Foreign Investment Guarantees

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Mohammad Hamdan
Russian Federation

Foreign Investment Guarantees

A foreign investment guarantee is an international investment contract defined as a (written) agreement whereby a foreign company is obligated to provide technical and/or financial assistance, with the aim of contributing to the implementation of national plans for the economic and social development of the host country, which in turn is obligated to provide a compensation to the company, financially or in kind.
Suppose you represent this foreign company, or you are its owner and find yourself facing a host country which is the sovereign party that has exceptional advantages within its borders. How can you protect yourself from the contractual imbalance caused by the state's intervention as a public authority, whether in the form of issuing new legislation or imposing enforcement measures against you without the slightest respect for your rights? In other words, what are the most important investment guarantees that you can ask for as a foreign investor while negotiating a contract to ensure your rights?

What are Investment Guarantees? Definition

Investment guarantees are the advantages and arrangements that the host country grants to foreign investors, to dispel their fears and encourage them to invest their money within its territory. They are given either by stipulating them in special legislation or by agreeing with the investor in the investment contract.

Types of Investment Guarantees

  1. CHOICE OF LAW CLAUSE
    You have to work hard through negotiations to exclude the internal legal system of the host country and work on liberating the contract from the authority of the law depending on its self-sufficiency (meaning that the contract includes all legal aspects that may be raised in the future so that your contract is your law), or subjecting it to the rules of public international law or to the rules of international trade law.
  2. DISPUTE SETTLEMENT MECHANISMS
  3. Try to stay away as much as possible from the settlement of disputes arising when negotiating or when implementing the contract or after the completion of its implementation through the normal local judicial remedies of the host country. This will break the contract's balance and put you at the mercy of judges who will not have the required impartiality to settle the dispute. Not to mention the risks of wasting time which will result in large losses and great negative effects, due to the length of time that the local court takes to settle. Therefore, before starting the negotiation, stipulate that all problems arising from contracting must be solved through mediation and arbitration. And be sure to write "Stipulation to Arbitrate" that organizes its procedures to settle disputes and indicates the conditions for its validity.
  4. STABILIZATION CLAUSE
  5. This aims "to preclude the application to an agreement of any subsequent legislative (statutory) or administrative (regulatory) act issued by the government or the administration that modifies the legal situation of the investor". This does not mean that the host country relinquishes its power to enact new legislation, or in other words, it relinquishes its legislative authority, but only obliges it not to enforce new regulations against the other contractual party. That means, only the rules, procedures, and laws that were in effect at the time of the contract shall be applied to it.
  6. PROTECTION OF PRIVATE PROPERTY RIGHTS
  7. Property rights are sacred rights for foreign investors. Therefore, before making your decision and choosing the host country, be sure to familiarize yourself with its legislative system, and with the guarantees that its laws grant regarding the protection of property rights. Also, make sure you confirm this, by including a clause in the contract related to not prejudice to the property rights, whether through nationalization, confiscation or even by invoking public interest.
  8. CURRENCY CONVERTIBILITY AND TRANSFER MONEY
  9. The foreign investor will not be interested in making profits if she/he doesn't possess the possibility of transferring them freely outside the host country. So remember to keep this point in mind when negotiating, whether these transfers are related to capital, interest, principal loans, profits, returns, or any other transfers. In this regard, also make sure that you obtain guarantees that protect you from the risks of a depreciating exchange rate in the host country. This is one of the most important problems faced by foreign investors when investing in developing countries.
⇨ Please share your experiences and information about investment guarantee mechanisms and methods and drop me a reaction!

References:
Multilateral Investment Guarantee Agency World Bank Group (2015), Investment Guarantee Guide, p. 4.
Kathryn Gordon (2008), Investment Guarantees and Political Risk Insurance: Institutions, Incentives and Development, OECD Investment Policy Perspectives, p.p. 91-122.
Jan H. Dalhuisen & Andrew T. Guzman (2013), The Applicable Law in Foreign Investment Disputes, p. 16.

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