Introduction
International investment contracts are agreements concluded between the “host state” or a state-controlled entity (such as TPOA, BOTAŞ, etc.) and the “foreign investor.” These contracts typically involve large-scale projects requiring substantial capital and advanced technology, carrying political risks, and generating long-term economic consequences. There are three main actors in such contracts: the host state; the “home state” of the foreign investor; and the foreign investor itself. The foreign investor is a natural person who is a national of a state other than the host state, or a legal entity incorporated under the laws of such other state.
Although the actual contractual relationship is between the host state and the foreign investor, the home state enters the picture as a third party by virtue of “international treaties,” as explained below. In other words, the foreign investor benefits from international protections afforded under treaties concluded by its own home state.
2. International Investment and Energy Contracts
The subject matter of international investment contracts may involve infrastructure or works contracts such as bridges, tunnels, highways, ports, water resources, or telecommunications, as well as energy investment contracts, including petroleum or gas production, oil exploration, drilling, construction of refineries, natural gas storage, transportation and distribution of oil and gas, gas sales, and pipeline construction. Some infrastructure contracts also qualify as cross-border energy infrastructure contracts.
Whether cross-border in nature or domestic, infrastructure contracts are often structured as build-operate-transfer (BOT), build-lease-transfer (BLT), build-transfer (BT), or rehabilitate-lease-transfer arrangements. In such projects, the host state and the foreign investor typically enter into a primary or “master agreement,” which may take the form of a BOT concession contract, a joint venture agreement, a production-sharing agreement, or a service contract.
In addition to the master agreement, there are often multiple ancillary contracts concluded with various other parties. For instance, where multiple companies form a consortium to act as the investor in a concession agreement, a joint venture agreement will govern the mutual rights and obligations of the consortium members. Similarly, financing agreements between the foreign investor and lenders may also be part of the overall contractual framework. This article focuses exclusively on the master investment contract, and does not address ancillary agreements.
Among international investment contracts, concession contracts hold particular importance. Concession contracts structured under the BOT model—or, in broader terms, as public–private partnerships—grant specific rights to the foreign investor. In such arrangements, the provision of a public service is entrusted to the foreign investor under a contract subject to private law.
Prior to 1999, BOT-type concession contracts were subject to administrative law, requiring review and approval by the Council of State (Danıştay) to be valid. The 1999 amendment to Article 125 of the Turkish Constitution introduced the possibility of resolving disputes arising from such contracts through arbitration. The stated purpose of this amendment was to encourage foreign investment into Turkey.
Today, under Article 125, it is possible to resolve disputes arising from concession contracts by arbitration, and investors often prefer this route. However, concerns have been expressed that arbitration in such cases may result in higher service fees for public users, that the absence of an appellate mechanism in arbitration could lead to decisions against the host state, and that different arbitral tribunals might reach divergent conclusions in similar disputes. Some commentators therefore argue that, where the employer is the state, infrastructure projects could be more effectively realized through conventional public procurement with payment to the contractor, thus safeguarding the public interest.
3. Conditions and Investment Climate for International Investment
States endeavor to create a favorable investment climate in order to attract foreign investors. An investor will proceed with an investment only if it feels secure within that climate. The investment climate is closely linked to the host state’s geographic and geopolitical position, its economic and political conditions, and its investment legal framework. A legal regime that adequately protects the investor offers a clear advantage; however, investors also assess the political and economic environment. This article focuses on legal conditions.
4. Legal Foundations of International Investment Contracts
The legal basis of international investment contracts rests upon the host state’s investment law, bilateral investment treaties (BITs) between the host state and the home state, multilateral treaties, and the investment contract concluded between the host state and the foreign investor.
As a general rule, the investor will be subject to the laws of the host state in many respects. Provisions governing the applicable tax regime, exemptions and incentives, the entry of the investment into the country, the repatriation of investment income, the employment of foreign personnel, the importation of investment equipment, and both narrow and broad forms of expropriation are of critical importance to the investor.
Even where the host state’s legal system contains provisions favorable to investors, such protections may be insufficient if the host state retains the power to unilaterally amend them. Consequently, the foreign investor will also look to the BITs and multilateral treaties to which the host state is a party. In particular, the provisions of BITs between the host state and the home state carry significant weight.
The investment contract between the foreign investor and the host state is one of the most important instruments defining the parties’ mutual rights and obligations. A breach of the contract by either party may give rise to certain remedies under the contract. In the event of a dispute, foreign investors generally prefer to resort to alternative dispute resolution (ADR) methods rather than to domestic courts, and, if they have sufficient bargaining power, they often insist on including institutional arbitration clauses—commonly ICC (International Chamber of Commerce) Arbitration or ICSID (International Centre for Settlement of Investment Disputes) Arbitration.
As will be discussed below, even in the absence of such a clause in the contract, BITs, the ICSID Convention, or multilateral treaties such as the Energy Charter Treaty may afford the foreign investor the right to submit the dispute to arbitration. Importantly, BITs and multilateral treaties grant this right solely to the foreign investor, not to the host state.
5. Common Provisions in Bilateral Investment Treaties
In modern practice, states seeking to attract investment frequently conclude BITs. It is estimated that there are over three thousand such treaties in force worldwide. These treaties are often based on model forms and contain similar provisions.
A review of BITs reveals that they typically begin by defining “investment” and “foreign investor.” The definition of investment is generally broad, encompassing all types of assets, including movable and immovable property, shares, patents, licenses, usufruct rights, pledges, mortgages, and intellectual property rights. As for foreign investors, the definition generally covers natural persons who are nationals of the home state but not of the host state, and legal entities whose seat or place of incorporation is in the territory of the home state.
Another common provision concerns the standard of treatment to be accorded to foreign investors. These clauses often stipulate national treatment, meaning that the host state will extend to foreign investors the same treatment afforded to its own nationals. Many BITs also provide for most-favoured-nation (MFN) treatment, ensuring that any favorable conditions granted to investors from a third state will likewise be extended to investors from the home state. In addition, BITs frequently require that investors be accorded fair and equitable treatment and full protection and security. Such standards, however, do not generally apply to advantages accorded under customs unions or economic integration agreements.
BITs also address the protection of investments against expropriation. While they do not prohibit expropriation outright, they generally require that it be carried out for a public purpose, on a non-discriminatory basis, and against prompt, adequate, and effective compensation. The concept of expropriation is often construed broadly to include nationalization, the imposition of additional tax burdens, and similar measures.
Almost all BITs include provisions on dispute resolution. These typically require that the parties attempt to resolve disputes amicably—often within a period of three to six months—before resorting to litigation in the host state’s courts, ADR mechanisms (such as mediation or conciliation), or arbitration. A frequently used mechanism is the fork-in-the-road clause, under which the investor must choose between the available dispute resolution options (e.g., domestic courts or arbitration) and, once a choice is made, may not later pursue the other option.
Finally, multilateral treaties to which both the host state and the home state are parties may also play a decisive role in the investment context. Notable examples include regional agreements such as NAFTA (North American Free Trade Agreement) and multilateral instruments such as the Energy Charter Treaty and the ICSID Convention, all of which contain significant provisions relevant to investment protection.
Attorney Yalçın Torun
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