Originally from World Arbitration and Mediation Review (WAMR)

ABSTRACT

This article summarizes the basic aspects of investment arbitration as a tool to manage country risk that foreign investors should consider when planning and designing investment structures in Latin America.  As this article shows, country risk is a current and strategic topic for foreign investment decisions in Latin America, and investment arbitration is a legitimate tool for managing it.  After reviewing relevant cases—both stemming from national courts and investment arbitration tribunals—national laws and treaties, and also leading scholarly opinions, this article highlights a series of aspects that should inform any prudent legal advice given from the onset of the investment process, and which should integrate the litigation and transactional lawyer’s views.

I.   INTRODUCTION

The purpose of this article is to summarize the core principles of investment arbitration as a tool for managing country risk in Latin America.   The analysis adopts the perspective of lawyers engaged in private practice or acting as in-house counsel.

Country risk, also referred to as sovereign or political risk, has several definitions, but the one relevant for this article is the following: “The possibility that the economic activity of a country or sector be affected by the decisions of a Government.”   Risk management consists in identifying and preventing the potential risks of a future and uncertain event.  Country risk management, therefore, identifies and prevents potential damages arising from the eventual mistreatment of the foreign investment by the host State of the investment.

The traditional tools for country risk management include insurance, guarantees and/or financing granted by insurance companies, foreign export credit agencies or multilateral financial entities.   Investment arbitration is another valuable tool for managing country risk (although not all foreign investors contemplate it in their business plans) and is part of the International Law on Foreign Investments.   It has the advantage that it does not require the intervention of a third party, such as the traditional options, and may co-exist with them.