In Dispute: Slovakia aims to reduce lawsuits by tightening treaty language

With fewer than 5.5 million citizens, Slovakia forms a tiny part of the EU. However, it is developing a large footprint when it comes to reform of the international legal regime for foreign investment. The country has faced a string of international arbitration lawsuits, many of them from disgruntled foreign investors in the country’s health insurance sector.

The legal writs started flying after the government sought to backpedal from a privatisation experiment. Foreign investors claimed to have missed out on billions of dollars in anticipated profits, and contended that Slovakia’s 'mistreatment' of them had breached the terms of investment protection treaties with Austria and the Netherlands.

Slovakia ultimately emerged unscathed from those lawsuits, apart from some hefty lawyers’ bills. But it also learned some valuable lessons. In particular, Slovak bureaucrats began to appreciate just how easy it is for the country to be dragged before international arbitral tribunals.

Following the Velvet Revolution, and the fall of the USSR, Slovakia had negotiated investment protection treaties with dozens of countries so as to protect bilateral investment flows from nationalisation and other forms of abusive government treatment. However, those treaties allowed any investor – even portfolio investors – to sue the Slovak state for perceived harms.

The treaties also dictated that foreign investors must be treated fairly and equitably, without clarification as to what this means in concrete terms. This latter ambiguity meant that policymakers lacked certainty as to what policies and regulations could be imposed on foreign investors, without attracting legal liability.

Slovak officials also fretted that lawyers who make their living suing (or defending) governments could moonlight as arbitrators asked to judge such lawsuits, thus casting doubt on the capacity of such persons to adjudicate cases without any regard for the wider financial ramifications of their legal rulings.

Recently, Slovakia decided to go back to the drawing board and to design investment protection treaties that narrow the circumstances where investors can sue on the international playing field and to make clearer what 'fair and equitable' treatment actually means. Moreover, Slovakia moved to prohibit arbitrators from moonlighting (in other cases) as advocates on behalf of investor or state interests.

The first treaty in which Slovakia has set out its new negotiating positions is a recently signed investment pact with Iran. However, the government hopes to adopt similar treaties with other countries, and to phase out the earlier generation of more loosely drafted treaties.

For now, lawyers around the world are studying the new Slovakia-Iran treaty and wondering if its sweeping reforms will represent the start of a sea change in how such treaties look and operate.

Luke Eric Peterson is the publisher of InvestmentArbitrationReporter.com a news and analysis service focused on international arbitration of foreign investment disputes.