What to Consider in International Investment and Energy Contracts?

Introduction 

International investment contracts are contracts signed between the "host state" or a state-dominated company (TPOA, BOTAŞ, etc.) and the "foreign investor". International investment contracts are large-scale contracts that require high capital and technology, involve political risks and have long-term economic consequences. There are three actors in these contracts: the host state, the "home state" to which the foreign investor belongs, and the foreign investor undertaking the investment. A foreign investor is a natural person who is a national of a state other than the host state or a legal entity established under the law of that state. Although in reality the parties to the contract are the host state and the foreign investor, the source state also appears on the scene as a third party due to "international agreements" as explained below. In other words, the foreign investor gains international protection due to international agreements signed by its own state. 

International Investment and Energy Contracts 

The subject matter of international investment contracts may be projects related to infrastructure and works contracts such as bridges, tunnels, highways, ports, water resources, telecommunications, etc., as well as energy investment contracts such as oil or gas production, oil exploration, drilling, refinery establishment, natural gas storage, oil and natural gas transportation and distribution, gas sales, construction of pipelines, etc. Some of the infrastructure contracts are also transboundary energy infrastructure contracts.  Whether cross-border or domestic, infrastructure contracts are build-operate-transfer, build-lease-transfer, build-transfer, repair-lease-transfer, etc. In these contracts, there is a master agreement between the investing state and the foreign investor, such as a build-operate-transfer style concession agreement, joint venture, production sharing or service contract. In addition to the master agreement, there are many other agreements with different parties.  For example, if several companies come together in a joint venture and become a party to a concession agreement as an investor, a joint venture agreement determining the rights and obligations between the companies, loan agreements signed by the foreign investor with credit institutions, etc., many contracts may be within the scope of the relevant project. Other agreements other than the master agreement are outside the scope of our subject. 

Concession contracts have an important place among international investment contracts. In order to determine the meaning of "build-operate-transfer" or in other words "public-private partnership" concession contracts, it is useful to first look at the meaning of the word "concession". The word "concession" means the granting of a special status or the granting of a special status. In this case, it is seen that a concession is granted to the foreign investor. In investment contracts to which foreign investors are a party, a public service is made subject to private law through a contract and made to be performed by a foreign investor. Considering these characteristics, concession agreements in the form of build-operate-transfer were subjected to the rules of administrative law before 1999 and were valid after being reviewed and approved by the Council of State. 

The 1999 amendment to Article 125 of the Constitution stipulates that disputes arising from such contracts may be resolved through arbitration. The purpose of the amendment was expressed as transferring foreign investment to our country. Today, there are justified opinions and criticisms regarding the possibility of resolving disputes arising from concession agreements through arbitration in accordance with Article 125 of the Constitution and the investor's preference for this method, as the service fee would be too high in the utilization of public services, decisions may be made against the host state due to the lack of an appeal mechanism in the arbitration procedure, different solutions may be offered by arbitration committees in the same dispute, instead of this, the state is the owner of the work and the public interest would be provided in the realization of infrastructure contracts by giving the contractor the price of the work.

Conditions for International Investment and Investment Climate 

States strive to create a favorable investment climate to attract foreign investors. If the investor feels safe in the investment climate, he/she will make the investment. The investment climate is closely related to the geographical and geopolitical location, economic and political conditions of the host state and the investment law of the state accepting investment. If the investment law of the state is organized in a way to protect the investor, it provides an advantage.  However, the investor also considers the political and economic conditions in addition to the law. This article will focus on the legal conditions.

Legal Bases of International Investment Agreements 

The legal basis of international investment agreements is the investment law of the host state, bilateral international agreements and multilateral international agreements signed between the host state and the source state, and investment agreements signed between the host state and the foreign investor. 

