Advanced  Contract  Law  and  

Negotiation
Unit  5  – The    legal  framework  of  ISCs  and  
contractual  devices  for  foreign  investment  
protection

David  Rossati
Lecturer  in  Law
Salford  Business  School
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Unit  5  – Learning  outcomes
Part  1
• Navigate  the  legal  framework  relevant  to  ISCs
• Have  a  general  understanding  of  the  public  international  
law  related  to  foreign  investment
• Understand  the  key  aspects  of  bilateral  investment  
treaties  and  their  provisions  on  dispute  settlement
Part  2
• Identify  and  understand  the  rationale  of  the  most  
relevant  contractual  clauses  in  ISCs,  which  aim  to  
protect  the  interests  of  foreign  investors
• Understand  the  scope  and  limits  of  force  majeure  and  
hardship  clauses
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Part  1  -­ The  legal  framework  of  
ISCs  
The  Public  International  Law  (PIL)  on  foreign  investment

The  law  governing  the  contractual  relationship  between  the  foreign  

investor  and  the  host  state

Host  state’s  laws  and  regulation The  elected  law  in  the  contract

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The  sources  of  PIL
Article  38(1)  of  the  Statute  of  the  
International  Court  of  Justice:
• General  principles  of  law

• Customs

• Treaties

• [Judicial  decisions]

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General  principles
• It  is  a  general  and  residual  source,  comprising  
those  general  principles  of  law  recognised  by  
‘civilized  nations’

• Binds  all  states  and  other  subjects  of  

international  law

• The  principle  of  ‘sanctity  of  contract’  (pacta sunt

servanda)  has  been  the  most  used  in  
investment  arbitrations

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Customs
• Are  originated  by  two  contextual  events:
– States  practice  a  certain  conduct  uniformly  and  
through  a  certain  period  of  time  (state  practice);;  and

– They  regard  such  conduct  as  legally  binding  (opinio

juris)

• Bind  all  states  and  other  subjects  of  

international  law  (e.g.  the  UN)

• In  the  context  of  foreign  investment,  an  example  

of  customary  law  is  the  duty  of  the  host  state  to  
offer  adequate  compensation  to  the  foreign  
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investor  if  its  investment  is  expropriated
The  evolution  of  foreign  
investment  under  PIL
• Capital-­exporting  states  have  been  concerned  
with  the  expansion  of  the  definition  of  foreign  
investment  in  treaties  to  mainly  protect:
– The  physical  property  of  the  foreign  investor
– Extend  protection  to  intangible  goods  such  as  
intellectual  property  and  some  types  of  portfolio  
investments
– The  administrative  rights  granted  to  the  investment  
by  the  host  state,  which  are  necessary  to  run  the  
business  (e.g.  licences)

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Treaties
• They  are  international  agreements  in  written  
form  concluded  by  states  and  covered  under  
international  law

• They  are  contracted  between  states  and  are  

binding  only  on  the  states  that  are  parties  (ratify)  
the  treaty

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Bilateral  Investment  Treaties
• They  are  contracted  between  two  states  only

• Their  scope  is  to  set  ‘equal’  standards  of  

treatment  between  states  for  the  nationals  of  a  
state  investing  into  the  territory  of  the  other  state

• They  also  contain  provisions  on  arbitration  

allowing  foreign  investors  to  bring  the  host  state  
before  an  international  tribunal.  This  is  virtually  
never  the  case  under  international  law!  It  is  a  
very  exceptional  feature
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Some  recurring  standards  in  
BITs
• Fair  and  Equitable  Treatment

• Most-­Favored  Nation  Treatment

• National  Treatment

• Full  protection  and  security

• Expropriation

• Repatriation  of  investment  returns

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Settlement  of  disputes
• The  peculiarity  of  BITs  and  other  
international  investment  agreements  is  
that  they  contain  arbitration clauses  
allowing  the  foreign  investor  to  initiate  
arbitration  proceedings  against  the  host  
state  for  breach  of  treaty  provisions

• This  possibility  historically  originated  from  

investor-­states contracts,  where  often  the  
state  agrees  to  settle  contract  disputes  via  
arbitration
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Types  of  arbitrations
• Ad  hoc arbitrations
– Are  instituted  by  contract,  including  the  composition  
of  the  tribunal  and  its  procedures

• Institutional  arbitrations
– Are  instituted  by  international  treaties  (e.g.  ICSID,  
PCA)  or  according  to  national  laws  (LCIA,  ICC).  They  
provide  a  ready  set  of  rules,  including  the  
composition  of  the  tribunal  and  its  procedures

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Enforcement  of  international  
arbitration  awards
1958  New  York  Convention  on  the  Recognition  
and  Enforcement  of  Foreign  Arbitral  Awards
Article III

Each Contracting State shall recognize arbitral awards as

binding and enforce them in accordance with the rules of
procedure of the territory where the award is relied upon,
under the conditions laid down in the following articles. […]

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Part  2  – Contractual  devices  
for  foreign  investment  
protection

From  the  point  of  view  of  the  foreign  investor,  what  
are  the  contractual  devices  available  to  reduce  
some  typical  risks  of  ISCs?

