Contractual means of foreign investors' protection in countries with a risky business environment by Elena Seryapina

Elena Seryapina

Investing money abroad is always a big risk. Needless to say that risk of losing assets grows tremendously when it comes to investing money in economically and politically unstable countries. Even though the success of a foreign investment project depends on many various factors (economic, political, social, legal, environmental, etc.) I believe it is reasonable to study available contractual means of investors’ protection before launching any investment projects abroad. Careful draft of an investment contract is the first step in preparing for the future possible international dispute resolution.

1.       Legal principles in the contract.

By including certain provision in investment agreements at the initial stage of the project (i.e. principle of legal certainty (including the principle of protection of legitimate expectations), principle of sanctity of contracts, protection of property rights), foreign investors will secure their rights and avoid challenges of enforcing the contract.

2.       Choice of law governing contractual relationship.

The second crucial provision of the investment contract that every foreign investor should consider is the law governing contractual relationships. For example, in accordance with mandatory provisions of the RF Civil Code (Art. 1210) the parties to the contract (in the case where one of the parties is a foreign resident) are free to choose the law applicable to the contractual relationship at the moment of signing the contract or at any time later on. Often foreign direct investments are executed via purchase of local companies or any local assets. Therefore the law governing the investment agreement will influence particularly the transaction on purchase and sale of stocks, but not the operation of local companies in the territory of Russia. Foreign investors will have to deal with Russian legislation anyway, since it is mandatory for all business operations carried out in the country by locally established legal entities.

Nevertheless it is crucially important for the investor to think of the most favorable law to govern the investment agreement since it defines rights and obligations of the parties, enforcement procedure, penalties for breach, ways to contract out, and finally, affects the arbitration clause incorporated in the agreement. Professor Lew expressed the following concern about the law governing the agreement: 

There is a very strong presumption in favor of the law governing the substantive agreement which contains the arbitration clause also governing the arbitration agreement. This principle has been followed in many cases. This could be even implied as an agreement of the parties as to the law applicable to the arbitration clause.[1]  

Russian legislation for example is not the best choice for the foreign investors: Russian laws are often unclear, manipulated and selectively interpreted by state authorities and courts, generally unfavorable for the investors and unexpectedly changed by legislators. Unfavorable legal framework for the foreign investors is mainly caused by the Law No. 57-FZ introduced in April 2008. The law restricts the activity of foreign investors and requires approval of the Government Commission for Control over Foreign Investment in Russia of any transaction through which foreign investors obtain a controlling interest in a company involved in a strategic sector. Western lawyers argue that Russian commercial law is difficult to predict since it does not recognize judicial precedent as a binding source of law.[2] In addition, Russian commercial contracts do not usually have such provisions as “representations and warranties and indemnities.”[3] As a result different courts (state courts and third-party arbitration tribunals) apply legal principles and even mandatory provisions of law differently.

Legal consultants, hired to support international investment activity of multinational corporations in Russia should first of all do research about domestic laws of countries that contain the most beneficial provisions in relation to targeted investments and international dispute resolution. The logic is the same as in those cases when many corporations choose English law to govern maritime contracts. 

3.      Security (“stabilization”) clauses.

The second very important mechanism to secure rights and privileges of foreign investors might be so called the security or “stabilization” clause incorporated into investment agreements:

“The laws of the host state are applicable as in force of ___ ______ 20__.”

Or alternatively such a clause might stipulate that any future changes in the host state’s laws negatively affecting the investor will not be applicable to the parties’ relationship under the investment agreement. Such a clause is usually requested by the investor and might serve as a nice “compensation” for agreeing to have the law of the host state as a governing law of the contract. According to Professor Christoph Schreuer, the nature and precise legal meaning of stabilization clauses have never been fully clarified. One position is that any change (negative for the investor) in the law applicable to the contractual relationship of the parties will be considered as violation of the contract. The other position favors the interest of the host state and says that change in the applicable law is possible, but requires the state to compensate any losses of the investor caused by such change.[4] 

