What happens when a state that has promised to protect foreign investors’ rights becomes their greatest obstacle? Investment disputes have proven to be an incredibly effective way of resolving disputes in which one of the participants is a state, or even a state-controlled company, while the other participant is a foreign investor.
In recent years, there has been a growing trend of states acting as commercial participants in their national economies. As a result, situations where states engage as equal players in the market have become more common. Since the beginning of this trend, legal and economic experts have viewed the state as a commercial participant with scepticism, anticipating challenges in protecting the rights of private individuals entering into business ventures with the state.
In this context, there are legitimate concerns that judicial proceedings in disputes between private parties and the state as a commercial actor may not always be entirely fair before the courts of the state. This issue is especially evident when it comes to foreign investments, in relations between a state and a foreign investor.
As an alternative to resolving disputes before the state courts, specialized institutional arbitration bodies have taken on the role of resolving investment disputes, as well as ad hoc arbitration. Notably, the International Centre for Settlement of Investment Disputes (ICSID), established under the Washington Convention, is frequently noted for its significant role. A key question arises: will states agree to establish the jurisdiction of an arbitration tribunal, whether in ICSID arbitration or ad hoc arbitration?
To attract foreign investors, states have actively pursued bilateral agreements to protect foreign investments, known as BITs (Bilateral Investment Treaties). BITs, concluded between two states, guarantee fair treatment for investors from one signatory state investing in the territory of the other signatory state.
The significance of a BIT lies in its ability to allow foreign investors to claim their rights before an international forum, even if that forum is not explicitly designated as competent in a specific agreement between the state and the foreign investor for investment in the signatory state’s territory. Additionally, a dispute can be raised whenever a foreign investor has not received fair treatment in the host state, which can extend beyond violations of the specific agreement between the host state and the foreign investor and include violations of fair treatment in general.
Our country has concluded more than 50 bilateral investment treaties. These agreements have been signed with China, Russia, as well as with numerous European countries, and neighboring countries such as, for example, North Macedonia and Bosnia and Herzegovina.
In this regard, business entities registered in the Republic of Serbia, which have invested in the territories of states with which Serbia has concluded a BIT, are entitled to special protection under the BIT, which they can pursue before international tribunals.
To establish the jurisdiction of an international forum based on a BIT, it is usually required that certain conditions, known as the Salini Test be met. This test stipulates that the foreign investor must have made an investment in the territory of the other state, which involves the contribution of funds, with the aim, which includes, among other thing, the contribution to the development of the host state. The investment must also have been made within a specified period, and the foreign investor must have assumed risks related to the success of the investment. These risks are typical business risks that commercial entities encounter, but they do not include the risk of unfair treatment by the state in whose territory the investment is made.
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