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ISC  drafting  exercise  – land  
concession  agreement  1
The current Government of Poorland, a least developed country, has recently
accepted the offer fro a multinational corporation you represent, Seeds Inc.
(based in Richland), for the purposes of developing a 30.000 hectares palm oil
plantation. According to the minutes of the first meeting between the Ministry of
Agriculture of Poorland and Seeds Inc. managers, the project will rely on a
land lease agreement guaranteeing free and exclusive use of the identified
land for 20 years, against payment of a yearly rent based on production
performance.
As  part  of  the  legal  team  drafting  the  proposed  lease  agreement  by  Seeds.  Inc,  
you  are  requested  to  draft  some  initial  contractual  clauses/terms  which  would  
minimize  the  risks  stemming  from  the  following  facts:
• Poorland has  faced  three  coups  d’etat in  10  years  and  there  are  strong  
nationalist  (anti-­foreigners)  political  factions  which  might  be  able  to  gain  
power
• The  Richland-­Poorland bilateral  investment  treaty  provides  for  “full  
protection  and  security”  of  foreign  investments  …  (continues  in  the  next  
slide) 15
ISC  drafting  exercise  – land  
concession  agreement  2
• Poorland property  law  is  quite  different  from  ‘Western’  legal  systems:  chiefs  
of  villages  hold  customary  rights  on  land  that  is  considered  publicly-­owned  
by  the  state.  Under  such  customary  laws,  local  chiefs  have  the  right  to  
allocate  the  use  of  land  for  agriculture
• The  national  judiciary  is  strongly  inclined  to  protect  national  customary  land  
law
• 1/3  of  the  land  object  of  the  lease  is  currently  inhabited  by  10  villages  
counting  roughly  5.000  people  and,  for  the  proper  running  of  the  project,  
they  will  need  to  be  resettled
• Poorland’s Government  has  recently  passed  a  very-­much-­opposed  
‘Resettlement  Act’  providing  in  Article  32  that  the  “Ministry  of  Agriculture  can  
in  any  circumstances  impose  resettlement  of  persons  residing  in  areas  of  
key  importance  for  economic  development”.  While  this  provision  will  
certainly  help  establishing  the  project  in  the  first  years,  due  the  political  
situation  and  active  resistance  from  local  groups  and  NGOs,  it  might  well  
be  that  Article  32  or  the  whole  Act  will  be  amended  or  repealed.
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ISC  drafting  exercise  – land  
concession  agreement  3
• The  Richland-­Poorland bilateral  investment  treaty  provides  for  “full  
protection  and  security”  of  foreign  investments [a  clause  referring  to  the  
BIT]
• Poorland property  law  is  quite  different  from  ‘Western’  legal  systems:  chiefs  
of  villages  hold  customary  rights  on  land  that  is  considered  publicly-­owned  
by  the  state.  Under  such  customary  laws,  local  chiefs  have  the  right  to  
allocate  the  use  of  land  for  agriculture  [choice-­of-­law  clause]
• The  national  judiciary  is  strongly  inclined  to  protect  national  customary  land  
law  [arbitration  clause]
• Poorland’s Government  has  recently  passed  a  very-­much-­opposed  
‘Resettlement  Act’  providing  in  Article  32  that  the  “Ministry  of  Agriculture  can  
in  any  circumstances  impose  resettlement  of  persons  residing  in  areas  of  
key  importance  for  economic  development”.  While  this  provision  will  
certainly  help  establishing  the  project  in  the  first  years,  due  the  political  
situation  and  active  resistance  from  local  groups  and  NGOs,  it  might  well  
be  that  Article  32  or  the  whole  Act  will  be  amended  or  repealed.  
[stabilization  clause] 17
Vulnerabilities  of  ISCs
1. Time  vulnerability:  foreign  investments  are  
usually  considered  for  long-­term  periods.  The  
long  duration  of  ISCs  makes  it  likely  that  the  
economic  equilibrium  achieved  in  the  contract  
gets  modified  by  unforeseeable  political  and  
economic  shifts

2. Initial/sunk  costs  vulnerability:  foreign  

investments  require  high  expenditures  of  
capital  during  the  early  phases  of  project  
implementation.  A  viable  return  of  investment  
depends  on  the  realization  of  the  economic  
exchange  as  projected  in  the  ISC 18
Contractual  devices  for  
foreign  investment  protection
Type Scope

Concession  agreements,   Protect  the  long-­term  nature  of  

Production  Sharing   investments
agreements,  etc.
Arbitration  clause Avoid  jurisdiction  of  national  courts

