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GCC contractors need to know about the bilateral investment treaty

by CW Guest Columnist on Oct 7, 2017

BITs are a key tool for contractors [representational image].
BITs are a key tool for contractors [representational image].

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Many construction contractors operating in the Middle East are unaware that they may have the option of pursuing their contractual claims in a bilateral investment treaty (BIT) arbitration against a host state, or one of its entities.

This is regardless of whether the construction contract provides for claims to be settled by local courts or commercial arbitration, although some BITs may include a ‘fork in the road’ provision that allows a contractor to elect which forum to take its dispute to.

A BIT is a state-level treaty whereby two countries agree to provide certain protections to investors and their investments. Its purpose is to promote foreign direct investment between the contracting states.

If a host state subsequently violates one of these protections, then the aggrieved investor – in this case, the contractor – can commence dispute resolution proceedings under the BIT, which will usually provide for arbitration under the auspices of the International Centre for Settlement of Investment Disputes (ICSID).

Generally, there are four main requirements that a contractor has to meet in order to bring a claim under a BIT. These include establishing that there is a valid BIT in place; meeting the definition of an investor; showing that the contract entered into between the contractor and the host state qualifies as an investment; and identifying the BIT protections that the host state has violated.

Importantly for construction contractors, contractual claims can be taken to the ICSID if the BIT contains a suitably worded umbrella clause. An example of this is the recent case of Garanti Koza LLP v Turkmenistan (ICSID Case No ARB/11/20; Award, 16 December, 2016). This is applicable regardless of the dispute resolution provisions contained within the contract.

This protection ensures that a host state will be accountable for any breaches of its obligations under a construction contract. Examples of an umbrella clause can be found within Article 2(2) of the United Arab Emirates – United Kingdom BIT; Article 8(2) of the Saudi Arabia – Korea BIT; Article 8(2) of the Saudi Arabia – Austria BIT; Article 10(3) of the Oman – Korea BIT; Article 8(2) of the Oman – Germany BIT; Article 10 of the Iran – China BIT; and Article 11(3) of the Kuwait – Korea BIT.

One of the benefits of pursuing contractual claims through an ICSID arbitration is that the contractor can avoid having to take its claims to a local court or arbitral tribunal in a jurisdiction that is not arbitration-friendly.

Furthermore, the contractor may have the option to bring parallel proceedings against the host State. Another benefit is that the ICSID tribunal would be neutral, and would apply principles of international law, which may overcome unfavourable aspects of local law.

In addition, ICSID arbitrations are not confidential; hence, the host state may run the risk of adverse publicity which could impact future financing and/or foreign investments.

Finally, the contractor will have the benefit of the enforcement regime set down in the ICSID Convention to enforce its arbitral award.

Given the recent problems of enforcing arbitral awards in the region, contractors should give careful thought to whether a BIT applies to their contracts and whether their contractual claims could be pursued in an ICSID arbitration.

Fernando Ortega is a legal consultant in Dubai. Dean O’Leary is a partner in the construction and infrastructure group of DWF (Middle East).