INVESTOR-STATE AGREEMENTS Encouraging Investment By Protecting Foreign Investors

For several years now, commentators — particularly in the business community — have opined that Thailand needs a significant infrastructure upgrade, including its mass transportation, road, and railway systems.

The government appears to agree. Despite their differences, Thailand’s two main political parties have both presented proposals for large-scale, comprehensive infrastructure projects, and continue to agree that Thailand needs to invest significantly to modernize its infrastructure.

In such circumstances, it’s not uncommon for a government to encourage private sector investment, which can offer several benefits — technical or managerial expertise not available domestically, a larger and more competitive bidding pool, and, depending on the structure, project financing. Where the potential private investor is foreign, a significant consideration is the protection afforded to the investment. Internationally, this protection is usually provided by substantive rights and enforcement provisions in a public-private contract (“PPC”) between the host State and the foreign private party, an investment treaty (“IT”), or both. The following explains what types of rights and enforcement provisions are commonly available to foreign investors under these two options, and concludes with a brief comment on the current investor-State situation in Thailand.

Substantive Rights

The rights afforded to an investor under a PPC are for the contracting parties to determine, and may vary depending on the type of investment. A common concern for foreign investors, however, is that the State may enact or change its law in a way that diminishes the investment’s value. A substantive right commonly included in a PPC to address this is a provision applying the law of the host State — as it existed at the time of investment — throughout the investment’s duration. This is commonly known as a “freezing clause.”

Whereas the investor must convince the host State to include such investment protection provisions contractually, ITs provide these protections without that requirement. ITs take three common but different forms:

1. Bilateral agreements between two countries (BITs) — Thailand is currently party to at least 34 such agreements;
2. Multilateral investment agreements between more than two countries (MITs) — the 2009 ASEAN Comprehensive Investment Agreement (ACIA), to which Thailand is also a party, is a good example; and
3. Free-trade agreements (FTAs), which, while not dealing exclusively with investment protection, commonly include such provisions — the 2009 ASEAN-Australia-New Zealand Free-Trade Treaty (AANZFTA), to which Thailand is a party, is a good example of an FTA.

The substantive protections ITs commonly offer investors include:

1. “Fair and equitable treatment” in accordance with international minimum standards — generally equated with the investor’s legitimate expectation of transparent, predictable, consistent, and just treatment by the host State;
2. “Full protection and security” — imposing positive obligations on the host State to protect investments;
3. No “arbitrary or discriminatory treatment” — requiring the host State to observe internationally accepted standards of due process;
4. No direct or indirect “expropriation” of the investor’s property without “prompt, adequate, and effective compensation”;
5. “National treatment” and “most favored nation treatment” — sometimes treated separately, requiring the host State to treat the investor no worse than it treats its own nationals or investors from third States; and
6. Observance of specific contractual undertakings by the host State toward the investor — sometimes called “umbrella clauses,” requiring the host State to honor its undertakings regarding the investment.

Enforcement

Claims by an investor under a PPC are subject to whatever dispute resolution mechanism the PPC itself provides. Under an IT, this is usually by submitting the dispute either to the host State’s courts or to international arbitration. Where international arbitration is provided for, it commonly takes one of three forms:

1. ICSID;
2. Institutional arbitration; or
3. Ad hoc arbitration under the UNCITRAL Rules.

Submission to the host State’s courts is generally not the investor’s preferred choice — the forum isn’t considered “neutral,” and the decision-maker isn’t regarded as truly independent of the allegedly breaching host State.

ICSID stands for the International Center for the Settlement of Investment Disputes, established by the 1965 Washington Convention “primarily to create an arbitral forum for the resolution of disputes between investors and States.” As of 1 November 2013, 150 States had ratified the Washington Convention. Because it was designed specifically for investor-State disputes, ICSID arbitration is distinctive in that it:

1. Virtually eliminates any involvement by another State’s courts in the arbitration proceedings; and
2. Requires all contracting States to immediately enforce the final award without any grounds for refusing enforcement — avoiding the “indignity” of a contracting State being subjected to scrutiny by another State’s courts.

Institutional arbitration refers to arbitration under the administration and rules of a service provider — for example, the International Chamber of Commerce, the International Center for Dispute Resolution, the Singapore International Arbitration Center, or the Thai Arbitration Institute.

