(ISDR) It is a seesaw debate with the old and established pro State principles surrounding public policy and self-determination heavily slumped at one end and the spritely pro-investor arguments surrounding the benefits of foreign direct investment firmly holding on at the other. What lead the State to even consider diluting its sovereignty in the first place? Arguably, a simple desire to increase the number of players in the playground. The relatively limited number and considerable differences in the size, weight and power of States means that on the State to State seesaw one State is always left stranded in the air. By shedding a little of its sovereignty by complying with ISDR provisions a State can encourage non-State players to participate and in so doing the investor State seesaw can begin. It has been an overwhelmingly successful engine for growth and has been recognised by the UN as a key factor in helping countries attract foreign direct investment. Since 1980, merchandise trade has expanded by a factor of six and the stock of FDI has expanded by a factor of 20. Employment growth associated with FDI is equally impressive: some 21 million people were employed by foreign affiliates of multinational companies in 1990, rising to 69 million in 2011. The investor State seesaw is in fact a powerful engine for change. However, like an older child playing with a younger one, the latter’s enjoyment is very much dependent on the former’s willingness to be fair. At any one time, the State may shift its full weight and leave an investor high and dry. This not only harms the investor but it diminishes the pool of investors and the willingness of future investors to participate. For these reasons investment protection clauses are found in more than 3,000 international investment agreements, and growing.

Now, imagine that on the seesaw between the investor and the State, three plump and wise mice tentatively sit. Suddenly there is a bump and a yelp and the investor cries foul. If the three mice scamper along the seesaw their collective weight may either redress the balance or jettison the investor. Which way do they run? Every investor who is left stranded by a State cries foul but that does not mean that every investor is a victim. Sometimes States have legitimate reasons for pulling them up, but not always. Both the State and investor are compelled to entice the three wise mice with cheese. However, the investor is often unable to reach his having been left stranded in the air by the actions of the State. The three wise mice are naturally wary of traps and skilled at detecting them. It behoves anyone coming to the aide of an investor to be similarly skilled and cautious. A few potential traps to consider:

  • The majority of investment agreements have carefully defined investment protection standards. Can the investor prove that one or more of the investment protection standards in an agreement has been breached?
  • The law and regulations of their host country bind international investors and potential violations can lead to local civil, penal or administrative penalties. Has the investor been sloppy?
  • Similarly, consider the conduct of the investor overall. Would they for instance fall foul of the OECD Guidelines for Multinational Enterprises? How is their social and environmental performance?
  • What contribution was the investor making towards the State? Was it just a commercial arrangement and thus the investor should seek local remedies or can it be seen as a real investment under prevailing case law? The Salini test for instance and a plethora of other cases since throws this into question, but overall, was the investor making a valuable contribution in some meaningful sense?
  • To bring a claim under an investment treaty, an investor must qualify as a “foreign” investor. What this means precisely will often depend on the relevant treaty, but is the investor genuinely foreign or merely conveniently foreign in the form of a holding company, for example.

These are only a few of the traps to consider but they are essential to understanding whether the investor has legitimately cried foul or not. If he has not, he will be jettisoned if he has, the balance may be redressed. According to the UN, of the 244 concluded BIT cases known by the end of 2012, 42% of the decisions were in favour of the host State, 31% of decisions were issued in favour of the investor and approximately 27% were settled. On the basis that investment disputes are long running and third party funding is still relatively new, we can surmise that few of those cases received commercial litigation financing. There will however be many more opportunities in the future. According to the ICC, to recover from its growth slump, the world economy needs a big dose of new FDI. At the current rate, US$1.6 trillion new FDI flows are little more than 2% of world GDP. Doubling that rate to around US$3 trillion annually would provide a major stimulus to the world economy, helping create jobs, raise living standards, contributing to government tax revenues and inevitably increasing the number of investor disputes. It is a worthy objective despite the increase in disputes that will come with it. The opportunities for funders with the requisite skills in an environment rich in investment disputes are clear but there is more than money to be made. Those funders who rigorously scrutinise their investment opportunities in the next 10 years could significantly increase the percentage of decisions in favour of the investor by filtering out unmeritorious claims. If increased FDI is the panacea to our economic woes then funders may prove vital in successfully redressing the balance of the investor State seesaw.

Notes to Editors:

For more information on Vannin Capital, please contact: Leanne Harker, Marketing at Vannin Capital, T: +44 (0)1624 615 111, E: lsh@vannin.com