DEALING WITH SOVEREIGN WEALTH FUNDS: IMMUNITY CONCERNS AND PRACTICAL STEPS TO MITIGATE THEM

Sovereign wealth funds invest across a range of asset classes and engage in capital markets and loan transactions. Their engagement in these activities is consistent with that of any other commercial actor. However, the connection between a sovereign wealth fund and the State by which it has been created raises the question of whether the fund will benefit from state immunity.

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ENGLISH HIGH COURT GRANTS NIGERIA EXTENSION OF TIME TO CHALLENGE USD 6.6 BILLION AWARD FOR FRAUD

In The Federal Republic of Nigeria v. Process & Industrial Developments Limited [2020] EWHC 2379 (Comm), the English High Court (“Court”) granted the Federal Republic of Nigeria (“Nigeria”) an extension of time to bring challenges to an arbitral award of US$6.6 billion in damages and approximately US$4 billion in costs and interest (“Final Award” or “Award”) in favour of Process & Industrial Developments Limited (“P&ID”) under Sections 67 and 68(2)(g) of the English Arbitration Act 1996 (“Act”), nearly three years after the award was made.

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SIERRA LEONE BECOMES THE 166TH STATE PARTY TO THE NEW YORK CONVENTION 1958

On 28 October 2020, Sierra Leone deposited its instrument of accession to the UN Secretary General, acceding to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “Convention“).

Sierra Leone will become the 166th state party to the Convention, following the recent accession of Ethiopia and Tonga earlier this year. Under Article XII (2), the Convention will come into force for Sierra Leone on 26 January 2021.

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DISPUTE RESOLUTION CHOICES FOR BANKS AND FINANCIAL INSTITUTIONS: MAXIMISING THE CHANCES OF SUCCESSFUL ENFORCEMENT – WEBINAR RECORDING NOW AVAILABLE

Choice of dispute resolution forum can have a fundamental impact on the ability of banks and financial institutions to enforce contractual obligations.

In our client webinar on 23 September, Dispute Resolution Choices for Banks and Financial Institutions: Maximising the Chances of Successful Enforcement, Julian Copeman, Nick Peacock and Hannah Ambrose discussed recent trends in dispute resolution choices in the banking and finance sector in the context of Brexit, before addressing:

  • the use of the English courts, providing guidance as to enforcement of English court judgments in the EU in the context of Brexit;
  • the risks and rewards associated with unilateral clauses which enable a choice of forum to be made once a dispute has arisen; and
  • the key points which banks and financial institutions need to be aware of if choosing arbitration, such as the powers of arbitral tribunal with respect to remedies and the award of interest, and the increasing use of summary judgment procedures to resolve unmeritorious claims.

The speakers also touched on practical points to bear in mind for successful enforcement in Russia, Africa, India and China, and addressed questions from clients on the restatement of English court jurisdiction clauses after the end of the Brexit transition period to minimise enforcement risk, and the availability of interim relief from the court to support arbitral proceedings.

The webinar recording is now available for clients and contacts. To access the recording, please contact Hannah Ambrose (here) or your usual Herbert Smith Freehills contact.

For more information, please contact Julian Copeman, Partner, Nick Peacock, Partner, Hannah Ambrose, Senior Associate or your usual Herbert Smith Freehills contact.

Julian Copeman

Julian Copeman
Partner
+44 20 7466 2168

Nicholas Peacock

Nicholas Peacock
Partner
+44 20 7466 2803

Hannah Ambrose

Hannah Ambrose
Senior Associate
+44 20 7466 7585

NAVIGATING THE LOW OIL PRICE ENVIRONMENT PODCAST: HOW INVESTMENT TREATIES CAN PROTECT FOREIGN INVESTMENTS AGAINST STATE ACTION

Oil prices have recently reached historic lows and oil companies are faced with a number of potential legal issues as the prices impact their trading and operational agreements. In this podcast series, our energy disputes lawyers consider some of the key issues triggered by the current low oil price environment.

Even investments into relatively stable ‎jurisdictions may be affected by changes in the political and financial landscape. No investor can completely insulate their investment from such changes, but access to an investment treaty can be critical: Andrew Cannon, Laurence Franc-Menget and Hannah Ambrose discuss how investment treaties can protect foreign investments against state action in the second episode in the series.

The episode can be listened to here.

For more information, please contact Andrew Cannon, Partner, Laurence Franc-Menget, Partner, Hannah Ambrose, Senior Associate, or your usual Herbert Smith Freehills contact.

