ARBITRATION & PUBLIC INTERNATIONAL LAW: An Introduction to Latin America - International Counsel

Disputes Arising From a Shifting Economic, Political, and Geopolitical Context

Introduction

International disputes involving governments and/or businesses in Latin America continue to emerge in the context of significant economic, political, and geopolitical shifts impacting the region. Indeed, the presence of key resources in the region continues to attract new investment from investors in both long-established key sectors that continue to be strong – such as mining, infrastructure, and oil and gas – and from investors looking to invest in emerging sectors, such as renewable energy (including hydrogen), lithium, and data centres. Shifting economic, political, and geopolitical tides makes investment opportunities more or less attractive and can often lead to international disputes, in particular, as countries change from “investment friendly” to “investment hostile” policies during the course of an investment.

While investments in Latin America have always been subject to uncertainty, including regulatory and political changes, the volatility impacting these investments has increased significantly in recent years as these changes have become more frequent and more drastic. Moreover, governments have become more sophisticated in managing relations with foreign investors, including the manner in which they enact policies that are hostile to their investments. In this context, investors in Latin America must navigate an increasingly complex economic, political, and geopolitical context to protect their investments.

International arbitration continues to be the leading and preferred mechanism to resolve disputes in the region, whether those disputes are between an investor and a state or between two private parties. These disputes arise in a variety of contexts. Chief among them is when there is economic or political volatility impacting a key sector or jurisdiction, such as when an investment-friendly government is replaced by an investment-hostile one. Other recent disputes trends include an increase in (i) commercial disputes before the International Chamber of Commerce (ICC) involving state and state-owned parties; (ii) disputes related to environmental, social, and governance (ESG) issues; and (iii) disputes involving parties from outside the traditional geographic hubs of investment (North America and Europe), such as those from Asia (and China, in particular).

Economic, political, and geopolitical trends in Latin America

Growth remains robust across many key Latin American jurisdictions. This robust growth has been catalysed by strong investment opportunities in key sectors and jurisdictions, including the following:

• • Nearshoring in Mexico and Central America – As foreign companies seek to target growth in the United States, nearshoring has become increasingly prevalent in recent years as these investors seek to maximise economic efficiency and minimise production costs.
  • Lithium in Argentina, Chile, Bolivia and Mexico – With the recent rise in demand for batteries, lithium has emerged as an increasingly key commodity. Argentina, Chile, and Bolivia are home to the “Lithium Triangle”, a region containing nearly 56% of the world’s known lithium. Mexico is also home to significant lithium reserves, currently ranking ninth globally.
  • Mining in Ecuador and elsewhere – Mining continues to present a major opportunity for investors across key jurisdictions in Latin America. Indeed, mining has historically accounted for between 13–19% of Latin America’s FDI. Recently, Ecuador, in particular, has seen an increase in mining investment following various state acts that have created a more investment friendly legal framework for investors.
  • Renewables in Chile, Brazil, Colombia and Mexico – Investment in the renewable energy sector generally, and in hydrogen in particular, continues to grow in Latin America, including recent growth in photovoltaic and wind power projects.
  • Oil and gas in Guyana – Guyana has seen a massive increase in FDI in recent years that has contributed significantly to the 42.3% average annual GDP growth over the last three years.
  • Data centres – Latin America continues to see significant investment in data centres across the region, and the sector is expected to continue to expand to meet increasing technological and e-commerce needs.

The quality of investment opportunities in Latin America (judged on a purely commercial basis) remains robust. However, they must be viewed in the context of the economic, political, and geopolitical context present within each target jurisdiction and the region more generally. In this context, other regional trends have emerged. One, in particular, is that political cycles, often between investment-friendly and investment-hostile administrations, are becoming more common and more extreme. In this context, volatility in the region is high, contributing to increased uncertainty among investors.

