Growth opportunities abound, but political volatility often leads to investor-state disputes.

BY SILVIA MARCHILI, ESTEFANÍA
SAN JUAN AND JOHN DALEBROUX

International disputes involving Latin America continue to emerge against a backdrop of significant economic, political and geopolitical shifts impacting the region. These disputes arise in a variety of contexts. Chief among them is volatility impacting a key sector or jurisdiction, particularly when an “investment-friendly” government is replaced by an “investment-hostile” one.

Key resources in the region continue to attract new investment in both long-established sectors, such as mining, infrastructure, and oil and gas, as well as in emerging regional sectors, such as renewable energy—including hydrogen—lithium mining and data centers. Shifting economic, political and geopolitical tides impact the attractiveness of these opportunities and often generate international disputes.

While investments in Latin America have historically been subject to some level of uncertainty, this has increased significantly in recent years, as regulatory and political changes become more frequent and more drastic. Moreover, governments are more sophisticated in managing relations with foreign investors, including in enacting long-term policies that are hostile to their investments. Indeed, the days where a state would expropriate an investment through an army takeover appear to be gone. More and more, states adopt approaches that enable them to seize an investment, but through means that seek to reduce their exposure to international liability. Thus, investors in Latin America must navigate increasingly complex circumstances to protect their investments.

In this context, it is more important than ever before for investors in Latin America to have an integrated investment protection strategy at an early stage of the investment that will provide them with protections in a worst-case scenario.

INVESTMENT TRENDS IN LATIN AMERICA

Growth remains robust across many key Latin American jurisdictions, catalyzed by strong investment opportunities in key sectors and jurisdictions.

Investment opportunities have tended to emerge when there is both a market opportunity to invest in a particular sector and a relatively stable and predictable legal framework where the opportunity is located. Some recent trends include:

• Nearshoring in Mexico and Central America. Nearshoring has become more prevalent in recent years, as foreign companies target growth in the US and seek to maximize economic efficiency and minimize production costs.
• Lithium in Argentina, Chile, Bolivia and Mexico. With demand for batteries booming, lithium has emerged as a vital commodity. Argentina, Chile and Bolivia are home to the “Lithium Triangle,” a region containing nearly 56 percent of the world’s known lithium. Mexico also has significant lithium reserves, currently ranking ninth globally.
• Mining in Ecuador and elsewhere. Mining, which has historically accounted for 13 to 19 percent of Latin America’s foreign direct investment (FDI), continues to present major investment opportunities across key jurisdictions. Recently, Ecuador, in particular, has seen an increase in mining investment under the administration of President Daniel Noboa following various state acts that have encouraged mining investors, including supporting the easing of certain social requirements and the allowance of investment contracts to be signed with the state.
• Renewables in Chile, Brazil, Colombia and Mexico. Investment in the renewable energy sector continues to grow and evolve in Latin America, as investment has expanded from hydro projects to include other renewable projects, such as photovoltaic, eolic and hydrogen projects, in key jurisdictions, in response to government calls to encourage investment aligned with the energy transition. While the market has grown, so has volatility toward these projects in key jurisdictions, including Chile, Mexico and Colombia, increasing uncertainty for investors.
• Oil and gas in Guyana. Guyana has seen a massive increase in FDI in recent years, largely driven by the enormous oil and gas reserves located there.
• Data centers in Brazil, Chile and Argentina. Digital transformation and greater internet penetration across Latin America requires more technology investment in the region, including constructing data centers to enhance local cloud services, data storage and processing capabilities. Data centers tend to be energy-intensive, which can cause friction in local and national markets, including around potential environmental concerns and in effectively managing electricity demand.

DISPUTES TRENDS IN LATIN AMERICA

The significant volatility in Latin American markets is a direct consequence of more extreme political cycles. This leads to increased uncertainty among investors. Indeed, the most persistent trend leading to disputes in the region remains: When a jurisdiction undertakes a radical and unanticipated policy shift from a pro-investment legal framework to a more hostile one, it can expect to face disputes from investors.

