Herbert Smith Freehills Kramer | 27 June 2025
Bahrain ratifies Bilateral Investment Treaty with UAE
Key features include the exclusion of concessions for natural resources from its protection remit, the inclusion of sovereign wealth funds as "Investors" and a denial of benefits clause.
Introduction
On 13 March 2025, the Kingdom of Bahrain (Bahrain) passed Law No. (10) of 2025, ratifying the bilateral investment treaty signed in Arabic (all translation in this blogpost are not official) between the United Arab Emirates (UAE) and Bahrain (each a Contracting State) on 11 February 2024 (the Bahrain-UAE BIT). Once it enters into force, the Bahrain-UAE BIT will have a term of 10 years with automatic renewal if neither Contracting State has given notice to the contrary.. This continues a streak of investment treaties signed by the UAE which still await ratification, including those signed with Australia, New Zealand and Sri Lanka in 2025, with Turkey in 2023, and the Philippines in 2022.
This post outlines the key features of the Bahrain-UAE BIT. Of note: (i) the exclusion of concessions for natural resources from its protection remit (consistent with other recent BITs entered into by the UAE, such as the 2025 New Zealand-UAE BIT, the 2024 Australia-UAE BIT and the 2024 India-UAE BIT); (ii) the inclusion of sovereign wealth funds as "Investors" under the treaty, similarly found in the 2021 Hungary-UAE BIT; and (iii) the denial of benefits clause allowing Contracting States to deny the treaty’s protections to investors in specific circumstances.
Cooperation on Digital Commerce
The Bahrain-UAE BIT contains provisions regarding the development of the digital economy in Bahrain and the UAE. The Contracting States will aspire to cooperate in matters relating to digital commerce, including data protection, data privacy, cyber security, intellectual property rights, consumer protection, electronic documents and signatures, information exchange, capacity building and the exchange of best practices to foster and develop digital technologies and standards (Article 6(1)).
The Contracting States will also aim to ensure that their laws, regulations and policies which apply to digital commerce are transparent and non-discriminatory (Article 6(2)).
Definition of Investment and Investor
The Bahrain-UAE BIT defines an "Investment" by reference to a non-exhaustive list of different types of investments, provided they involve a contribution of capital or other resources, an expectation of profit or return and an assumption of risk. This definition mirrors the language in the 2024 treaty signed between the UAE and India (see our previous blog here).
The definition of an Investment expressly excludes: (i) concessions for the exploration, extraction and exploitation of natural resources, consistent with typical definitions of investments in UAE BITs; and (ii) arbitral awards or decisions made relating to an Investment.
Under the Bahrain-UAE BIT, the definition of "Investor" includes corporate entities having their "seat" (unofficial translation, original Arabic requires a “مركز”) in the relevant Contracting State. A Contracting State’s sovereign wealth fund falls into the definition of a covered investor, reflecting the uptick in investments made by sovereign wealth funds in the region, such as the UAE’s Mubadala and Abu Dhabi Investment Authority.
The Bahrain-UAE BIT’s temporal scope
The limitation period for claims is three years after the Investor learned or ought to have learned of the relevant breach (Article 13(5)). The Bahrain-UAE BIT specifies that it will apply to Investments made both before and after its the entry into force, but will not apply to disputes which arose prior to its entry into force (Article 20(1)).
Investment Protections
The Bahrain-UAE BIT includes most typical protections found in modern investment promotion treaties.
Fair and Equitable Treatment and Full Protection and Security
The Bahrain-UAE BIT includes a fair and equitable (FET) standard, as well as a full protection and security provision (Article 3(1)). Examples of conduct that may breach the FET standard, as expressly included in the treaty, include denial of justice, fundamental breach of due process, arbitrary treatment, or discrimination (Article 3(2)). Additionally, the Bahrain-UAE BIT specifies that a breach of its terms or of any other treaty may not breach the FET standard (Article 3(4)).
Expropriation
The Bahrain-UAE BIT provides for protection against expropriation, unless such expropriation is: (i) for a public purpose; (ii) not discriminatory; (iii) carried out according to legal procedures; and (iv) followed by prompt, fair and effective compensation (Article 7(1)).
The protection against expropriation is without prejudice to a Contracting Party’s right to adopt measures necessary to legitimate public policy objectives relating to public health, education, social services, consumer protection, workers’ rights and protection, safety and the environment, (Article 7(5)).
National Treatment
Investors must be accorded treatment no less favourable than that provided to the host State’s nationals in like circumstances under the Bahrain-UAE BIT (Article 5(1)). Government contracts, subsidies, loans or insurances provided by a Contracting State to its own small or medium sized enterprises are excluded from the national treatment protection (Article 5(2)).
