arab Emirates (UAE) have adopted foreign investment laws. Investment laws typically afford foreign investors a number of:
- Basic, yet fundamental, investment guarantees, such as protection from expropriation, free transfer of the investment and repatriation of income.
- Investment incentives, such as tax exemptions and exemptions from custom duties.
Despite their generally favourable, pro-investment language, these investment laws are not as advanced as competing BITs and MITs. Importantly, few of them contain provisions on equal and non-discriminatory treatment between local and foreign investors. In addition, not all of them provide for investor-state arbitration in the traditional sense of that term and to the extent that they do, there is a marked preference for ad hoc arbitration, that is, outside a designated institutional framework.
By contrast, most countries in the Middle East have concluded a number of BITs, both with other Middle East and North Africa (MENA) countries, so-called “intra-MENA BITs”, and with countries further afield. Most of these BITs follow some form of a standard model and contain the following minimum substantive protections:
- Unlawful expropriation.
- Fair and equitable treatment (FET).
- A guarantee of national treatment.
- Free transfer of funds.
- Umbrella clauses, under which states must comply with their commitments or obligations undertaken in respect of the foreign investor, including the performance of contractual obligations and which allow a foreign investor to “elevate” a claim under an investment contract to the level of a claim under a BIT.
One of the principal procedural benefits afforded by these BITs is the foreign investor’s right to resort to arbitration against the host state in the event of a dispute. Mostly, these BITs lay down a multi-tier dispute resolution procedure, providing for:
- Amicable dispute resolution in a first instance (whether through negotiation, conciliation, consultation, or otherwise).
- If no settlement is reached, investor-state arbitration (under the ICSID Convention, UNCITRAL Arbitration Rules, or otherwise).
There are two main multilateral investment agreements for investor protection in the Middle East apart from membership of the ICSID Convention, which allows a foreign investor to resort to arbitration directly against an ICSID host State.
The Agreement on Promotion, Protection and Guarantee of Investments among Member States of the Organisation of the Islamic Conference (OIC Agreement) has been in force since 23 September 1986 and seeks to encourage mutual investment between its member states, guaranteeing the investment adequate protection and security in the host state. Similar to traditional BITs, it confers a number of substantive benefits upon qualifying investors, but is overall more limited in the protections that it offers. In summary, the OIC Agreement provides for:
- Protection from expropriation (article 10).
- Repatriation and free transfer of the invested capital and net proceeds flowing therefrom in any convertible currency at the rate fixed by the International Monetary Fund (IMF) (article 11).
- A free right of disposal of the investment in whole or in part (article 12).
- A right to compensation for any damage done to the investment by the host state by violation of any of the protective guarantees granted to the investor under the OIC Agreement (article 13).
- National treatment in relation to compensation of any physical damage done to the investment as a result of civil unrest or violent acts of a general nature (article 14).
- Most favoured nation (MFN) treatment (article 8).
Unlike traditional BITs, the OIC Agreement does not provide for an FET standard, nor a guarantee of non-discriminatory national treatment. That said, it has been found that the MFN clause in article 8 of the OIC Agreement entitles an investor to rely upon the FET standard contained in United Kingdom-Indonesia BIT (see Hesham Al-Warraq v Republic of Indonesia, UNCITRAL Final Award dated 15 December 2014).
The investor is afforded a right to take recourse to the national courts of the host state or arbitration in the event of any complaints about measures adopted or the failure to adopt certain measures in the host state; recourse to one will foreclose recourse to the other (fork in the road) (article 16). Disputes arising from an investment under the OIC Agreement more generally are subject to conciliation and arbitration pending the establishment of the “Organ for the settlement of disputes” (article 17). In the event that conciliation does not succeed, the parties are at liberty to resort to arbitration (article 17(2)). Each party will be entitled to the appointment of an arbitrator and the two party-appointed arbitrators will elect an “umpire”, who has a casting vote in the event that the two party-appointed arbitrators fail to agree. Default appointments are the responsibility of the OIC Secretary General. The tribunal’s decisions are final and binding on the parties.
Arab Investment Agreement
The Unified Agreement for the Investment of Arab Capital in the Arab States (Arab Investment Agreement) pursues objectives broadly similar to those of the OIC Agreement. Following its amendment in January 2013, the Arab Investment Agreement makes provision for the following minimum substantive protections:
- Protection from unlawful expropriation, whether direct or indirect (article 8).
- National non-discriminatory treatment (article 5(2) and (3)).
- A right to FET (article 2).
- Free transfer of capital and revenues in a convertible currency recognised by the IMF (article 6).
- MFN treatment (article 5(2) and (3)).
- A right to fair compensation in the event of damage caused by the host state (article 9).
- A right to unimpeded entry to, residence in, relocation within and departure from the host state, including family members and to some extent staff (article 11).
Under the Arab Investment Agreement, disputes are to be resolved by recourse to the Arab Investment Court (AIC) (article 22) unless the investor resorts to the national courts of the host state (article 21) or the parties have agreed to resort to alternative dispute resolution in the form of conciliation, mediation or arbitration instead (article 24). Like the OIC Agreement, the Arab Investment Agreement also operates a fork in the road (article 21). In the event that the parties’ chosen method to resolve a dispute fails, the AIC will be competent by default (article 24).
For the avoidance of doubt, despite the restrictive wording of article 24 of the Arab Investment Agreement, it has been found that the Arab Investment Agreement gives rise to investor-state (and not only inter-state) arbitration, dispensing with the need for a stand-alone arbitration agreement (see Hesham Al-Warraq v Republic of Indonesia). Finally, it should be cautioned that at the time of writing, the 2013 amendment to the Arab Investment Agreement has not yet entered into force, awaiting ratification by at least five member states in total. In its original 1980 version, which presently remains in force, the substantive protections under the Arab Investment Agreement are limited to free transfer of capital, unlawful expropriation and national treatment (articles 5 and what follows). Exclusive jurisdiction over disputes arising from the Agreement is granted to the AIC bar express agreement by the parties to conciliation or arbitration, or failure of a tribunal to render an award within the prescribed time-limit (articles 25-27).
Some Middle Eastern countries, such as Bahrain and Oman, have concluded FTAs with countries outside the MENA. One of the most common contracting counterparties is the United States, Canada and a number of European countries.
The FTAs with the US are essentially based on the US Model FTA (see, for example, the US-Oman FTA). These typically include the common minimum substantive protections known from other international investment agreements, such as unlawful expropriation and compensation, national treatment, FET, full protection and security, free transfers of all monetary investments and investment returns. FTAs with other countries contain similar provisions.
At the procedural level, FTAs typically provide for arbitration as a means to resolve disputes arising between an investor and the host state under them, following an unsuccessful process of consultation and negotiation. Arbitration may be initiated under the ICSID Rules, the ICSID Additional Facility Rules or the UNCITRAL Rules (or any other rules the parties may agree). An FTA will usually include detailed provisions on the conduct of the arbitration procedure, including the transparency of the proceedings.
Part 2 of this blog will discuss some relevant case law precedent on the subject.