As part of Paris Arbitration Week, we hosted a panel discussion in collaboration with unyer (Fidal, Luther Rechtsanwaltsgesellschaft, Pirola Pennuto Zei and KWR) and Cuatrecasas.
Our expert panel discussed critical strategies for managing political risk in international investments. The panel was moderated by Francesca Proietto (Pirola Pennuto Zei), with panellists Garbhan Shanks (Fladgate LLP), Richard Happ (Luther Rechtsanwaltsgesellschaft), Manuel Tomas (FIDAL) and José Ángel Rueda García (Cuatrecasas).
Here are some key insights from their discussion:
Investment Treaty Arbitration is no Longer a "Silver Bullet"
Investment treaty arbitration is increasingly costly, lengthy, and uncertain. Richard Happ highlighted that ISDS arbitrations can incur significant costs, take over a decade to reach an award and face significant enforcement challenges. Investors now view political risk insurance (PRI) as a more efficient and reliable alternative, particularly when arbitration enforcement prospects are weak.
Effective Investment Structuring and Risk Management are crucial
Garbhan Shanks emphasised structuring investments carefully from the outset to maximise protection under Bilateral Investment Treaties (BITs), which in turn can unlock PRI cover. He noted practical challenges investors face when initiating claims, particularly when multiple investments are present in the same jurisdiction. Maintaining robust document management which is accessible electronically and carrying out regular asset valuations from the beginning are vital for supporting potential claims.
Complementing Arbitration with Political Risk Insurance and Diplomacy
Manuel Tomas and José Ángel Rueda García stressed the importance of adopting a multi-faceted approach, combining BIT arbitrations, political risk insurance, proactive diplomatic negotiations and creative contractual solutions (which can offer more practical and immediate resolutions than the traditional route of issuing BIT arbitrations). Particularly in volatile regions like Africa and Latin America, BIT arbitration alone may be insufficient. A comprehensive strategy should include proactive diplomacy and adaptable solutions tailored to local contexts.
Political Risk Insurance Must Be Integrated Early into Investment Strategies
José Ángel Rueda García highlighted that political risk insurance should be considered from the outset of investment planning, especially in politically unstable regions. Early integration of PRI into investment strategies not only provides financial security but can also facilitate quicker recovery and mitigate potential losses without lengthy arbitration proceedings.
Garbhan Shanks considered the importance of progressing and crystallising PRI recoveries in the first instance before managing any subrogated BIT claims for insured and uninsured losses, and noted the increased interest by litigation funders to step in and invest in such BIT claims.
Summary
To summarise, investors navigating politically volatile environments must adopt an integrated and proactive approach. Political risk insurance, complemented by the availability of BIT claims, diplomacy, and strategic structuring, is essential for effectively safeguarding investments.
