Despite facing on-going security difficulties, Iraq has a growing appetite for investment to develop its enormous — and world’s second largest — proven oil reserves. The government has stated its commitment to securing foreign investment and has taken steps on a domestic level to make the country more attractive to foreign investors.
Compared with most developed nations, Japan has been slow to enter into free trade agreements with other countries, reducing its opportunities for foreign investment. In the late 1990s, Japan began entering into agreements with Pacific Rim countries and negotiations with Canada and Mongolia with the aim of signing BITs.
The groundbreaking agreement with Iraq signals Japan’s recognition of the importance of BITs and its intention to take an active investment and development role in Iraq.
Japan initially strengthened its ties with Iraq by offering a considerable financial assistance package in 2003 in the aftermath of the conflict. The Japan-Iraq Comprehensive Partnership in 2009 has boosted bilateral ties and contributed to Iraq achieving greater self-reliance and political stability.
Japan has provided financial assistance beyond that pledged in 2003, with the money being used for four new projects in the areas of oil, telecommunications and health. Japanese companies are reported to be involved in the associated contracts.
Given that this is one of the first of Iraq’s BITs, the treaty contains a “most favoured nation” (MFN) provision at Article 4, giving investors of the other contracting party and their investments treatment no less favourable than that given to investors of a non-contracting party.
This will provide comfort to Japanese investors in the event that Iraq enters into subsequent BITs with other countries with more favourable provisions than these.
However, followers of investment treaty decisions will be interested to note that this MFN treatment is expressly stated not to apply to dispute resolution.
A further provision of note is Article 17 which sets out the process for settlement of investment disputes. This includes a three-month period for consultations before the dispute can be submitted to arbitration.
The interpretation and application of such negotiation provisions is a hot topic in the investment treaty community. It will be interesting to see whether investors are held to this three-month period to consult should any disputes arise under this BIT in future.
Although submission of disputes to the International Centre for Settlement of Investment Disputes (ICSID) is one of the options provided for in the BIT, Iraq is not a member of the ICSID (Washington) Convention. Submission of any disputes to ICSID, therefore, assumes that it will become a signatory at some point in the future, as expressly stated in the wording of the treaty.
There are other dispute resolution methods available in the BIT in the alternative, including arbitration under the UNCITRAL Rules.
For details of the Iraq-Japan treaty, please contact Peter Godwin, Herbert Smith’s managing partner, and Gaikokuho Jimu Bengoshi, head of dispute resolution, in Tokyo at telephone 813-54125412.