In particular, Argentina and Ecuador, jurisdictions in which investors have historically faced significant volatility, including, at times, investment-hostile policies, have recently elected more investor-friendly administrations. Colombia, in contrast, has been historically more investor friendly but has recently become more hostile. The challenge of navigating this oscillation is particularly acute for investors with long-term investments, as during the lifetime of those investments, they are likely to be subject to multiple political regimes that have significantly different policies towards foreign investment. Moreover, recent and upcoming elections in other key Latin American jurisdictions, including Mexico, Panama, Peru, and Brazil, have highlighted the region’s volatility and uncertainty.

Disputes trends in Latin America

The volatility across key Latin American jurisdictions creates significant challenges for investors, especially those with long-term investments, and increases the risk of disputes. In this context, investors must look to protect their investments through a variety of tools, including the protections afforded by international investment treaties. These treaties provide substantive investment protections to qualifying investors, including that their investments must be treated fairly and equitably, that they not be subject to discrimination, and that they not be subject to illegal expropriations. They also provide qualifying investors with certain procedural protections, including, often, the ability to bring claims against the state in which the investors have made their investment in an international arbitration before a neutral and independent arbitral body if the state has breached one of these investment protections. Additional protections, including the ability to bring private commercial arbitrations can also be key in protecting investments, particularly where investment treaty protections may be unavailable.

The most persistent trend leading to disputes in the region remains the fact that when a jurisdiction undertakes a radical and unanticipated policy shift from a pro-investment legal framework to a more hostile legal framework, it can expect to face disputes from investors. Recent examples of this include Panama’s treatment of investors in the mining sector, Mexico’s treatment of investors in its electricity and mining sectors, and Honduras’s treatment of investors in its renewable energy sector, all of which have led to investment disputes brought by foreign investors.

Another trend is the continued increase in cases before the ICC involving state and state-owned parties, which has grown significantly over the last decade. While the exact cause of this trend is complex and likely attributable to numerous factors, it seems to coincide with the movement in Latin America of some states away from the International Centre for Settlement of Investment Disputes (ICSID) as the preferred forum to resolve investor-state disputes.

Another emerging trend is a rise in claims related to various ESG issues that investors are increasingly facing. For example, local social opposition and disruptions of investment projects, including in Panama with respect to its mining sector, have played an increasing role in various investment claims. This trend is expected to continue to grow as ESG issues become increasingly important in the management and development of investments in Latin America.

Moreover, while investment from traditional hubs (such as North America and Western Europe) in Latin America remains robust, the region is attracting increased investment from a more diverse group of foreign investors, including those based in Asia (and China, in particular). With increased investment from these markets, an increase in disputes involving parties from these jurisdictions can be expected. Indeed, China has investment treaties with various Latin American states, including Chile, Peru, Colombia, Argentina, Mexico, and Nicaragua, among others, and many of these include very significant investment protections, including ensuring fair and equitable treatment (which is not included in other Chinese investment treaties).

In this context, we continue to see strong growth in terms of the number of disputes involving Latin American states across key sectors, including both disputes under investment treaties and commercial contracts. In particular, Latin America remains a key hub for international investment disputes, reflecting the uncertainty and volatility of the region. For example, there were 22 new cases registered at ICSID in 2023 involving Latin American or Caribbean states (representing 39% of all ICSID cases filed in 2023), which is the most in any year in the last decade. Moreover, Latin American and Caribbean States (and state-owned parties) were party to 37 additional cases before the ICC in 2023, in a continuation of a recent trend seeing many such cases over the last decade.

Conclusion

Key resources and market opportunities continue to attract robust investment to Latin America. Nonetheless, these investors face increasingly complex economic, political, and geopolitical issues. In this context, disputes continue to arise. To best protect their investments, investors should consider structures under which their investments will have access to the investment protections under international treaties. In addition, investors should consider insisting upon 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. Moreover, even before any potential dispute arises, investors should develop a strategic and integrated approach to potential disputes to maximise their leverage and improve their position in any future settlement discussions and/or arbitrations, should they arise.

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Any views expressed in this publication are strictly those of the authors and should not be attributed in any way to White & Case LLP.