Hotels in the firing line: using international law to protect your cross-border investment

Governmental and state agencies are crucial to the granting of permission for the construction, management, and operation of hotels and resorts. Misconduct by those bodies, and a failure by courts or other appellate bodies, can leave foreign investors at risk of losing substantial value in their investment, or even the investment itself. Even without misconduct, a sharp change in political direction caused by social or environmental objectives, or even wider geopolitical tensions and conflict, can lead to unfortunate results for foreign investors caught in figurative or even actual cross-fire. The current conflict in Ukraine, and the political and economic climate in Russia resulting from the international response, have created difficulties for investors into both countries.

Where acts of state cause harm to cross-border investments in hotels and leisure developments, investors may first turn to domestic judicial proceedings for a remedy. Where that is not successful, or is not feasible, there may yet be a path to remedy using international law. International investment agreements (IIAs) comprise a network of bilateral or multi-lateral treaties which operate in the sphere of international law to offer cross-border investors protection where their investments are harmed or threatened by actions of a ‘host’ state government or its authorities.

Importantly, such protections will often include the ability for investors to enforce promised protections directly against host states through international arbitration in a neutral venue. In the hotel and hospitality sector, according to the United Nations Conference on Trade and Development (UNCTAD), 17 investment arbitration claims have been filed against host states since 2005.[1] Such claims, and even the threat of such claims, can offer meaningful protection for investors caught in the firing line of geopolitical events.

What are IIAs?

IIAs are international treaties signed between two or more countries to encourage nationals of one country to invest in the other/another. The most common form of IIA is a bilateral investment treaty (BIT) between two such countries. UNCTAD currently records over 2,800 BITs in force globally.[2]

Each BIT will depend on its terms, but typically they will provide that “investments” made by “investors” of one country in the territory of the other (the “host” state) will be afforded certain standards of treatment and protection. These will apply whether or not the investor has a direct contractual relationship with the host state. Investors will typically include companies and corporate bodies incorporated in a contracting state, as well as individual citizens. Although the provisions vary, protected investments may include shareholdings, licences, permits and contractual rights, intellectual property and real property rights.

Common BIT provisions include promises that investments will benefit from:

• fair and equitable treatment, including protection against arbitrary or discriminatory treatment by the host state;
• full protection and security, including protecting investments against actions of private parties, e.g. in the course of civil unrest;
• protection against expropriation, including nationalisation, save on payment of reasonable and prompt compensation.

How can investors invoke the protections under a BIT?

An important provision often included in BITs or other IIAs is the ability for an impacted investor to assert the right to the protections in the treaty directly against the host state. This typically follows a period for negotiations after the investor serves notice on the host state government of the alleged breach of the treaty protections and the required remedy. The notice of the claim can act as a catalyst to prompt the parties to reach a solution without the need for proceedings.

Where proceedings are needed, these will generally take place before an international arbitration tribunal seated in a neutral location. Both the investor and state will typically appoint an arbitrator, with the president of the tribunal being selected by the party appointees. Proceedings may take place under the auspices of an institution such as the International Centre for Settlement of Investment Disputes (ICSID), where the host state is a signatory to the ICSID convention, or else ad hoc often under the United Nations Commission on International Trade Law (UNCITRAL) rules.

Relevance to the Russia-Ukraine situation

The devastation in Ukraine following the Russian invasion in February 2022 currently requires tools beyond the reach of IIAs.

However, even now, the existence of IIAs signed by Russia may provide relevant options for investors caught in the wider geopolitical turmoil.

As businesses of foreign investors in Russia face the political backlash arising from international sanctions against Russia, so reactive measures of the Russian state that damage or effectively expropriate valuable investments, including intellectual property rights, may constitute BIT breaches.

Russia has some 69 IIAs currently in force, including with France, Germany, the Netherlands, the UK, Switzerland, Singapore, Japan, the UAE and also Ukraine.[3]

In the meantime, BIT claims resulting from Russia’s 2014 annexation of the Crimea are also continuing. One such claim is that of Everest and others v Russia, which was filed with the Permanent Court of Arbitration in The Hague in 2015 following the effective nationalisation by the Russian Federation of a number of real estate holdings, including resorts, hotels and apartment buildings along the Black Sea coast of Crimea formerly within Ukraine. After these assets became situated within the de facto territory of Russia, their Ukrainian owner brought a claim for their value under the Russia-Ukraine BIT of 1998.

In March 2017, the arbitration tribunal hearing the claim decided unanimously that it had jurisdiction to allow the claim to proceed. In May 2018, the tribunal issued an award on merits and quantum, in which it ordered Russia to pay Everest damages of some US$159 million. Enforcement efforts have followed including national court proceedings in the Ukraine. While Russia chose not to participate in the arbitration proceedings, it later applied to the Hague court to set-aside the award on jurisdiction. The application was dismissed in July 2022.

Authored by Nick Peacock and Rhiannon Graves

[1] Advanced Search | Investment Dispute Settlement Navigator | UNCTAD Investment Policy Hub

[2] https://investmentpolicy.unctad.org/international-investment-agreements/by-economy

[3] https://investmentpolicy.unctad.org/international-investment-agreements/by-economy