Foreign investment, and specifically, foreign investments in the mining sector, frequently face challenges and risks in host countries that, in certain circumstances, cannot be resolved through negotiation or mediation. These challenges can result in damage, delays, and in certain circumstances, the destruction of investments and projects. Properly taking the risk of disputes into account is crucial to managing a project in a foreign country, and can affect the bottom line financing and insurance costs.
Structuring investments to obtain investment treaty protection can provide businesses, partners, and in some instances, project shareholders with certain baseline investment protections against government (or de facto government) measures that may negatively affect a project. While some similar protection can be obtained through political risk insurance through private providers or the World Bank’s Multilateral Investment Guarantee Agency, investment treaty protections provide foreign investors with more expansive investment protection, and if proper investment structuring is taken into account, such protections can be obtained at no cost.
Investment treaty protections generally include the following:
- The obligation to treat investors’ investments fairly and equitably, or in line with principles of customary international law;
- The obligation to treat investors no less favourably than the host state accords its own nationals (national treatment);
- The obligation to treat investors no less favourably than a state accords to nationals of third-party states (most favoured national treatment);
- The obligation to compensate, at fair market value, any expropriation of covered investments; and
- The obligation to comply with any contractual obligations assumed with regards to investments in its territory.
Investment treaties also provide foreign investors with recourse to impartial international arbitration procedures to challenge measures that violate the investment protection. In this regard, investors are not required to submit to host country courts or dispute resolution processes, which may be lengthy and burdensome.
Standing under investment treaties is governed by nationality. For a corporate entity, depending on the specific treaty, the acquisition of the nationality of a country can range from a mailbox corporation to having the “siège social” of a business in a home, to more stringent business operation requirements. For individuals, nationality is based on citizenship or, in certain cases, another nationality status. Similarly, investors must have a covered investment, which is generally defined broadly in a non-exhaustive manner encompassing physical property to intangible rights, among other things. Yet another consideration would be the views of applicable laws toward third-party funding in the event the investor may want to look to financing for any potential dispute.
In the mining space, a significant number of projects have opted for structuring through investment treaties. Structuring for investment treaty protection can be done at any time to gain investment treaty protection; once a dispute has arisen, it likely too late to gain the benefits of an investment treaty. Canada currently has 37 bilateral investment treaties and 17 free trade agreements with investment protections that Canadian businesses currently benefit from. However, Canadian businesses can also benefit from the global network of over 2600 investment treaties if their investment is properly structured and managed. In many ways, this vast network allows for business, investment, and tax structuring to work in tandem.
The investment treaty system is not static – it is subject to change and those changes may have a material impact on the protections available. In addition to seeking structuring advice at the outset of a project, or investment, it may be necessary to revisit that structure from time to time as circumstances change.