To sue, or not to sue, that is the question

The lowdown on BITs and ICSID arbitrations and their significance in construction and engineering contracts

Suzannah Newboult is a construction specialist at DLA Piper LLP.
Suzannah Newboult is a construction specialist at DLA Piper LLP.

The lowdown on BITs and ICSID arbitrations and their significance in construction and engineering contracts.

While together, these terms are a means of allowing a private foreign investor to sue a state, why are they relevant to the construction and engineering sectors?

A BIT is a bilateral investment treaty; a treaty entered into between two contracting states to promote investment and then to provide certain protections for those investments on a reciprocal basis.

Importantly, the treaty provides an investor from one state a right to claim compensation from the other state, the state in which he is investing (known as the host state), if these protections to his investment are not honoured.

Qatar has signed quite a number of BITs albeit some, including that entered into with the UK, have not been ratified under Qatari law and are therefore not legally binding. Ratified and legally binding BITs include those entered into with China, France, Germany, India, Italy, Korea and Turkey. It should be remembered that a ratifying state can repeal the ratifying legislation or withdraw from the treaty.

To be able to take advantage of the protection provided by a legally binding BIT there must be: a qualifying investor; a qualifying investment; and a violation of the protection offered by the BIT.

Each BIT depends on its own terms but there are some common themes. Typically a qualifying investor can be an individual or a company that is constituted or incorporated in the state that is party to the BIT.

Additional requirements may apply, such as the investor state being the place from which the company is controlled and the management of the company is located.

Often the BIT will acknowledge that the foreign investor may need to set up a local entity in the host state and allow it to retain qualifying investor status, provided the local entity is controlled by the foreign investor.

A qualifying investment is harder to identify but, by way of example, BITs between other contracting states have found the following construction/engineering works to be qualifying investments: renovation, construction and operation of airport terminals; dredging operations; design and construction of public roads; real estate developments including social and commercial infrastructure; and the construction and operation of a hotel. Violation of the protections afforded by the BIT will again depend on the protections offered by that BIT but examples of violations could include: the host state interfering with the contract, eg. by not allowing full access; the state as employer under the construction contract not performing its obligations; expropriation of plant, equipment or material; or the passing of legislation modifying or voiding the construction contract.

Although slow to take advantage of this alternative redress, international contractors are increasingly looking to BITs as a route to compensation when wronged under construction and engineering contracts.

ICSID is the International Centre for the Settlement of Investment Disputes, a neutral forum providing a set of arbitration rules pursuant to which a BIT dispute can be arbitrated.

The agreement to arbitrate under ICSID is usually found in the BIT itself and will exist as an avenue for the contractor regardless of the dispute resolution mechanism found within the construction contract.

However, it should be noted that there is usually a requirement to attempt to resolve the dispute amicably before arbitrating and there may be a requirement to exhaust all local dispute resolution remedies before referring to ICSID arbitration.

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