Italy-Czech Bilateral Investment Treaty Terminated

What is a bilateral investment treaty, and what are Italian investors going to lose?

Since 1997, Italian investors who do business in the Czech Republic have been protected by the Italy-Czech Bilateral Investment Treaty.  Now this protection is coming to an end.  Bilateral investment treaties (BITs), although not very well known, are a very powerful tool available to many investors who do business internationally.

Not many businessmen know that even relatively small businesses can afford investment protection. Most people think that an investment that it makes sense to protect under a BIT has to be a euro multibillion project in sectors such as banking or energy.  In fact, however, there are known cases in which even very small investments were able to gain BIT protection.  Such an example, even though not very typical, is a recent investment arbitration against the Czech Republic which involved a 15-year lease of premises of 309 m2 renovated at the cost of approximately EUR 300.000.  The Czech Republic terminated the lease illegaly and lost the ensuing dispute.  The arbitral award has remained confidential but unofficial sources have it that the premises at stake hosted a pizzeria!  Surely, this was not a big investment.  Yet it was able to obtain international investment protection.

Under a BIT, foreign investors can sue host states that harm or fail to protect their investments.  The BIT standards provide protection in situations where, for example, a businessman makes an investment on the basis of a licence and the licence is subsequently revoked without good reason.  Or if an investor's investment is expropriated, (if, for example, the states takes investor's real estate because it decides to build a road across), and it fails to pay the investor adequate compensation, a BIT can be invoked.  If an investor gets into a dispute with somebody and the court proceedings take too much time, a BIT can be invoked too.

In fact, if the host state changes its regulatory framework in almost any way to the detriment of a foreign investor as compared to the state of affairs at the time when the investor made his investment, it probably makes sense for the investor to see whether damage thus incurred (think of even reduced profits) could be recoverable under an applicable BIT.

Standards of protection found in BITs typically provide a high degree of additional protection that would otherwise not be available to investors if they were to rely only on the host state's courts.  The most important standard of protection, so called „fair and equitable treatment," is usually understood to provide for host state's predictable, transparent and consistent behavior.  To obtain protection under this standard, an affected investor does not have to show the host state's intention to harm him.  In addition, even host state's behavior that is perfectly legal under domestic law can be found in breach of international investment protection standards.

Nowadays, there are estimated 2,500 BITs in existence worldwide.  Italy has entered into approximately 50 BITs.  The Czech Republic is a party to even more BITs, approximately 70 treaties.  The first BIT was entered into 50 years ago but the „boom" of investment arbitration started only a decade or so ago.  Since then, hundreds of cases have been decided and more are pending at present.

However, there is a recent tendency among some EU member states to prefer EU law as a means of international investment protection.  Accordingly, those states started terminating „intra-EU" BITs.  One of the first BITs to be thus affected is, unfortunately, the Italy-Czech BIT.  The two governments agreed to terminate it as of April 30, 2009.  Luckily, investments that were made prior to the termination are going to be protected for another ten years.  Italian investments made in the Czech Republic after 30 April 2010 are, however, not protected anymore and  investors have to rely on Czech courts only.

In some cases there is, luckily, a way out of this situation.  If an investor does not come from a country that has a BIT with the host state, the investor can incorporate a holding company in a country that has such a BIT, and „channel" the investment from his home state to the host state via such third country.  As a result, the investment will get international protection.  Netherlands, for one, is a country that has entered into a BIT with the Czech Republic that allows for such investment structuring.

The above should not lead to conclude that, if you are an Italian investor in the Czech Republic and want to provide your local business with the above described additional degree of protection, all you need to do is to set up a „BV" and make it the formal owner of your Czech business.  There is one important caveat: if you want to protect your business in this way, you have to create the right international holding structure before any problems in the host state arise.  Should you do this only after problems arise, it is very likely that your claims would be dismissed as an abuse of the system of international investment protection.

Consulting your projects with an investment arbitration expert at the earliest stage is key to provide your investment with superior, public international law based legal protection against undue host state interference.

Massimiliano Pastore
Smed Jorgensen Attorneys at law
pastore@smedjorgensen.com

with the co-operation of

Mgr. Ondřej Sekanina, LL.M.