Ad hoc arbitration under the UNCITRAL Rules refers to arbitration not administered by an institution, but controlled instead by the United Nations Commission on International Trade Law’s Arbitration Rules.

Both institutional and ad hoc UNCITRAL arbitration are designed for commercial disputes between individual parties, without regard to the particular sensitivities of disputes involving national “sovereigns.” Both depend on the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, which only recognizes arbitration awards subject to the procedural law — and a certain degree of possible court involvement — of the State where the arbitration takes place. This third-party court involvement is the reason ICSID arbitration is generally the preferred choice for arbitration involving a State. ICSID gained broad acceptance within ITs as they proliferated; however, as States have increasingly recognized that their commercial activity doesn’t necessarily implicate their sovereignty, ITs have also become increasingly subject to institutional and ad hoc arbitration.

With regard to enforcement under ITs, investors are sometimes required to first submit their dispute to the host State’s courts for some minimum period. Ultimate resolution, however, is generally vested in one of the forum options discussed above — the investor typically has a choice of forum, but once made, that choice excludes the others. A typical example is Article 33(1) of the ACIA, which allows a disputing investor to submit a claim, at their choice, to:

(a) The courts or administrative tribunals of the disputing Member State, if they have jurisdiction;
(b) ICSID, if both the disputing State and the non-disputing State are ICSID Convention parties;
(c) The ICSID Additional Facility Rules, if either State is an ICSID Convention party;
(d) The UNCITRAL Arbitration Rules;
(e) The Regional Centre for Arbitration in Kuala Lumpur, or another ASEAN regional center; or
(f) Any other arbitration institution the parties agree to —

with the choice of any one forum excluding resort to the others.

It’s also worth noting that an investor may have a claim under either their PPC, an applicable IT, or both — though any such claim is properly addressed only under the dispute resolution provision of whichever instrument actually applies.

Thailand

Thailand can point to several successful foreign investor-State projects in recent years. However, in December 2003, the Civil Court of Thailand upheld a 6.2 billion Thai Baht international arbitration award against the Expressway and Rapid Transit Authority of Thailand (a Thai government agency) in favor of Bangkok Expressway, PLC (a Thai-foreign joint venture), concerning their PPC for construction of the Bang Na–Chonburi elevated expressway and the concession to operate it. Following this, on 27 January 2004, the Thai Cabinet passed a resolution prohibiting the inclusion of arbitration in PPC contracts involving concessions without prior Cabinet approval.

Then, on 1 July 2009, Walter Bau AG (a foreign contractor) was awarded approximately 30 million euros in an international arbitration regarding construction of the Don Muang tollway. Although that arbitration was brought under an IT rather than a PPC, the Thai Cabinet responded on 28 July 2009 by extending the 2004 resolution to cover all PPCs.

Both Cabinet resolutions — along with other instances where Thai courts have refused to enforce international arbitration awards based on interpretations not in keeping with international norms — have caused concern within the foreign business community in Thailand. Thailand also signed the Washington Convention in 1985 but has still not ratified it. These issues should undeniably be considered by any foreign investor contemplating a contract with the Thai State.

That said, Thailand remains part of the broader trend toward protecting foreign investors through its various IT commitments. Cabinet approval for arbitration provisions in PPCs has, in fact, been granted in several instances since 2010. A further encouraging sign is the 14 July 2015 Cabinet resolution, which amended the 2009 resolution — Cabinet approval for arbitration in PPCs is now required only for:

1. Contracts covered by the Private Investments in State Undertakings Act (2013), which includes all PPCs for projects worth 1 billion Thai Baht or more; and
2. All PPCs involving concessions.

Any potential investor should therefore carefully consider PPC contractual provisions with the Thai State — including arbitration as the chosen means of dispute resolution — alongside any applicable IT, which may achieve protections that a negotiated PPC alone cannot.

With few exceptions, the dominant global and regional trend continues to favor strong protection and enforcement of rights between investors and States. Thailand has always been, and continues to be, a responsible and active member of the global economic community, and is expected to continue moving toward harmonization with internationally accepted foreign investor-State practices.