Nevertheless, Professor Schreuer notes that “over the last decade, reliance on such clauses has decreased in practice, mainly in difference to the sovereignty of the host state.”[5] Promises hastily given by the host states during contractual negotiations worldwide lead to the most extensive renegotiations of energy investment contracts. Many disputes have been submitted to international arbitration involving the largest energy companies in the world and the governments of several major producing states during the last decade.[6] Decisions of the tribunals differed from case to case despite the fact that in all cases the host state had violated stabilization clause designed to shield investors against regulatory changes. Thus, Tribunal in Liamco v. Libya case (arbitration initiated against expropriatory actions taken by Libya in 1970s) ruled that a stabilization clause does not affect the sovereign right to expropriate a contract, and that a violation of a contract is not unlawful under international law.[7] In contrast, Tribunal in Texaco v. Libya case ruled that by breaching a stabilization clause the host state violates principle of international customary law pacta sunt servanda. The decision concluded that expropriation made by Libya was null and void and the concession continued to be in force.[8]     

In this context, Peter Cameron in his article suggests shifting the traditional approach to stability of contract in the international energy industry towards a “complex, multilayered framework.” He argues (and I tend to agree with him) that the new approach shall combine significantly expanded provisions of international investment law, investors’ protections incorporated in domestic laws of many states, and more sophisticated contract-based stabilization provisions.[9]

4.      Renegotiation/Adaptation clauses.

An alternative approach to preserve stability of an investment agreement is to incorporate a “renegotiation clause.” Often the parties focus on economic equilibrium rather than on legal sanctity in such clauses. As an example of a renegotiation clause, foreign investors might consider the following wording used in the Model Exploration and Production Sharing Agreement of the Sheikdom of Qatar in 1994:

Art. 34.12 Equilibrium of the Agreement

Whereas the financial position of the Contractor has been based, under the Agreement, on the laws and regulation in force at the Effective Date, it is agreed that, if any future law, decree pre- regulation affects Contractor’s financial position, and in particular if the customs duties exceed … percent during the term of the Agreement, both parties shall enter into negotiations, in good faith, in order to reach an equitable solution that maintains the economic equilibrium of this Agreement. Failing to reach agreement on such equitable solution, the matter may be referred by either Party to arbitration pursuant to Article 31.[10] 

Renegotiation clauses leave more flexibility to the parties in comparison with stabilization clauses. However the parties are encouraged to make renegotiation clauses as specific and detailed as possible, since it is often unclear what particular circumstance triggers the renegotiation process. Structuring the renegotiation process is usually beyond the investment agreements and is considered to be the full responsibility of the parties. Nevertheless it is very important for the investor to realize that the renegotiation process requires the good will and good faith of both parties in order to bring the desired results. This means that in case of a dispute or tense relationship between a foreign investor and a host state (as it often happens) a renegotiation clause might not be very helpful. Major investor-state arbitration commentators have agreed to research the effects and practical meaning of renegotiation clauses more thoroughly and to give further recommendations (if any) after conducting research. I personally believe that one of the practical applications of renegotiation clauses might be a transformation of the dispute from an active confrontation between an investor and a host state to a civilized and mutually beneficial mediation.[11]       

5.      Multi-tier clauses.

A multi-tier clause is a more advanced version of a renegotiation clause. Thus, parties to an investment agreement might decide that prior to submitting their dispute to arbitration they will try to reach settlement via direct bilateral negotiation or third-party assisted communication such as mediation. Through such an approach to dispute resolution, the parties will be able to avoid “lengthy, expensive and disruptive arbitral proceedings.”[12] A multi-tier clause also requires good will and good faith of the parties as well as their clearly expressed intention to settle the dispute. Otherwise this clause will only delay and obstruct legally binding proceeding by leading to additional procedural and enforcement problems when put into effect. Commentators of international arbitration involving multi-tier clauses strongly encourage the parties to clearly draft multi-tier clauses in order to avoid future uncertainty. Thus they encourage parties to state expressly whether such pre-arbitral proceeding shall be mandatory for the parties or optional, and when the parties can escalate from one tier to the next. It is also recommended to set out a process description, timelines and rules for pre-arbitral tiers, ensuring that consequences of non-compliance or resolution are clearly defined.[13]   