Choice-­of-­law  clause Avoid  the  application  of  national  law

Force  majeure  clause Avoid  unwanted  events  altering  the  

economic  equilibrium  agreed  in  the  
Hardship  clause ISC
Renegotiation  clause
Stabilization  clause
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Force  majeure  clause
Lasmo Group  Production  Sharing  Contract,  
Art.17.7
The obligations of each of the Parties hereunder, other than
the obligation to make payments of money, shall be
suspended during a period of Force Majeure and the term of
the relevant period or phase of this Agreement shall be
extended for a time equivalent to the period of Force Majeure
situation. In the event of Force Majeure the Party thereby
shall give notice thereof to the other Party as soon as
reasonably practical stating the starting date and the extent of
such suspension of obligations and the cause thereof. A Party
whose obligations have been suspended as aforesaid shall
resume the performance of such obligations as soon as
reasonably practical after the removal of the Force Majeure
and shall notify the other Party accordingly. 20
Hardship  clause  -­ 1
UNIDROIT  Principles  of  In’tl Commercial  Law
Article 6.2.2 -­ Definition of Hardship
There is hardship where the occurrence of events fundamentally
alters the equilibrium of the contract either because the cost of a
party's performance has increased or because the value of the
performance a party receives has diminished, and
(a) the events occur or become known to the disadvantaged
party after the conclusion of the contract;;
(b) the events could not reasonably have been taken into
account by the disadvantaged party at the time of the conclusion
of the contract;;
(c) the events are beyond the control of the disadvantaged
party;; and
(d) the risk of the events was not assumed by the
disadvantaged party. 21
Hardship  clause  -­ 2
UNIDROIT  Principles  of  In’tl Commercial  Law
Article 6.2.3 -­ Effects of Hardship
(1) In case of hardship the disadvantaged party is entitled to
request renegotiations. The request shall be made without
undue delay and shall indicate the grounds on which it is based.
(2) The request for renegotiation does not in itself entitle the
disadvantaged party to withhold performance.
(3) Upon failure to reach agreement within a reasonable time
either party may resort to the court.
(4) If the court finds hardship it may, if reasonable,
(a) terminate the contract at a date and on terms to be
fixed;;or
(b) adapt the contract with a view to restoring its
equilibrium.
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Hardship  and  force  majeure  
compared
Force  majeure Hardship
Reduces  the  negative  impact   Aims  at  maintaining  the  
on  the  party  affected  by   commercial  equilibrium  of  the  
economic  political  or  social   contract.  It  is  triggered  when  the  
events  unforeseeable  at  the   burden  posed  on  one  party  has  
time  contracting,  though   reached  the  "limit  of  sacrifice."  A  
without  the  aim  of  ensuring  or   consequence  of  hardship  is  that  
re-­establishing  the  commercial   the  parties  are  obliged  to  
equilibrium  of  the  contract. renegotiate  their  contractual  
relationship  against  the  ‘threat’  of  
court  or  arbitration  proceedings.

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Hardship  and  force  majeure:  
limits  of  their  effectiveness
• ‘Sanctity  of  contract’  >  restoration  of  economic  
equilibrium
– International  arbitrators  are  reluctant  to  interfere  or  
modify  the  terms  of  the  contract  unless  specific  terms  
are  agreed
• Limited  types  of  event
– Force  majeure  applies  to  unforeseeable  acts  of  
‘extreme  nature’  (e.g.  natural  disasters,  war,  strike)
– Hardship  does  not  apply  to  loss  of  profitability  due  to  
changes  in  the  economic  environment  for  how  
unforeseeable  they  might  be
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Unit  5  – Summary  1
• The  obligations  and  law  applicable  to  ISCs  is  
not  necessarily  restricted  to  the  elected  contract  
law  and  the  clauses  of  the  contracts,  but  
international  legal  norms  might  find  application.
• In  particular  the  international  law  stemming  from  
modern  Bilateral  Investment  Treaties  (BITs)  
provides  international  standards  of  protection  for  
the  foreign  investor,  which  however  apply  
outside  the  contract
• In  addition,  BITs  contain  arbitration  clauses  
allowing  foreign  investors  to  institute  arbitral  
proceedings  against  host  states 25
Unit  5  – Summary  2
• There  are  several  ‘contractual  devices’  in  the  
practice  of  ISCs  which  aim  to  reduce  some  
typical  risks  of  the  foreign  investment
• Of  these,  Force  Majeure  and  Hardship  clauses  
aim  at  avoiding  the  negative  impacts  from  
events  that  could  not  be  foreseen  at  the  time  of  
formation  of  the  ISC
• Force  Majeure  and  Hardship  differ  both  on  the  
type  of  event  covered  and  on  their  effects  on  the  
restoration  of  the  economic  equilibrium

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