PROTECTION FOR FOREIGN INVESTORS IN LATIN AMERICA UNDER BILATERAL INVESTMENTS TREATIES

• Jurisdiction: Derecho Internacional

MINING LAW & INVESTMENT IN LATIN AMERICA
(April 2003)
CHAPTER 20A
PROTECTION FOR FOREIGN INVESTORS IN LATIN AMERICA UNDER BILATERAL INVESTMENTS TREATIES
Pablo Mir
Grasty, Quintana, Majlis &Cia
Santiago, Chile

I.INTRODUCTION

In the last half of the eighties and during the nineties, Latin American countries undertook ample economic reforms and foreign trade and investment regime liberalization. As a consequence of this process, significant investment flows, principally from the United States, Canada and Europe, were allocated to Latin America, concentrated significantly in the mining and the hydrocarbon sectors. By way of example, the foreign investment made in Chile between 1985 and 2000 totaled US$41,493,707,000¹ of which US$14,123,896,000 were allocated to the mining sector.

This economic phenomenon made it necessary for the different Latin American countries to amend or enact new laws and regulations, mostly beginning in 1990, to create foreign investment statutes.² These rules and regulations sought principally to foster foreign investment while guaranteeing fair and equitable treatment and eliminating the restrictions on the remittance of capital and profits.

Simultaneous to this local change process and creation of new domestic laws, those same Latin American countries participated, as part of a world phenomenon, in the negotiation and subsequent signature of bilateral foreign investment treaties (Bilateral Investment Treaties or BIT).

The first BIT originated in Europe at the end of the fifties.³ Only as of the eighties, and throughout most of the nineties, did Latin American countries begin to sign BITs, although some countries in the region signed BITs with Germany, France and Switzerland in the sixties. The first BIT between American countries is the BIT between the United States and Panama dated 1982. According to information from the World Bank, approximately 2000 BITs are now in effect throughout the world.

The economic crisis that has affected Latin American countries in recent years has, to a greater or lesser extent, led domestic authorities to adopt legislative and/or administrative measures to confront its effects. In several cases, those measures have injured or affected businesses or activities conducted by foreign investors. Faced with this situation, part of those foreign investors have chosen to enforce the protective provisions and exercise the rights and actions granted to them by the BITs rather than make use of the rights and actions established in foreign investment statutes in the country in which they hold their investment.

For this reason, the BITs and related issues have now become an ever-more frequent source of inquiry for attorneys, both on the part of foreign investors as well as the domestic authorities.

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This paper seeks to describe and explain the principal provisions of a BIT. The BITs signed by Chile with different Latin American countries have been used as the model as the language is repetitive or is very similar to the BITs signed by other countries in the world. A second section will discuss the mechanisms for the resolution of disputes between an investor and a BIT party (Member State), concentrating on the procedure of the International Center for the Settlement of Investment Disputes (ICSID).

II. BILATERAL INVESTMENT TREATIES (BIT)

1.Application of a BIT

BITs initially define which investments or investors are protected. They will normally regulate the application of the BIT provisions over time.

1.1 What does the concept of investment include?

In the most recent BITs, a trend can be perceived to expand the concept of "investment" to protect new forms of transactions existing today, specially financially. In order to define the forms of investment covered, generic forms are usually used, such as "any type of asset," "any type of asset or right related to an investment," "assets and rights of any nature," etc. Normally, this generic definition will be followed by a non-restrictive list of examples. They normally include: chattel and real estate and other real rights, share, corporate interests and holdings in companies, credits, securities, rights to money, intellectual and industrial property rights, including copyrights, patents, trademarks, process and know-how rights as well as franchises granted by law or under an agreement.

1.2 Investors

A second essential aspect of the BIT will be the determination of who will receive the benefits under the treaty, namely who must be considered investors. This definition usually distinguishes between individuals and bodies corporate.

1.2.1 Individuals

All BITs consider an investor to be natural persons who are nationals of a member state. Nationals will usually be determined by reference in the BIT to domestic laws on nationality in effect in each of the member states.

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In some cases,⁴ the concept of resident is also used in order to include individuals in the protection of the treaty. By way of example, the BIT between Chile and Argentina stipulates that the provisions of such treaty shall apply to the nationals of a member state who have lived 2 years or less in the territory of the member state where the investment was made and who prove that the investment funds came from abroad.

1.2.2 Corporate Entities

The standards used in the BITs to determine the nationality of a legal entity or company are different in order to grant them the benefits inherent to an investor.

The first standard, normally used in countries with a common law-tradition, is to refer to the place of incorporation of the company as a determining element of its nationality (founding- theory).

The other standard present in countries with a tradition of civil law is based on the place where the company has set up business and has its registered offices (seat-theory).

In treaties among Latin American countries the seat theory is usually combined with the founding theory. In some cases, a requirement is added that a company or corporate entity also conduct its principal business in its country of origin.

We also find cases where companies incorporated according to the legislation of any country other than the member state is recognized as an investor provided that they are effectively controlled by investors under the aforesaid definition.⁵

In some BITs, it will be normal to see a combination of the above standards, which will depend on the interests of the member states in order to expand or restrict access to these benefits by the entities of the member states.

III. APPLICATION OVER TIME

It is most common for a BIT to enter into effect in the month following the exchange of instruments of ratification between the member states. This type of treaty generally lasts in Latin America from 10 to 15 years and is renewable for new periods or indefinitely unless any of the parties states its intent otherwise.

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It is common to find provisions in Latin American BITs that extend the benefits and protection thereunder to investments made prior to the signature of the treaty.

IV. CLAUSES ON TREATMENT

There are three main bases or principles present in the majority of the BITs. They are: fair and equitable treatment, non-discrimination compared to domestic investors, and the most-favored-nation clause.

4.1 Fair and Equitable Treatment

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