Arbitration Clauses And Investment Treaty Protection In Emerging Markets Disputes

Author:Cleary Gottlieb Steen & Hamilton LLP
Profession:Cleary Gottlieb Steen & Hamilton LLP

The rewards of investing in emerging markets can be extraordinary: from ground-breaking and history making deals, to being the first to tap new opportunities. But those same factors also make it a riskier venture than most.

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These are regions and industries where scope for error, misunderstandings and disputes is frequently heightened, either through the intricacies of operating under particular regional cultures and local processes, or the technical expertise required by complex, regulated sectors. No matter how conscientious the due diligence and how watertight the contracts, every investor needs to factor in the 'what if'.

Some might argue that a standard arbitration clause is enough. However, Cleary Gottlieb partner Chris Moore argues that arbitration clauses can be an essential investment protection mechanism.

By contrast to the general boiler plate approach to dispute clauses, where the risk of needing to rely on the clause is higher, there can be real value in considering issues in more detail - such as the specific rules and forum selected, the substantive dispute resolution mechanism, what other protections are potentially available and how these might be impacted by how the investment is structured.

The Right Tool for the Job

When it comes to the macro environment, many investors favour arbitration processes over court proceedings because of the privacy and flexibility they offer. But making the most of these advantages depends on carefully thought-out dispute resolution clauses, developed with specialists in a range of options and with access to leading local expertise in multiple jurisdictions.

"The risk for disputes arising out of investments in emerging markets can be quite high, and the underlying transactions often involve states or state-owned entities or commercial parties investing in high-stakes projects in challenging political and business environments," says Chris. "While arbitration is an effective tool for emerging markets investments in several ways," it's essential that arbitration clauses for these parties are given as much thought and care as financing and other commercial aspects."

This is particularly the case if parties are considering whether to incorporate the rules of one of the newer arbitration centres in an emerging market (which may be well suited...

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