Bilateral Investment Treaties in Foreign Investment Law

Bilateral Investment Treaties in Foreign Investment Law

Investment activities require legal security and reliable guarantees to protect assets. In the absence of international agreements ensuring the protection of foreign investments, investors are generally reluctant to invest in foreign jurisdictions. Domestic regulations alone are often insufficient to provide adequate protection. International agreements, by virtue of their binding legal nature, provide foreign investors with assurance that their investments will remain protected and that compensation will be available in the event of non-commercial risks.

International insurance institutions also tend to avoid providing coverage for investments in countries that lack bilateral or multilateral investment agreements. The primary reason for this reluctance is the difficulty in enforcing legal rights in such jurisdictions. In the absence of bilateral agreements for the promotion and protection of foreign investment between the investor’s home country and the host country, insurance providers may either refuse to insure investments or impose significantly higher insurance premiums due to elevated investment risks.

Process of Concluding and Implementing Investment Treaties in Iran

Bilateral Investment Treaties

Bilateral investment treaties are commonly referred to by several titles, including:

• Agreements for the Promotion and Protection of Investment.
• International Investment Agreements.
• Bilateral Investment Treaties.

Key provisions of Iran’s bilateral investment treaties, formally issued in 1996, outline the legal framework for foreign investment protection and include the following:

• Promotion of Investment: Under these agreements, contracting states commit to providing favorable conditions for investments made by investors from the other contracting party within their territory.
• Treatment of Investments: Contracting parties undertake to provide foreign investors with treatment no less favorable than that granted to domestic investors. This principle ensures equal protection and fairness in the host country’s legal and regulatory environment.
• Expropriation, Losses, and Compensation: The treaties generally provide that investments of foreign investors cannot be nationalized or expropriated except for public interest purposes and subject to the payment of compensation. Compensation in cases of expropriation or nationalization must reflect the fair value of the investment. Additionally, when foreign investors suffer losses due to war, armed conflict, revolution, or civil unrest, compensation must be provided through restitution or financial payment. Such compensation must not be less favorable than the compensation provided to domestic investors or investors from third countries.

Transfer of Funds

These agreements guarantee investors’ right to transfer capital, profits, and related funds into and out of the host country. Transfers must be conducted in freely convertible currency at officially determined exchange rates. However, the agreements may permit temporary restrictions on transfers if necessary to fulfill financial or legal obligations.

Subrogation

If a foreign investor insures its investment through its home government or a government-designated institution, the host country must recognize the substitution of the insurer for the foreign investor. However, the insurer may not assert rights exceeding those originally held by the foreign investor.

Scope of Application of Treaties

Under bilateral investment agreements applicable in the Islamic Republic of Iran, such agreements typically apply only to investments approved by the national investment authority. In contrast, since many countries do not require similar approval systems, investments made by Iranian investors in contracting states are generally covered by the protections of these agreements.

Dispute Resolution

These agreements typically provide that disputes between the host state and foreign investors may be resolved in domestic courts or through international arbitration. Disputes between contracting states concerning the interpretation or implementation of investment agreements are typically resolved through ad hoc arbitration tribunals.

Objectives of Bilateral Investment Treaties

The preambles of numerous bilateral investment treaties emphasize that their primary objective is to promote the flow of foreign investment. When developing countries enter into such agreements, they signal to potential investors their commitment to supporting foreign investment and reducing barriers to investment.

Policymakers in developing countries generally support bilateral investment treaties because they extend legal protection against political and non-commercial risks, thereby encouraging foreign investment inflows. Additionally, the expansion of bilateral investment agreements is often driven by competition among countries seeking to attract foreign capital. When neighboring or competing countries enter into investment treaties, other countries frequently follow to maintain economic competitiveness and investor confidence.

Frequently Asked Questions About Bilateral Investment Treaties in Foreign Investment Law