Regime change threatens investments worldwide

by Rob Hebert
Law Weekly
April 1, 2009

On Thursday, Mar. 26, the International Arbitration Society sponsored a panel discussion concerning the current state of investment arbitration in countries experiencing regime change. The panel featured Claudia Salomon, co-chair of DLA Piper's international arbitration practice, and Nigel Blackaby, head of Freshfields' U.S. and Latin America dispute resolution team.

The panelists shared lessons from their experiences in Eastern Europe and Latin America, highlighting key differences and similarities between the ways each area had coped with sudden regime change and its attendant challenges.

Blackaby explained how regime change created the need for international investment arbitration. Arbitration is often necessary when developing or politically unstable countries alter their governmental structure or leadership in such a way that they are unable or unwilling to meet their past liabilities. This usually happens during times of considerable political upheaval, when contracts and treaties signed by previous regimes are no longer convenient for those now in control. This negatively affects the citizens of the newly restructured nation, foreign business partners, and other nation-states that have invested in the development of the country.

Blackaby discussed his work with the International Centre for Settlement of Investment Disputes (ICSID), an autonomous international institution that provides facilities for conciliation and arbitration of international investment disputes. Blackaby's work with ICSID primarily involved renegotiating ownership of private land and utilities that had been seized by governments. "These are situations where the citizens are unhappy--unhappy with their government, unhappy with a lack of opportunity that they see as part of this deregulation trend of the last couple of decades," said Blackaby. "We've seen an upswing in these sorts of populist movements, where a new regime comes to power and swiftly begins seizing land their predecessors sold to Americans and the Dutch."

One such instance involved the seizure of a large piece of grazing land in Ecuador from a British dairy farm, on the basis that the British parent company could not produce documentation proving a valid claim to the land. The dairy farm had deed renewals going back at least to 1841, but the Ecuadorian government cited their inability to produce an original as evidence that the deeds were forgeries.

According to Blackaby, the company was unable to produce an original because, even if it still existed, the Ecuadorian government would have it anyway. "The government is demanding to see a document that the private company doesn't have, because the government has it all along," he said. ICSID was brought in to renegotiate the contract between both parties, and eventually brokered a use-based land-sharing deal that was acceptable to all involved.

In essence, however, the national governments are usually able to ensure their desired terms by threatening to nullify outright the contracts of uncooperative business partners.

Sometimes, the seizures themselves can become the source of more political unrest. For foreign companies that treat their employees with dignity, their greatest defenders are often the workers themselves. When the Venezuelan government attempted to nationalize a Dutch-owned refinery and replace the management with Chavez supporters, the workers retrieved rifles from their homes and defended the gates of the compound. Eventually a deal was brokered that allowed the refinery to continue operations in essentially the same manner it had before.

Arbitration in Eastern Europe, on the other hand, is usually more about devising a way for nation-states to fulfill the mutually exclusive terms of contradictory treaties after more peaceful government transitions.

Salomon has spent several years in the Czech Republic working on contract disputes arising out of the terms of the nation's admission to the European Union in 2004. The laws of the E.U. create a number of conflicts with he Czech Republic's Bilateral Investment Treaties (BITs), which set terms and conditions for private investment by nationals and companies of one state in the state of the other. "You can't just cancel all the treaties of an old governmental system every time the country initiates a new reform," said Salomon.

One of the problems is that many less-developed European countries, especially former Soviet republics, have a backlog of declarations and treaties that are no longer workable.

"A lot of times, it's kind of like the left hand not knowing what the right hand is doing." Because all parties involved are searching for an amenable outcome to the disputes in order to maintain a constant flow of capital across the border in both directions, the states are usually more conciliatory than their Latin American counterparts. "Here, they want the companies, they want the money, they want the Western business expertise."

But in yearning for quick resolutions, states such as the Czech Republic develop an inconsistent series of judicial decisions. In one case, a Dutch businessman lost one case but won another based on the same claim because it was brought under the name of the British company he owned.

Still, the challenges for both Eastern Europe and Latin America are the same: forging stable business relationships domestically and abroad in an age of increasing globalization and trade.