For example, Argentina and Ecuador, where investors have historically faced certain volatility—including, at times, investment-hostile policies—recently elected more investor-friendly administrations. Colombia and Chile, by contrast, had more investor-friendly administrations in the past, but recently became more hostile. The challenge of navigating this oscillation is particularly acute for investors with long-term investments, as they often are subject to multiple political regimes with significantly different foreign investment policies. Moreover, recent elections and political transitions in other key Latin American jurisdictions, including Mexico, Peru and Brazil, highlight the region’s unpredictability.

To mitigate risks stemming from these trends, investors must protect their investments through a variety of tools, including the protections afforded by international investment treaties, which form a key component of an integrated investment protection strategy. This strategy should be developed and implemented at an early stage of the investment to maximize its effectiveness and provide the investor with protections in a worst-case scenario. The strategy should include the following key pillars:

• Investment treaty planning. Foreign investors may be entitled to certain protections for their investments if they hold them through a jurisdiction that is a party to an investment protection treaty with the state in which they plan to invest. Such protections are generally considered quite strong, because they allow the investor to bring claims directly against the state before an international and neutral arbitral tribunal for any breaches of a variety of substantive protections. Investors may be able to secure these protections even if they already invested without having them. The key to obtaining coverage involves (re)structuring the investment to secure investment treaty protections, and doing so before a dispute is foreseeable.
• Contractual and domestic protections. Investors may secure key contractual protections—including in concession contracts and investment agreements—and certain protections under domestic law. These protections may include rights to bring claims against the state (or entities thereof) outside of its home courts, as well as securing substantive investment protections. However, to the extent that they do not provide the investor with the same ability to bring claims directly against the state under the same, or very similar, terms as an investment treaty, these protections may not be as strong and may be more at risk of state recalcitrance.

But they are particularly helpful in situations where investment treaty protections may not be available for foreign investors. For example, present investors in Ecuador, Bolivia and Honduras are unlikely to secure investment treaty protections, as these countries do not currently offer many investment protections to foreign investors. Some investors in these jurisdictions, however, have been able to secure additional protections in relevant contractual instruments, such as investment agreements between mining, investors and the Ecuadorian state and similar agreements between lithium investors and the Bolivian state.

• Creating a record. Creating a robust record of contemporaneous state acts in support of an investment, such as in a contract or correspondence, is crucial and can provide an investor with significant leverage against the state, should it change its position. Indeed, most Latin American states are sophisticated and highly competent parties to international disputes and will likely seek to undermine any attempts to establish the reasonableness of the investment by highlighting past volatility. Having an established record that shows support for the investment can undercut these efforts. For example, in various disputes related to investments in Colombia’s mining sector, investors relied on such records to undercut post hoc state attempts to attack the investment’s reasonableness.

CONCLUSION

Key resources and market opportunities continue to attract robust investment into Latin America. Nonetheless, these investors face increasingly complex economic, political and geopolitical issues that provide fertile ground for disputes to arise. To best protect their investments, investors should develop and implement an integrated investment protection strategy at an early stage of the investment. This is particularly important considering Latin American states’ growing sophistication in managing international disputes and the underlying state actions that lead to them.

Such a plan will focus on structuring investments to secure investment protections under international treaties, as well as maximizing potential rights under contractual and domestic law—including potentially insisting on robust dispute resolution clauses that include a right to bring an international arbitration in contracts with state entities, such as concession contracts, investment agreements and legal stability agreements. Even if such a dispute does not materialize, an investment protection strategy maximizes an investor’s leverage and improves its position in any future negotiations.

Silvia M. Marchili and Estefanía San Juan are White & Case arbitration partners based in Miami, while John Dalebroux is a White & Case associate based in Washington, D.C.

This article was origionally published by White & Case.  Republished with permission from White & Case.

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