An international investment agreement is one tool available to hoteliers looking to establish a presence outside the U.S.
by CHARLES B. ROSENBERG and ZAIN JINNAH
The election of President Donald Trump in November 2016 paved the way for an uncertain landscape for businesses in the United States. In a few short months, the new administration has already modified or revoked policies that have been in place for years, introducing significant volatility to the U.S. economy. This has heightened the risk associated with establishing and expanding businesses in the United States. For example, in July 2017, it was reported that the U.S. government had blocked a record number of potential acquisitions of U.S. companies by foreign buyers. In such times, hotel owners, developers and management companies face significant challenges and should be aware of the tools available to mitigate political risk.
One such tool is an international investment agreement (IIA), which is an international treaty between two or more countries that protects international investments by creating substantive rights for foreign investors. IIAs may provide valuable leverage in negotiations with government officials and, perhaps most importantly, allow an investor direct recourse to international arbitration to resolve disputes.
There currently is a global network of approximately 3,000 bilateral investment treaties (BITs), which are IIAs between two countries. For example, the United States has around 40 BITs with countries such as Australia, Mauritius, South Africa and Switzerland, and it is currently negotiating a BIT with India. The U.S. also has a number of multilateral investment treaties (IIAs between more than two countries), including the North American Free Trade Agreement (NAFTA) between the U.S., Mexico and Canada.
WHO AND WHAT ARE PROTECTED?
IIAs typically protect investments by investors of one country that are made in another country. Most IIAs broadly define investments as “every kind of asset,” including shares, concessions, licenses, permits, leases, management contracts and land. An investment generally will cover international investments by hospitality companies, including hotel ownership, lease and management contracts, and franchise agreements.
A hospitality company also must qualify as an investor under an IIA. Most IIAs define an investor as a corporation that is incorporated in one of the countries that is party to the IIA. Generally investors are not limited to those with majority or controlling stakes in the investment, but also include non-majority shareholders and indirect corporate parents.
HOW DO THE AGREEMENTS PROTECT INVESTMENTS?
There are many ways that governments can act adversely to investments in the hospitality sector, including seizing a hotel, revoking an investment license, or expropriating land for conservation purposes. Most IIAs offer the following protections:
- Protection against nationalization or expropriation of an investment without prompt, adequate and effective compensation. An expropriation may involve the outright taking of property, or it could include measures with an extremely burdensome effect, such as a regulation that drastically reduces the value of a property.
- Protection against lack of due process, arbitrary or unreasonable conduct, and discrimination by the government against foreign investors.
- Protection against a government’s failure to protect the investment from damage caused by government officials or by actions of others where the government failed to exercise due diligence.
HOW DOES AN INVESTOR ASSERT THE PROTECTIONS?
If a dispute arises with respect to a hospitality company’s international investment, most IIAs provide that the company may commence international arbitration against the government. As opposed to litigating in local courts (which a foreign investor may perceive as biased in favor of the government), international arbitration offers a neutral forum, provides parties with more flexible procedures and may be faster. In addition, international arbitration awards may be overturned only on limited grounds and are easier to enforce abroad than local court judgments.
HOW CAN THE AGREEMENTS HELP HOTELIERS?
Foreign hospitality companies seeking to invest in the United States, or acquire or expand an existing investment in the United States, may be able to rely on the United States’ IIAs to protect their investment. Additionally, touting the increased certainty afforded by IIAs may assist U.S. hospitality companies in soliciting foreign investments for new or existing projects in the United States.
Companies interested in developing or expanding hospitality investments abroad also can benefit from IIAs. For example, a U.S. citizen or company establishing a hotel in Canada or in South Africa may be able to rely, respectively, upon the NAFTA or the United States’ treaty with South Africa. Many companies also may be inclined to invest in the hospitality sector in India, driven by strong business and personal ties to the country, as well as the fast pace of urban development and Prime Minister Narendra Modi government’s emphasis on growing tourism and hospitality. While there currently is no IIA between the U.S. and India, Americans interested in entering the Indian hospitality sector should consider structuring their investment through one of the more than 50 countries that does have an IIA with India. For example, if a U.S. investor invests in India through a UK-based company, the investor may be entitled to the protection of the UK-India treaty.
IIAs are an important tool to mitigate political risk and protect investments in the hospitality sector abroad. Companies should consider IIAs when planning their international investments in order to identify the rights they may have and to strategically decide how to most efficiently and effectively structure their investments. ■
Examples of U.S. IIAs
- New Zealand
- Saudi Arabia
- South Africa
Examples of India IIAs
- European Union
- United Arab Emirates
- United Kingdom