Ukraine: Japan and Ukraine Have Signed the Bilateral Investment Treaty

CMS Cameron McKenna, 
Kyiv, Ukraine, Fri, March 24, 2015

On 5 February 2015, Japan and Ukraine signed the Agreement for thePromotion and Protection of Investments (the “Bilateral Investment Treaty” or “BIT”). This agreement isexpected to protect private investment, develop market-oriented policies andpromote exports from both contracting parties. The BIT enters into force on the30th day after the parties confirm that the necessary internal procedures(ratification, approvals etc.) have been completed.

The BIT consists of 28 Articles. In line with international investmentprotection standards, the BIT grants a number of guarantees to investments madeby investors from one state in the territory of the other. The Agreement alsoprovides for an alternative dispute resolution mechanism: an investor fromeither state may have recourse to international arbitration, in the event thatthe investor’s rights under the BIT have been violated by the host State.

ProtectedInvestments and Investors

Article 1 of the BIT defines the term “investment” and “investor” broadly:

·          “Investments” mean anykind of asset owned or controlled, directly or indirectly, by an investor. TheBIT contains a broad nonexclusive, illustrative list of assets, including: (i)legal entities or enterprises; (ii) shares, stocks or other forms of equity;(iii) bonds, debentures, loans or other forms of debt; (iv) tangible andintangible property and related property rights; (v) intellectual property;(vi) claims to money or a performance related to an investment; and (vii) anyright conferred by law or contract (e.g., licences or concessions).

·          “Investor” means eitheran individual or an enterprise of the Contracting Party, covering any legalpersons and entities, corporations and partnerships, joint ventures orassociations, whether profit or non-profit, private or state-owned/controlled.

InvestmentProtection Guarantees

The BIT offers a number of standard investment protection guarantees,including:

1. National and Most Favoured NationTreatment

Under the BIT, the host state is obliged to accord “national treatment”(NT) to the protected investment, i.e. the host state may not treat foreigninvestors differently to comparable domestic investors without reasonablejustification.

Moreover, under the concept of “Most Favoured Nation Treatment” (MFNT), thehost state’s treatment may be no less favourable than the treatment it accordsin like circumstances to non-Contracting Party investors and to theirinvestments with respect to investment activities.

2. Fair and Equitable Treatment and FullProtection and Security

This standard of investment protection is the most frequently andsuccessfully invoked in investment arbitration. It generally protectsinvestors’ legitimate and reasonable expectations, and defends them againstarbitrary or capricious treatment, bad faith, coercion and harassment. The hoststate must not impair investment activities by arbitrary measures.

3. Protection against Expropriation andPerformance Requirements

The BIT covers both direct expropriation and any measures equivalent toexpropriation (i.e. indirect expropriation). The host state must refrain fromexpropriation except (a) for a public purpose; (b) on a non-discriminatorybasis; (c) in accordance with due process of law; and (d) upon payment ofprompt, adequate and effective compensation. The BIT also restricts the hoststate from undertaking trade-distorting practices. The host state may notimpose any performance requirements (including export requirements, localprocurement or local content requirements, technology transfer requirements,etc.).

4. Free Transfer of Funds

The BIT protects the investor’s right to transfer funds related toinvestment into and out of the host state in a freely convertible currency, atthe market rate of exchange, without delay, subject to certain limitations (forexample – in the event of bankruptcy, insolvency, in relation to criminal orpenal offences etc.).

5. Umbrella Clause

The BIT also contains a so-called “umbrella clause” which requires eachparty to the BIT to observe any obligations it may have entered into withregard to investments of investors of the other party.

Taxation Measures

The tax measures derive from the investment protection standards. The BITprovides that only certain standards of protection may be applicable withrespect to the host state’s tax measures, namely – (i) FET, (ii) NT and MFNTwith respect to access to courts of justice and administrative tribunals, and(iii) protection against expropriation.

Investor-State Arbitration

Investors can use the international arbitration mechanism against the hoststate in the event of the latter’s failure to perform its obligations under theBIT. The following arbitration options are provided:

·          ICSIDarbitration (provided that both thehost state and the investor’s state are parties to the 1965 Convention on theSettlement of Investment Disputes between States and Nationals of Other States).The International Centre for Settlement of Investment Disputes (ICSID)headquartered in Washington, D.C. is one of the most popular arbitrationforums;

·          arbitrationunder the ICSID Additional Facility Rules (if either the host state or the investor’s state are not a party to theConvention);

·          arbitrationunder the Arbitration Rules of the United Nations Commission on InternationalTrade Law (UNCITRAL Rules). Asopposed to institutional arbitration (for example – ICSID) this ad hocarbitration option allows the parties to tailor the arbitration process to thespecific circumstances of their dispute; and

·          any otherarbitration options as agreed upon by the disputing parties.

Law: “Agreement between Ukraine and Japan for the Promotion and Protectionof Investments dated 5 February 2015”

Authors:

Olexander Martinenko, Senior Partner, Kyiv, Olexander.Martinenko@cms-cmck.com;

Takura Kawai, Partner, Warsaw, Takura.Kawai@cms-cmck.com;

Sergiy Gryshko, Senior Associate, Kyiv, Sergiy.Gryshko@cms-cmck.com;