Most Favoured Nation
The Bahrain-UAE BIT contains a Most Favoured Nation clause (MFN Clause) (Article 4(1) with limitations regarding (i) an existing or future customs union or regional economic unit to which the host State is (or may in the future be) a party; (ii) a treaty or national legislation of the host State which relates entirely or primarily to taxation (Article 4(2)); or (iii) a more favourable dispute resolution mechanism contained in other investment treaties entered into by the Contracting States (Article 4(3)).
Compensation for Loss
In the event of certain circumstances such as war, armed conflict, state of emergency or revolution, Investors must receive treatment from the Contracting State that is no less favourable as the treatment provided to the host State’s nationals or to investors from other States (whichever is most advantageous) (Article 8(1)). Investors are also entitled to fair, prompt and effective compensation from the relevant Contracting State in specific circumstances (Article 8(2)).
Transfer of Funds
The Bahrain-UAE BIT provides for the free transfer of investment-related funds into and out of the territory of the host State without delay, with a non-exhaustive list of examples of such protected transfers (Article 9(1)). This is subject to certain exceptions, including in the event of (i) bankruptcy and the protection of creditors; (ii) the issuance and trading of securities; (iii) criminal offences; and (iv) the enforcement of judicial orders (Article 9(2)), provided the Contracting States act in good faith and in a non-discriminatory manner.
Scope of the Bahrain-UAE BIT
The mere breach of a contract signed by the host State and Investors will not be considered a breach of the Bahrain-UAE BIT (Article 20(2)).
Denial of Benefits
The host State may deny any legal person who is an Investor, or its Investments, the benefits of the Bahrain-UAE BIT if persons from a non-Contracting State own or control such legal person or its Investments (Article 10(1)).
The host State may also deny the benefits of the Bahrain-UAE BIT from:
- natural persons who are citizens of both Contracting States; and
- Investments which are restructured or Investors who obtain the citizenship of a Contracting State in order to benefit from the Bahrain-UAE BIT (Article 10(2)).
Lastly, the host State may deny the benefits of the Bahrain-UAE BIT from an Investor if such Investor is a company which does not meet certain activities requirements in the territory of the home State (Article 10(3), the Arabic original refers to “أنشطة استثمارية جوهرية”).
Investor-State Dispute Settlement
The Bahrain-UAE BIT’s dispute resolution provision is quite detailed.
An Investor may refer a dispute with the host State to the host State’s courts, ICSID arbitration, or any other dispute resolution mechanism agreed to by the disputing parties, following a six-month negotiation period (Articles 13(1) and 13(3)). The Bahrain-UAE BIT indicates that such referral would be final (Article 13(4)).
If the dispute is referred to arbitration, the disputing parties may agree to the governing law of the dispute, failing which an arbitral tribunal must apply the laws of the host State, and international law as it exists between the two Contracting States (Article 14(1)). Additionally, the joint interpretation of any provisions of the Bahrain-UAE BIT, exchanged through diplomatic channels, is provided as binding on a tribunal hearing the dispute (Article 14(2)).
If the dispute is referred to non-ICSID arbitration, then the parties must agree on a place where hearings should be held which must be in the territory of the Contracting States or any other member state of the Gulf Cooperation Council (GCC). Failing such an agreement, the tribunal may decide on such a place within the territory of the GCC member states other than the Contracting States (Article 15).
The Bahrain-UAE BIT also contains detailed provisions for the appointment of arbitrators (Articles 16(1) and 16(2)). It is worth noting that any arbitrator appointed to the tribunal may not subsequently accept any appointment as a lawyer, witness or expert for either of the disputing parties in any other investment protection dispute pursuant to the Bahrain-UAE BIT or any other international treaty (Article 16(3)).
In making an award, a tribunal to be constituted under the Bahrain-UAE BIT must not make an order for the payment of punitive damages or compensation for moral damage. The tribunal can only make an order regarding: (i) the breach of the Bahrain-UAE BIT; (ii) compensation for monetary loss; and (iii) costs of the arbitration and legal fees (Article 17(3)).
However, the Bahrain-UAE BIT prohibits a party which obtains an arbitral award in its favour from enforcing such an award until: (i) the lapse of 120 days from the date of the award, if neither party commences review or annulment proceedings; or (ii) the completion of any review or annulment proceedings (Article 18(2)) (reflecting a similar clause found in the 2024 UAE-India BIT and 2021 Hungary-UAE BIT). If the award requires a party to pay compensation, any delay in such payment arising from review or annulment proceedings shall not be taken into account (Article 18(3)) (reflecting a similar clause found in the 2021 Hungary-UAE BIT).
Conclusion
Bahrain and the UAE are one of the most frequently chosen seats for the incorporation of companies in the Gulf region. As such, the Bahrain-UAE BIT is noteworthy in that it marks a step to strengthen commercial relationships between the two states by seeking to strike a balance between investment protection, while carving out elements of state sovereignty including through some limitations in the protections provided, as well as in the dispute resolution and award enforcement processes.