6.      Arbitration clauses – choice of forum.

The last contractual provision, which I want to direct your attention to, is the arbitration clause. Classic and most secure arbitration clauses usually address the following issues: the number of arbitrators, establishment of arbitral tribunals, ad hoc or institutional arbitration, filling vacancies in the tribunal, place of arbitration, law governing arbitration, language of arbitration. Arbitrations usually take place pursuant to a standard form arbitration clause recommended by the arbitral institution to which the arbitration clause refers. Bearing this in mind, I would like to comment on possible arbitration institutions in Russia, which foreign investors might consider.

Generally speaking Russia has one major arbitration institution capable of considering international commercial disputes involving foreign investors - International Commercial Arbitration Court (ICAC) located in Moscow. ICAC is usually presented as the oldest and one of the best and most popular institutions for private dispute resolution in Russia.[14] However, it is still an open question whether ICAC is the best option for the foreign investors in the Russian electricity market. Generally speaking, private commercial arbitration institutions in Russia (including ICAC) have the same drawbacks as state courts: high level of corruption, potential jurisdictional challenges, and selective application of commercial law provisions. Thus, the biggest jurisdictional challenge that foreign investors might have is that state commercial courts have the right to hear international commercial disputes by default. The dispute might be moved to private commercial arbitration only in case that one of the parties objects and moves to enforce the arbitration clause. State courts can also assert jurisdiction to hear international commercial dispute if they discover that the arbitration clause (or agreement to arbitrate) incorporated into investment contract is invalid or cannot be enforced.

Therefore, it is highly recommended to use the exact wordings of arbitration clauses (model clauses) proposed by arbitration institutions such as ICAC. By doing this, foreign investors will be able to avoid interference of state courts in the private commercial arbitration process on the basis that the arbitration clause is invalid. Interesting to note, that Russian parties are “increasingly choosing to litigate major cases in foreign arbitration venues such as London, Stockholm, Paris, and New York.”[15] Many Russian litigation lawyers have recently started to insist on the application of foreign law to contractual relationships of parties since it contains more beneficial principle and concepts.[16] 


[1] Lew, The Law Applicable to the Form and Substance of the Arbitration Clause, ICCA Congress Series No 14, 1998, para 136.

[2] Mikhail Rozenberg, Commercial Dispute Resolution in Russia, Russian Investment Rev., Oct. 2006, at 44, available at http:// (search “dispute resolution in Russia”).

[3] Id. at 45

[4] Rudolph Dolzer & Christoph Schreuer, Principles of International Investment Law 75 (2008).

[5] Id.

[6]Peter Cameron, Stability of Contract in the International Energy Industry, 27 No. 3 J. Energy & Nat. Resources L. 305, (2009).

[7] LIAMCO v. Libya, Award, 12 April 1977, 62 ILR 141, 20 ILM (1981).

[8] Texaco Calasiatic (Topco) v. Libya, 17 ILM (1978).

[9] Rozenberg, supra note 27.

[10] K. Berger, Renegotiation and Adaptation of International Investment Contracts: The Role of Contract Drafters and Arbitrators, 36 Vanderbilt Journal of Transitional Law 1347, (2003).

[11] Dolzer & Schreuer, supra note 32, at 78.

[12] Nigel Blackaby & Constantine Partasides,, Redfern and Hunter on International Arbitration 115 (2009).

[13] Swiss Federal Supreme Court, How to Deal with Multi-Tired Dispute Resolution Clauses, ASA Bulletin, 26-No1, 103-112, (2008).

[14] Rozenberg, supra note 28, at 44.

[15] Id., at 45.

[16] Glusker, supra note 1, at 598.

© Conflict Change Consulting Ltd.  2014