Andrew Cannon

Andrew Cannon
Partner
+44 20 7466 2852

Laurence Franc-Menget

Laurence Franc-Menget
Partner
+33 1 53 57 73 70

Hannah Ambrose

Hannah Ambrose
Senior Associate
+44 20 7466 7585

Update: The discontinuation of LIBOR: issues of substance and procedure for parties and arbitrators

The global financial markets are currently preparing for the phasing out of the London Inter-bank Offered Rate (or LIBOR) and other Inter-bank Offered Rates (or IBORs). LIBOR is the most widely used benchmark interest rate globally, employed in an estimated US$350 trillion worth of financial contracts worldwide. LIBOR may also be used in commercial contracts – for example, in price adjustment mechanisms in share purchase agreements, price escalation clauses or as a reference rate for contractual interest on late payments. LIBOR may also be specified in arbitration clauses as a benchmark rate for interest on the award.

The clock is now ticking towards the deadline of the end of 2021 for the market to be ready but there is concern that many contracts will not be amended voluntarily by that time. Recognising the impact on existing contracts of the transition, the Tough Legacy Taskforce, part of the industry-led Working Group on Sterling Risk-Free Reference Rates, was set up to provide market input regarding the ‘tough legacy’ of products that may prove unable to be converted or amended to include robust fallbacks to address the end of LIBOR. Last month the Tough Legacy Taskforce published its report (the Tough Legacy Paper). As discussed in detail in our blog post here, the Tough Legacy Paper serves to highlight the difficulties in amendment of contracts, and particularly the complex relationship between contracts in different asset classes in many transactions.

Many financial instruments affected by the discontinuation of LIBOR will include arbitration clauses. As discussed below, whilst the substantive disputes arising from the end of LIBOR will be the same whether they are resolved in a court or by an arbitral tribunal, there are some additional considerations particular to the arbitration process which are relevant in the context of LIBOR discontinuation disputes. Further, even when determining a dispute which does not arise from the end of LIBOR, arbitral tribunals may have to grapple with how to award interest where an arbitration clause uses LIBOR as a reference point. Read more in the E-bulletin here.

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ENGLISH COURT CONSIDERS CHALLENGES TO A FURTHER AWARD MADE AFTER REMISSION TO THE TRIBUNAL FOLLOWING AN EARLIER SUCCESSFUL CHALLENGE

In Reliance Industries Ltd and another company v The Union of India [2020] EWHC 263 (Comm), the English Commercial Court (the “Court”) considered a series of challenges under sections 67 and 68 of the Arbitration Act 1996 (the “Act”) to a further award (the “Further Award”) made on issues remitted to the Tribunal after earlier challenges to parts of an arbitration award (the “Final Partial Award” or “FPA”) brought under sections 67, 68 and 69 of the Act.

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A BALANCE OF OBLIGATIONS: THE RESPONSE TO THE COVID-19 PANDEMIC AND INVESTMENT TREATY PROTECTIONS

The COVID-19 pandemic has brought about an unprecedented level of state action as governments around the world make difficult decisions in response to the spread of the virus. Over the past few months this has resulted in a variety of measures in different countries, including the suspension of contractual rights, social distancing regulations, the requisitioning or nationalisation of private property, the closure of borders, export and travel restrictions, and bail-outs of state carriers.

In such extraordinary times, a degree of interference with private rights is almost inevitable. Many states are balancing multiple concerns, looking to protect public health and absorbing expert evidence in a fast-moving environment, whilst trying to mitigate both economic and societal damage in the short and longer term. However, even in times of crisis, states nonetheless have domestic and international law obligations (including under investment treaties), which impose standards against which their conduct may be held to account. Depending on the circumstances, state action in response to the COVID-19 pandemic which fails to meet these standards could give rise to claims.

This article describes the potential international investment law protections which may be relevant in response to COVID-19. It also discusses the key considerations for states and foreign investors alike when assessing whether state action may infringe a state’s international law obligations.

Protections for foreign investors under investment treaties

A foreign investor may enjoy protections under an international investment agreement (an IIA), which if breached by state action can give rise to the right to make a claim. An IIA is an agreement between two or more states containing reciprocal undertakings for the promotion and protection of private investments made by nationals of the state signatories in each other’s territories. Such agreements have historically been entered into to provide confidence to foreign investors that their investment will not be negatively affected by certain types of irregular action by the state hosting the investment (the host state) and that if it is, to enable the investor to claim damages. Most commonly, these IIAs are bilateral arrangements (called bilateral investment treaties, or BITs), multilateral treaties or free trade agreements containing investment protections.

The definitions of investor and investment vary between different IIAs but the definition of investment often includes a broad and non-exhaustive list of categories of assets. Whilst IIAs are state-to-state agreements, they usually contain provisions allowing an investor from one state to enforce the guarantees as to the treatment of their investment in the host state through international arbitration before an independent tribunal.

