Global Business 3rd Edition by Mike Peng

Exercise 42

Formal institutional frameworks such as investment laws and treaties are designed to facilitate certainty and predictability. But what can foreign firms that have already invested in host countries do if these frameworks change?
One of the key concerns as a multinational enterprise (MNE) making foreign direct investment (FDI) is how to take advantage of incentives in different host countries while safeguarding investor interests if something goes awry. This issue may arise when countries change regimes, like when the Central and Eastern European (CEE) countries joined the European Union (EU) in 2004-2007. Similarly, when a country nationalizes an industry like Argentina did with utilities (such as water and gas) in 2001 and with the Spanish oil firm Repsol in 2012, it would leave many foreign investors without recourse for recouping their investments. Courts in Argentina were unable to enforce investor contracts and the government refused to repay investors. However, since these contracts fell under the protection of a series of bilateral investment treaties (BITs) between Argentina and other countries (typically one BIT covers one pair of countries), aggrieved firms can file for binding arbitration proceedings through the International Center for Settlement of Investment Disputes (ICSID), which is based in Washington, DC.
Binding arbitration is a private forum for contract dispute resolution. Its functions are similar to those of an international court, but it uses experts, rather than judges, to decide complex disputes. While arbitration awards do not change laws (they merely interpret laws), binding arbitration has the benefit of enforcement in multiple jurisdictions under the New York Convention of 1958 and the ICSID Convention. A total of 146 countries are signatories. Therefore, binding arbitration awards made in one country are enforceable in 145 other countries. This includes awards made against other signatory countries, such as Argentina. Generally, countries that lose cases pay voluntarily. However, even as recently as 2012 Argentina continues 1) © Brian C. Pinkham. Reprinted with permission. to be reluctant to pay. Many of these firms, such as Vivendi and Siemens, are seeking Argentine assets in other signatory countries.
The EU law is starting to feel the pressure of these government-firm investment disputes. To attract FDI before joining the EU, Hungary and Romania in the 1990s and the early 2000s offered large and lucrative incentives in long-term contracts. However, because Hungary and Romania joined the EU in 2004 and 2007, respectively, the incentives became illegal under the EU law. This is because the EU law forbids any discrimination against any EU member countries and firms. Any BIT between, for example, Hungary (a nonmember until 2004) and Austria (an EU member) that gives Austrian firms preferential treatment and investment incentives, by definition, discriminates against firms from other EU countries. Therefore, such BITs were declared illegal by the EU and contracts signed under the BITs were forcibly withdrawn by Romania and Hungary in 2008.
MNEs from the EU (Sweden and Belgium) and the US responded to the 2008 abrogation of their contracts in Hungary and Romania by seeking remedies in arbitration instead of national courts. For example, Micula, a firm from Sweden, is suing Romania for unilaterally removing tax and custom duties from the contracts. In Hungary, several foreign electricity producers are suing for breach of long-term power supply contracts based on unilateral change of electricity pricing. These contracts fell under the BITs between the contracting countries. Because the contracts are unenforceable under EU law, but enforceable under the BITs in place at the time of contracting, these cases present a larger question: Which law takes precedence?
Recent arbitration suggests that the EU law is secondary to original commitments-that is, local laws and BITs at the time of original contracting are to be respected if they clash with the EU law. For example, in 2008, a Dutch sugar company received an award of €25 million against the Czech Republic based on a contract under a Dutch-Czech BIT from the 1990s. The arbitration tribunal sent a clear message by excluding Copyright 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has the argument that the treaty ceased to have force upon the Czech Republic's entry into the EU in 2004. Likely responding to this message, the EU Commission is taking an active role in the current proceedings involving Hungary and Romania, seeking to intervene in the arbitration decisions.
Case Discussion Questions
As an investor, do you want to support BITs and arbitration or rely on local court systems?