What is Investment Protection?

Investment protection encourages foreign investment by reducing the political risks of state interference. These risks can arise in many ways including expropriation, conversion and transfer of assets, non-compliance with permits, or other forms of unfair, inequitable, discriminatory or arbitrary treatment.

States commonly enter into treaties to offer foreign investors protection against these risks. Many of these are Bilateral Investment Treaties or “BITs”. Protection may also be offered in Multilateral Treaties (such as the Energy Charter Treaty, or “ECT”) or in specific chapters of Free Trade Agreements (such as the North American Free Trade Agreement, “NAFTA”, the United States-Dominican Republic-Central America Free Trade Agreement, “CAFTA”, or agreements of the Association of Southeast Asian Nations, “ASEAN”). Together all such agreements are commonly referred to as “International Investment Agreements”, or “IIAs”. There are more than 4,000 such treaties in force today.

Common to all IIAs are a state’s guarantees of certain standards of treatment for the investments of nationals of the other state in its territory and as a consequence compensation for losses flowing from their breach. Many IIAs also offer qualifying investors themselves the right to take a resulting dispute with the host state to arbitration before an international tribunal under international law (commonly called “Investor-State Arbitration”, or “I-SA”). This offers a substantially more effective process than the alternatives of diplomatic protection or claims before the local courts of the host state.

Investment protection can decisively influence an investment’s feasibility on the one hand and the attractiveness of a host economy on the other, affecting the availability and cost of financing and of investment guarantees or political risk insurance and the required rate of return on capital. Once the investment is made it can be instrumental in avoiding an unstable situation escalating into expropriation or a full-blown dispute.

Not all foreign investments qualify for protection. An “investor” must be a national of a state that has an applicable treaty with the host state in question, and only “investments” in the host state within the definition of the particular investment treaty will be protected.