Each treaty must be considered on its terms but IIAs commonly include the following investment protections:

  1. a protection against the unlawful expropriation of an investment without adequate compensation, whether directly or indirectly through a series of governmental acts which encroach on an investment and result in it being deprived of value;
  2. the guarantee of fair and equitable treatment (or FET). Claims under FET provisions typically fall into two broad categories: prohibitions against a denial of justice and claims based on administrative decision-making. Not all regulatory changes will constitute a violation of the FET standard, and the existence of such protections does not deprive a state of its ability to exercise its regulatory powers. However, where the state’s exercise of its regulatory power is arbitrary or based on procedural unfairness or lack of due process, bad faith, discrimination or a failure to protect an investor’s legitimate expectations as to how they will be treated, a FET claim may be warranted;
  3. a guarantee of full protection and security for the investment and for the investor. Whilst this is generally understood to concern physical protection, it may also encompass legal protection;
  4. guarantees of treatment no less favourable than that given either to nationals of the Host State of the investment or to nationals of third states, which prevent the host state discriminating against the foreign investor; and
  5. the right to repatriate profit and capital.

Some treaties specifically guarantee non-discriminatory treatment with respect to restitution, compensation or other valuable consideration for losses due to civil strife or state of emergency.

Treaty obligations in the context of COVID-19

On the one hand, states are undoubtedly facing significant challenges in balancing the need to protect public health with the prospect of short and long term economic damage.  On the other hand, many foreign investors are facing wide-ranging governmental interference in multiple aspects of their business (including, in many jurisdictions, restrictions on the use and movement of their employees, the use of their property and the enforcement of their contractual rights). Some investors have questioned whether the extent of the measures imposed is justified, or whether the measures are proportionate to the serious economic damage which they can inflict.

Based on the standard protections found in IIAs outlined above, key considerations as to whether a state’s response to COVID-19 is consistent with its international law obligations may include:

  • the evidential basis for state measures introduced to address the pandemic in different ways;
  • the length of time for which measures are imposed and the regularity with which they are reviewed;
  • whether measures restricting private rights and freedoms are proportionate based on the anticipated benefit in terms of fighting the virus and the possible negative impact of those actions on the affected investors;
  • whether steps have been taken to mitigate the damage caused by the measures;
  • whether the measures impact unequally or disproportionately on one sector, group or type of company or individual impacting the foreign investor;
  • whether the enforcement mechanisms used by states to implement COVID-19 regulations are consistent with domestic legislation;
  • whether, particularly in the context of any requisitioning or nationalisation, any provision has been made for compensation and, if so,
    • how such compensation is calculated; and
    • the availability (or otherwise) of compensation for all who are similarly affected (including whether nationals of the host State are placed in a better position than foreign investors);
  • whether the measures imposed are capable of, and are being used for, purposes beyond tackling COVID-19;
  • whether any assurances have been given to sectors, companies or individuals as to their treatment in the context of COVID-19 and whether those assurances were fulfilled; and
  • whether existing laws are being used to address COVID-19 in a manner which is inconsistent with their legislative intent.  

States may find it important, for a multitude of reasons, to retain comprehensive contemporaneous records of the reasons for decisions, as well as ensuring that communications with individual investors, as well as industry and sector groups, are clearly documented.

For investors, it will also be important to keep contemporaneous records of the impact on the investment(s) affected by state action. Any communications with states, particularly those seeking or receiving assurances as to treatment, should be carefully recorded and those records preserved.

Other relevant considerations

The fact that state action has negatively affected a foreign investment does not automatically lead to an actionable breach of an IIA. This will depend on the nature of the state action and the circumstances in which it has been taken, the wording and interpretation of the IIA, and whether the IIA contains exemptions or prudential carve outs which apply in certain circumstances (such as national security, public health or public order). In such extraordinary circumstances there may be defences available to a state, either based on the wording of the relevant treaty or on customary international law (including defences based on necessity, distress or force majeure).

In summary, notwithstanding the fact that COVID-19 presents an unprecedented and fast-developing challenge, the guarantees given to foreign investors under IIAs remain relevant to an assessment of state action in response to the pandemic. Whilst the question of whether an investor may be entitled to damages under an IIA is fact and treaty-specific, the prospect of such claims is therefore relevant to states and investors alike.

For more information about our investment treaty practice, and to find a key contact in a relevant jurisdiction, please click here.

Andrew Cannon

Andrew Cannon
Partner
+44 20 7466 2852

Christian Leathley

Christian Leathley
Partner
+1 917 542 7812

Hannah Ambrose

Hannah Ambrose
Senior Associate
+44 20 7466 7585

ETHIOPIA ACCEDES TO 1958 NEW YORK CONVENTION

On 13 February 2020, Ethiopia’s parliament approved accession to the 1958 Convention on the Recognition and Enforcement of Foreign Arbitral Awards (the “New York Convention” or the “Convention“). Ethiopia will become the 163rd state signatory and the 39th African state to accede following the recent accessions of the Seychelles, Cabo Verde and Sudan.

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