The investor will primarily be subject to the law of the host state in many matters.  In the legal order of the host state, the tax regime, exemptions and incentives to be applied to the foreign investor, the entry of the investment into the country, the regulations regarding the transfer of the investor's income from the investment abroad, the conditions and facilities for employing foreign personnel, the regulations regarding the entry of investment instruments into the country, the narrow and broad expropriation to be applied to the foreign investor, etc. are important for the investor. Although the legal order of the host state contains regulations to protect the investor, the fact that these regulations can be changed by the host state will not provide sufficient protection. The foreign investor will also take into account bilateral and multilateral agreements on international investment signed by the host state. In particular, existing bilateral agreements between the host state and the source state will be effective.  

The investment agreement between the foreign investor and the host state is one of the most important sources that determines the mutual debts, obligations and rights of the parties. An action or transaction contrary to the contract will give the parties certain rights under this contract. In order to resolve the dispute arising in case of breach of the contract, the foreign investor generally wants to resort to alternative dispute resolution methods instead of applying to the state courts, and if it is strong enough, it usually includes an institutional arbitration clause in the contract, such as ICC (International Chamber of Commerce) Arbitration or ICSID (International Center for The Settlement Of Investmant Disputes) Arbitration. As will be explained below, bilateral agreements between the host state and the source state for the promotion of investment, multilateral international agreements such as the ICSID Convention or the Energy Charter Treaty also allow foreign investors to resort to arbitration, even if the contract does not contain such a clause. Bilateral and multilateral international agreements only provide the foreign investor with recourse to arbitration, but not the host state. 

Common Aspects of Bilateral International Investment Treaties 

Today, states sign many bilateral international agreements to increase investment. It is stated that there are over three thousand international bilateral investment agreements signed by states. These agreements are generally type agreements and contain similar provisions. When bilateral agreements are analyzed, it is seen that "investment" and "foreign investor" are defined in these agreements. The concept of investment is broad and all assets (movables, real estate, stocks, patents, licenses, usufruct rights, pledges, mortgages, intellectual and industrial rights, etc.) are considered within the scope of investment. There are regulations stipulating that a foreign investor must be a foreign person who is not of the nationality of the host state in terms of natural persons, and a legal entity whose head office or place of incorporation is not in the country of the source state in terms of legal entities.

Another issue regulated in international bilateral agreements is the "standard of treatment" to be applied to foreign investors.  In these arrangements, the standard of "national treatment" is usually set and it is stated that the foreign investor will be provided with the same conditions that the host state provides to its domestic investors. Another treatment requirement is usually "most favored nation treatment". Most favored nation is that the favorable conditions provided to another foreign investor will also be provided to the investors of the source state. In addition to these treatment standards, there are also standards on "fair and equitable treatment" or "full protection and security". These treatment standards do not apply to the advantageous standards set in customs union economic union agreements. 

Another issue regulated in bilateral agreements is the protection of foreign investors' investments against expropriation. While bilateral agreements do not impose restrictions on the prevention of expropriation, it is seen that expropriation is also regulated in terms of expropriation in the public interest, without discrimination, full and timely compensation of the damage with effective means of payment, and appropriate compensation. In these arrangements, expropriation is given a broad meaning and issues such as nationalization, nationalization, imposition of additional tax obligations, etc. are considered within this scope. 

Another issue regulated in almost all bilateral agreements is dispute resolution methods. In these agreements, there are generally provisions stipulating that the amicable settlement mechanism will be operated for a period of 3 months or 6 months before resorting to the judiciary, and in case of failure to reach a solution, the host state courts, alternative dispute resolution methods (mediation, amicable settlement, etc.) or arbitration will be used. Among these regulations, the fork in the road clause, which refers to a fork in the road, is widely used. The meaning of this clause is that when the dispute is not resolved after amicable settlement, the parties choose one of the options specified in the investor agreement, which offers two or more options such as court or arbitration. Once the investor chooses one of these options, the investor cannot go beyond these options. 

Multilateral international agreements between the host state and the source state are also effective in investment. Within the scope of these agreements, regional agreements such as NAFTA (North American Free Trade Agreement) and multilateral international agreements such as the Energy Charter Treaty and the ICSID Convention also contain important regulations.