Protecting Construction Contractor’s Investments in International Construction Projects

Cross-border construction activity has grown in recent years, with numerous complex construction projects initiated in developing countries, involving multiple parties with diverse specialisations and operating in multiple jurisdictions.

Contractors are often required to enter into long-term contractual relationships with foreign host Governments that involve the contractor bearing the up-front costs of constructing the built asset and then recovering the contract price by way of progress payments from the host Government.

Arrangements of this kind involve precisely the kinds of contributions of capital and assumptions of risk that the global system of International Investment Treaties (Investment Treaties) – including Bilateral Investment Treaties (BITs) and Free Trade Agreements (FTAs) – was designed to promote and protect. Historically, this Investment Treaty system has been used more by other industries, such as the oil and gas and mining industries, than by participants in the construction sector.

However, construction contractors and other construction project stakeholders are increasingly making use of the Investment Treaty system, in circumstances where the protections afforded under their contractual arrangements may not afford adequate relief against host Government interference in their projects.

The high-profile and politically sensitive nature of such construction projects renders them susceptible to host State interference and adverse Government policy changes. This is especially so in jurisdictions where the rule of law is not robust and mechanisms for the control of Government actions are not well established or enforced.

It is therefore in the interest of international construction contractors to familiarise themselves with the protections provided by Investment Treaties, which may provide protection and relief from these forms of sovereign risk. Most Investment Treaties are of the bilateral variety, in the form of BITs or FTAs between two States, but an increasing proportion of such agreements are multilateral/multi-State in nature.

In practice, the most important protections that an Investment Treaty offers are: (i) the protection against unlawful expropriation, direct or indirect, and (ii) the guarantee of Fair and Equitable Treatment by the host State authorities. It is these protections that are most often invoked by Contractors in claims under Investment Treaties.

However, qualifying for protection under such Investment Treaties is not guaranteed, and Contractors should look to take steps to ensure that they have maximised their prospects of acquiring such protections.

Typically, to qualify for protection under Investment Treaties, Contractors will need to satisfy the following two jurisdictional “gateway criteria”.

First, the Contractor must be an “investor” under the Treaty, which requires the Contractor to be a company of a contracting State, other than the host state. Second, the Contractors’ assets and interests in the host state must be within the Treaty definition of “investment” and must be made in the host state.

Investment Treaties’ definition “Investment” usually covers most assets and interests in a large scale construction project and typical protected investments include rights under typical construction contracts, including D&B, EPC and BOT contracts etc., company shares, permits and licences, and intellectual property. Accordingly, major construction projects made in the host state will usually qualify as “investments” under Investment Treaties.

While these requirements appear straightforward, the multi-jurisdictional nature of cross border construction projects can make qualification for protection a complex process.

For example, the requirement for the investment to be made in the host state was recently at issue in an ICSID Arbitration between a Kenyan Contractor carrying out construction and fit-out works on an embassy in Somalia for the UAE Government (Spentech Engineering Limited v United Arab Emirates ICSID Case No. ARB/24/16).

The parties fell into dispute over payment claimed by Spentech (the Contractor) for work performed. The contractor brought a claim under the Kenya-UAE BIT.

The Kenya-UAE BIT affords protection to an investment “in the territory” of the Contracting State, which in relation to the UAE meant “the territory of the United Arab Emirates its territorial sea, airspace and submarine areas…”. 

On that basis, Spentech argued that the embassy premises, and the contractual rights in the project, constituted investments “in the territory of” the UAE, given the UAE’s sovereignty over its embassy.

The UAE applied to have the case dismissed on the basis that all construction work and assets were physically located in Mogadishu, Somalia, not in UAE “territory”, and that a State’s diplomatic premises do not constitute the territory of that State under international law, and therefore the BIT did not apply. 

The Tribunal held that while a Government’s embassy is inviolable, meaning that the premises are protected from intrusion by the host state, the host country retains sovereignty over the land on which the embassy sits. Accordingly, the land was not UAE “territory” for the purposes of the BIT, and therefore the works at the embassy did not amount to an “investment in the territory” of the UAE under the BIT.

On that basis, the Tribunal held that the claims were manifestly without legal merit under ICSID Arbitration Rule 41 and dismissed the case.

This case, along with many others, serves a warning to Contractors to pay close attention to whether their investments in international construction projects are protected by relevant Investment Treaties. In circumstances where the relief available under their contractual relationships may fall short of what is required to protect their investments and profits, Investment Treaty Protection may afford an additional avenue for relief. However, Contractors will only benefit from such protections where they qualify for such protections under the terms of the relevant Investment Treaty.