On June 5, 2011, Peru's economic success and vast natural resources were handed over to Ollanta Humala to govern. Despite Humala's promises of moderate policies, now could be the time for foreign investors to re-examine and plan for the treaty protection they could expect to receive in the event of a dispute in a country that has the potential to soon become far less hospitable to foreign investors. 

In addition to oil and gas, Peru’s enormous reserves of silver, zinc, gold, and copper, form a thriving industry in which foreign entities are heavily invested. However, the post-election volatility in the Peruvian stock market shows that investors are cautious and are concerned as to whether their investments will be protected from governmental discord. This article examines the extent of protection extended to Peruvian investors by international investment law and investment protection treaties.¹

Investment protection treaties can provide some protection for investors in these circumstances. Peru has signed a relatively modest network of investment treaties since its economic resurgence in the early 1990s. Many important investor states have no BIT with Peru. There is no standard BIT between Peru and the U.S. The 2009 Free Trade Agreement between the US and Peru does contain an investment chapter, and the right to seek international arbitration between an investor and the state party, but the investment protections it affords are arguably more curtailed and weaker than those traditionally extended under other US BITs. Potential investors should therefore strongly consider nationality planning so as to gain access to BIT/FTA protection or to improve on the protections available.²

Nationality planning can provide protection in the event of expropriation (typically direct and indirect) or nationalisation of investments by host state authorities. The UK and Chinese BITs with Peru (in common with most BITs) provide for a public policy exception that permits expropriation in the public interest, though definitions vary. For example, the UK BIT requires public necessity, whereas the Chinese BIT requires only public interest.

In the event that intervention is less dramatic, such as a recently mooted windfall tax on mining, the remedy under the applicable BIT is less obvious. Typically, fiscal stability provisions will be found in individual contracts or concessions, if at all. In addition, it may be arguable that such a tax would breach the “Fair and Equitable Treatment” obligation found in almost all BITs. The UK BIT also contains a prohibition on unreasonable treatment, which may be more helpful.

In any event, such obligations are of little assistance without a means of enforcement. Investors should be aware that, in common with most Chinese BITs, the China-Peru BIT provides for resolution of treaty disputes before the competent local domestic court, not ICSID. A claim for breach of the “Full Protection and Security” clause may be available to an investor whose claim is not dealt with properly by the local courts, but this is unlikely to be satisfactory.

As with any investment, risks and protections should be assessed both at the time the investment is made, and at sensible intervals thereafter. Any change of regime is always a good time to reassess the protection available and accordingly, the recent elections are a good opportunity to consider how best to gain access to investment treaty protection and access to a neutral forum, should it become necessary. Such protection is available to investors in Peru, but perhaps not as readily as it is elsewhere in Latin America or the rest of the world — which suggests early planning should be a priority.

For more information, please contact Vinson & Elkins lawyers James Loftis, Nicholas Song, Tim Tyler, or Mark Beeley. Visit our website to learn more about V&E's International Dispute Resolution practice, or e-mail one of the practice contacts.

1 In particular, this article refers to the UK-Peru and China-Peru BITs.
2 A list of Peru’s BITs can be found at http://www.unctad.org/sections/dite_pcbb/docs/bits_peru.pdf.