How to Protect Israeli Investments Abroad Through International Agreements to Draft

Recent years have seen a steady rise in investments by Israeli companies and businesspeople in foreign countries. While these investments carry significant commercial potential, they also come with risks, particularly when made in emerging economies. Additionally, a number of States have recently shown a tendency to give Israeli investors the cold shoulder, or even to adopt an outright hostile stance toward them. International investment protection agreements, where they apply, may offer a distinct and valuable tool for managing these risks and difficulties. 

What are investment protection agreements, and what do they offer investors?

Beginning in the 1990s, many countries entered into Bilateral Investment Treaties (BITs) in order to create a stable and secure investment climate that would encourage foreign investment. Today, more than 2,200 such international agreements are in force. Israel is a party to approximately 40 of them, including with Türkiye, the United Arab Emirates, Ethiopia, Georgia, Guatemala, Croatia, the Czech Republic, and Bulgaria. Although these agreements are concluded between States, they afford protections to investors who are nationals of those States, whether companies or individuals. The scope of the protections varies from treaty to treaty, but typically includes commitments by the host State to accord investors a fair and equitable treatment; treatment no less favourable than that given to its own nationals; and treatment no less favourable than that given to nationals of a third State. Most such agreements also provide that investments may not be expropriated without adequate compensation. 

Resolving a dispute with a foreign State through international arbitration

Investment protection agreements may offer investors yet another significant safeguard: the ability to resolve a dispute with the host State through international arbitration, rather than having to litigate before that State’s domestic courts. The best-known institution for such investment arbitration is the International Centre for Settlement of Investment Disputes (ICSID), based in Washington, D.C., and operating under the auspices of the World Bank Group. Established by an international treaty in 1966, ICSID was designed to provide a convenient and neutral forum for the swift and efficient resolution of investment disputes. It now counts 158 member States, including Israel, and has administered more than 1,000 arbitration cases. ICSID arbitration offers investors several notable advantages:

1. Lower costs: ICSID sets the hourly rates payable to arbitrators, which the arbitrators themselves cannot alter, and it provides hearing rooms in Washington, D.C. to the parties free of charge.
2. Streamlined enforcement: States parties to the ICSID Convention are obligated to enforce ICSID awards in the same manner as final judgments of their own domestic courts.
3. A self-contained system: Because ICSID operates as a closed system, the entire proceeding, including any application to annul the award, is handled within ICSID itself.

What if there is no applicable treaty?

Israeli investors should thus check, both before investing and if a dispute later arises with the foreign State, whether Israel and the relevant State are parties to an investment protection agreement, and if so, what protections that agreement affords. Where no such treaty exists, an Israeli investor seeking to bring international arbitration proceedings against a foreign State still may have several other available options:

1. Arbitration under the foreign State’s domestic investment law, where one exists: Approximately 60 countries, mainly in Africa and South America, have adopted investment laws that allow foreign investors to bring international arbitration proceedings against them. The protections such laws afford vary considerably from country to another and should preferably be examined closely before an investment is made.
2. Including an international arbitration clause in an investment contract: When an Israeli investor signs an investment agreement with a foreign State, they may request that the contract include an international arbitration clause. The conditions for the validity of such a clause depend on the circumstances and on the arbitral institution chosen. For example, where local law requires the investment to be made through a company incorporated in the host State and the parties intend to arbitrate before ICSID, it is essential that the foreign State agree in writing to treat that locally incorporated company as a foreign investor for such purposes. As always, engaging specialized counsel while the contract is being negotiated is the best way to avoid complications down the line.
3. Restructuring the investment so that it falls within the scope of an applicable investment treaty: Nothing, in principle, prevents an investor from structuring an investment so that it comes within the scope of an investment treaty to which Israel is not a party– for instance, by routing the investment through a holding company incorporated in a State that does have such a treaty with the relevant State. Most (but not all) investment treaties protect investments made through holding companies. Importantly, any such restructuring must take place before a dispute between the investor and the foreign State becomes foreseeable; otherwise, it risks being characterized as an abuse of process.
4. Reaching an agreement with the foreign State, after a dispute has arisen, to submit it to international arbitration.

Key considerations before initiating arbitration proceedings

Naturally, there are several additional factors an Israeli investor should weigh before commencing international arbitration proceedings against a foreign State. Our firm’s International Arbitration team is available to answer any questions in this regard.